MACROECONOMICS I February 28th, 201 Class 2. National Accounts (Cont). Introduction to Economic Growth • Real GDP: Chain-weighted approach • GDP deflator • Introduction to economic growth • Class Outline 1. Why are they equivalent ? GDP: Three Equivalent Approaches 1. Production approach (value-added) 2. Income approach 3. Expenditure approach Firms Households Labor THE CIRCULAR FLOW MODEL OF MARKET ECONOMY Bicycles Expenditure ($) Income ($) The rule of accounting: Expenditure of buyers = Income of sellers Total production = =Total income = =Total expenditure GDP by the Expenditure Approach Source: Czech Statistical Office. Qatar Ministry of development planning and statistics. Expenditure category Czech Republic Qatar China Consumption 71.1% 26.9% ? Investment 23.3% 35.3% ? Net export 5.6% 37.8% ? GDP 100% 100% GDP by the Expenditure Approach Source: Czech Statistical Office. Qatar Ministry of development planning and statistics. Expenditure category Czech Republic Qatar China Consumption 71.1% 26.9% 49.1% Investment 23.3% 35.3% 48.3% Net export 5.6% 37.8% 2.6 % GDP 100% 100% 100% GDP Variations GDP • Expressed in current prices • Expressed in constant prices • Removing seasonal pattern • Adjustment for differences in standards of living Seasonally Adjusted GDP • Quarter-to-quarter fluctuations • A pronounced seasonal pattern: Steady growth over the year - peaking in Q4 - sharp drop in Q1 Source: IMF Financial Statistics Database PPP Adjusted GDP § Comparing the standards of living (GDP per capita) across countries • Converting GDP into common currency using currency exchange rates Issues: 1. Variation of exchange rates 2. Difference in prices of basic goods Solution: using a common set of prices which reflects the purchasing power Purchasing power parity: The price of a typical basket of goods is equal across countries being converted into the common currency Real GDP: The Chain-Weighted Approach • GDP growth rate: • The growth rate is affected by the choice of the base year What year to choose? Real GDP: The Chain-Weighted Approach Popcorn Movies Year Q P ($) Q P($) 2010 10 5 5 3 2011 15 10 10 5 2012 10 15 12 10 TE Real GDP (100=2010)? Real GDP growth rate? Real GDP: Example (Cont.) Popcorn Movies Real GDP growth rate Year Q P ($) Q P($) 2010 10 5 5 3 --- 2011 15 10 10 5 60 % 2012 10 15 12 10 -20% Real GDP (100=2011) Real GDP: Example (Cont.) Popcorn Movies Real GDP growth rate Year Q P ($) Q P($) 2010 10 5 5 3 --- 2011 15 10 10 5 62 % 2012 10 15 12 10 -16% Real GDP (100=2012) Real GDP: The Chain-Weighted Approach Three step procedure: Step 1 Real GDP growth rate (100=2010) Real GDP growth rate (100=2011) Real GDP growth rate (100=2012) Year 2010 --- --- --- 2011 61 % 60% 62% 2012 -19% -20% -16% Real GDP: The Chain-Weighted Approach Real GDP growth rate (100=2010) Real GDP growth rate (100=2011) Real GDP growth rate (100=2012) Year 2010 --- 2011 61 % 60% 62% 2012 -19% -20% -16% Three step procedure: Step 2 Real GDP: The Chain-Weighted Approach (Cont.) • In order to calculate next year real GDP, we need to know the previous year figure GDPCW2011= GDP2010 (1+gR2011) GDPCW2012= GDPCW2011 (1+gR2012) Three step procedure: Step 3 • If we start from year 2011, real GDP for 2010 is GDPCW2010= GDP2011 /(1+gR2011) The GDP Deflator • Changes in the overall price level between the base year and the current year • The price of output relative to ithe price in a base year GDP Deflator(t) = Nominal GDP (t)/Real GDP(t) • • It is an index • Equals to 1 or 100 in the base year • Its level has no economic interpretation • Removes the inflation out of nominal GDP The GDP Deflator (Cont.) • US GDP deflator (100=2005) GDP Deflator (2006) = 103 Þ Increase in overall prices by 3 % relative to