Introduction National accounting and the wealth of nations

Transcription

1 Understanding the World Economy Master in Economics and Business Introduction National accounting and the wealth of nations Lecture 1 Nicolas Coeurdacier nicolas.coeurdacier@sciencespo.fr

2 Practical matters Course website Link to Master E&B Contact No office hours but meetings can be easily organized. Just drop me an .

3 Practical matters Suggested textbooks Macroeconomics, S. Williamson, 4 th edition. Macroeconomics, Charles. I. Jones, 2 nd edition. Other material Slides for the course as well as additional readings/references posted on my website.

4 Practical matters Grading 40% homework (group of 4 people). To be handed back at lecture 9. Find an important policy question (YES/NO) which deals with a subject of macroeconomics. Find related academic articles (IMF, OECD, Economic Policy, World Bank, NBER or CEPR WP ) and press articles (FT, The Economist, ) which tackle the question. In a 6 pages document (4000 words max.), provide a critical answer to the question. 60% final exam: Multiple choice, short exercise(s), short essay. See website for example.

5 Practical matters Homework suggestions Will Chinese growth slowdown? Is ICT a Third Industrial Revolution? Should the Anglo-Saxon labour market be the inspiration for reform in continental Europe? Should governments reduce legal working hours to fight unemployment? Should monetary policy target asset prices as well as consumers prices? Should the ECB tolerate more inflation? Should governments bailout banks in difficulties? Should governments use actively fiscal policy to stabilize output? Should governments make reductions of public debt and fiscal deficits their immediate priority? Have global financial markets spread the 2008 financial crisis worldwide? Should Greece leave the eurozone? (or should Iceland join?).. These are just suggestions. You are free to choose another topic as long as related to macro topics covered in class! Avoid very broad questions. Please contact me once you have chosen your question.

6 Lecture 1 : Introduction National accounting and the wealth of nations 1. What is macroeconomics? 2. Defining GDP 3. Welfare& Income 4. GDP: The production function 6

7 Micro and Macro Microeconomics Focuses on the behavior of a single agent (firms, households, government) or a single market(the market for tomato soups) Partial equilibrium Macroeconomics Focuses on the behavior of the aggregate variables Prices and quantities General equilibrium

8 Macroeconomic discussion often focuses on the short/medium term What will happen to house prices? Should the Fed raise interest rates? Outlook for the World Economy? Will governments reduce debt and deficits? Will unemployment fall next year? 8

9 Macroeconomic discussion often focuses on the short/medium term US business cycle fluctuations (% deviations from trend) Source: Federal Reserve Economic Data

10 US but also long term-issues U.S. Gross domestic product per capita,

11 but also long term-issues Gross domestic product per capita, (log-scale)

12 Course Syllabus Introduction (1) Long-term economic growth (2/3) Labour Market and Unemployment (4) Money and Inflation (5) Business cycle fluctuations (6/7) Monetary Policy (8) Fiscal Policy (9) Exchange rates and open economy macroeconomics (10/11) Financial crises (12)

13 Lecture 1 : Introduction National accounting and the wealth of nations 1. What is macroeconomics? 2. Defining GDP 3. Welfare& Income 4. GDP: The production function 13

14 Definition of GDP GDP (Gross Domestic Product) is the most important variable in macroeconomics. GDP measures aggregate production or aggregate output. GDP is a flow variable measured usually during a yearly or a quarterly period. GDP per capita indicates the level of development of a country. Massive variations across countries

15 Real GDP per capita and shares of global population Source: World Bank, 2011 Data

16 Real income per capita, in 2000 USD Output has grown faster than population so GDP per capita has risen sharply although not at the same rate across countries Copyright 2004 South-Western

17 Measuring GDP: National Income Accounting Level Product Price Labour Capital Retailer 10 each Manufacturer 10 each Forester Wood $

18 Measuring GDP: National Income Accounting Three different ways to compute GDP 1. Expenditure approach : GDP = total spending on all final goods and services produced in the economy 2. Income approach: GDP = all income received by economic agents contributing to production 3. Value added approach GDP = sum of value-added to goods and services across all productive units in the economy ValueAdded=increaseinthevalueofgoodsasaresultoftheproductionprocess. Value Added = Value of production- Value of intermediate goods

19 Measuring GDP: National Income Accounting Level Product Price Labour Capital Retailer 10 each Manufacturer 10 each Forester Wood $ Method1=Expenditureapproach:GDP=10*$400=$4000 Method2=IncomeApproach:GDP=$2800+$1200=$4000 Method 3 = Value-added: GDP = 10*($400-$200)+(10*$200-$1000)+$1000 = $4000 Veryimportanttonoticethatwemeasurevalueadded.Addingvalueofoutputateach stage instead of value added would lead to double or triple counting