the base year • GDP Deflator (2000) = 88.7 • Year Deflator 2000 88.723 2001 90.727 2002 92.196 2003 94.135 2004 96.786 2005 100 2006 103.231 2007 106.227 2008 108.582 2009 109.529 2010 110.993 2011 113.359 2012 115.36 ÞIncrease in overall prices between 2000 and 2005 by 11.3 % compared N!B! Deflator shows the change in prices relative to the base year The GDP Deflator (Cont.) Year Deflator Inflation rate 2000 88.723 2.17 2001 90.727 2.26 2002 92.196 1.62 2003 94.135 2.10 2004 96.786 2.82 2005 100 3.32 2006 103.231 3.23 2007 106.227 2.90 2008 108.582 2.22 2009 109.529 0.87 2010 110.993 1.34 2011 113.359 2.13 2012 115.36 1.77 •Inflation – a change in aggregate price level from one year to another • GDP as a Measure of Well-Being GDP does not account for: • Non-marker transactions • Leisure • Improved product quality • Distribution of income • Quality of environment • Depletion of resources § Developed by Simon Kuznets in 1930 for BEA as a tool which allows to monitor the effect of government policy Czech Republic: Czech statistical office Český statistický úřad (CSU) www.czso.cz Czech National Bank: Global Economics Outlook USA U.S. Bureau of Economic Analysis (BEA) www.bea.gov European Union Directorate General on Economic and Financial Affairs of the European Commission http://ec.europa.eu/economy_finance/eu/index_en.htm OECD www.oecd.org Data Sources Long Run: Economic Growth Definition: Increase in real GDP per capita Two aspects • Changes in GDP per capita within one country over time • Tremendous differences in GDP per capital across countries • The World Bank Classification based on GNP per capita • Low income: < $1,005 • Middle income: $1,006 –$12,000 • High income: >$12,000 • Cross-Country Income Differences Source: Mankiw (2011) Economic Growth Changes over time Economic Growth (Cont.) § Distribution of countries according to PPP-adjusted real GDP per capita Source: Acemoglu, D. (2009) Distribution shift to the right => Increasing inequality across countries Economic Growth (Cont.) How can the US be 32 times richer than Bangladesh? • Different growth rate TE If we take two countries with the same GDP per capita One country is growing at 2 % per year Another country is not growing (0% per year) Þ In 200 years Þ The evolution of GDP per capita, 1960-2010 USA UK Singapore Guatemala S. Korea India Nigeria Botswana Log GDP Logarithmic Scale • If GPD per capita grows at a constant rate of 2 % per year, the value of GDP per capita increases by larger and larger increments over time TE Time X Exponential growth Logarithmic Scale (Cont.) • The same proportional increase in GDP per capita is represented by the same vertical distance on the scale (constant growth rate) Time LogX Linear growth Fundamental Causes • The factors potentially affecting why societies make different technology and capital accumulation choices ü Geographical differences Nature, physical, ecological, and geographical environment ü Institution Laws, regulations, enforcement of property rights ü Culture Values, preferences, and believes ü Luck (multiple equilibrium): divergent passes of the economies which are otherwise identical The Vicious Circle of Poverty GDP Low savings Scarce investment capital Scarce jobs, Poor capital Low output and income POVERTY Breaking the Cycle GDP Better institutions Investment capital Better jobs, Technology Higher output ECONOMIC GROWTH Correlates of Economic Growth Source: Acemoglu, D. (2009) • Investment in physical capital Correlates of Economic Growth (Cont.) Source: Acemoglu, D. (2009) • Investment in human capital Economic and Population Growth Savings and Economic Growth Next class: Solow-Swan Growth Model N!B! Reading Assignment: Handout “Theories that don’t work”