20 Share of value-added across sectors Selected developed countries

21 Expenditure approach GDP = total spending on all finalgoods and services produced in the economy Y : Nominal GDP C: Consumption Expenditures I : Investment Expenditures G: Government Expenditures Y = C + I + G + NX Transfer payments not included. Why? NX : Net exports NX = total export of goods & services minus total imports of goods & services

22 U.S and China expenditure components (% of GDP, average) 70% 60% U.S. China 50% 40% 30% 20% 10% 0% -10% Personal consumption expenditures Government consumption expenditures Private domestic investment Net exports Source: Bureau of Economic Analysis and United Nations

23 Income approach--- Capital and Labour Shares Output = =+ withcapital incomes(rk), labour incomes(wl) and output (Y) Capital share= ; Labour share= Capital share goes up if return per unit of capital (r) or capital stock (K) increase. Labour share goes up if wages w or labour supply L increase. Capital share Labour share = ( w ) ( L ) Usually relative quantities (K/L) and relative prices (r/w) and move in opposite direction. Why? Stable labour and capital shares?

24 The U.S. labour share ( ) % 70% 60% 50% U.S. Compensation of employees (% of GDP) Source: Bureau of Economic Analysis

25 Growth, wealth and inequalities Piketty moment Aggregate income /GDP (per capita) data gives average income of citizens. Over time, how income increases for average citizen. But can mask large disparities across citizens Benefits of growth can be unequally shared across citizens. =rate of growth of a unit of wealth; =growth rate of output (or wages) > implies that wealth grows faster than output. Does not necessarily lead to inequality if -wealth equally shared among citizens. -or if wealth consumed at faster rate (or savings fall).

26 Income inequality in the US ( ) Top 10% share in US national income Source: Piketty and Saez

27 Income inequality in the US ( ) Top 1% share in US national income Source: Piketty and Saez

28 Capital isback! Private Wealth-National Income Ratios, : Europe versus US increased over the last 40 years Source: Piketty and Zucman

29 GDP and GNI (or GNP) Gross Domestic Product(GDP) denotes value of output of goods and services produced within a country (including nationals and resident foreigners). Measures value added in the country. Gross National Income(GNI) denotes value of output of goods and services produced by the nationals of a country (excluding foreign residents remittances but including remittances from nationals resident abroad). Measures income of country s citizens.

30 From GDP to GNI (or GNP) Add transfers from abroad [UK nationals] - remitted profits from UK firms foreign operations -interest payments and dividends received from overseas investments - remittances from UK residents based overseas - grants received from foreign governments Deduct transfers to foreigners [non UK nationals] - remitted profits from foreign firms UK operations - interest payments and dividends received from foreign investments in the UK - remittances from overseas residents based in the UK -grants paid by UK government

31 Difference between GDP and GNI (% of GDP) Bangladesh Japan GDP lowerthangni United States Poland GDP higher than GNI Ireland % GDP Source: OECD Main Economic Indicators and Quarterly National Accounts, International Monetary Fund, 2009.

32 Some important issues with GDP GDP fails to capture: Non-Market Activity such as home production, informal sector and/or black market activity GDP excludes: Capital gains on assets, financial and non-financial. Not all GDP based activity is welfare enhancing e.g prices may not capture social value environmental pollution and Green GDP.

33 Size of the underground economy: estimates (% of GDP, average) Bolivia Georgia Thailand Guatemala Zambia Ivory Coast Russia Sri Lanka Philippines Madagascar Brazil Colombia Tunisia Venezuela Botswana Malaysia Mexico Poland Greece Italy South Korea Hungary Spain Portugal Israel Chile Germany Canada France Australia Netherlands Singapore UK Japan Austria Switzerland USA Source: World Bank

34 Issues with measuring GDP The African Growth Miracle? According to international statistics, (real) consumption growth has been 1% over the period Lower than world average (roughly 2% and much lower than many developing countries). International statistics fail to capture the informal economy. Consumption = GDP- other components of GDP. Issue also in comparing prices across countries(see later). A. Young (2012) uses survey data over the period on real consumption of durables, health, housing equipment. Important discrepancy with International Statistics. African growth over the period might have been between 3% and 3.5%. Africa was converging, although at a slow pace, despite large variations across countries.

35 Nominal and Real GDP Production Year 1 Production Year 2 Price Year 1 Price Year 2 Retailer 10 tables 10 each Between year 1 and year 2: Real GDP unchanged = 10 tables = 4000$ at Year1 Price Nominal GDP has increased by 10%, from4000$ to 4500$ Inflation = 12.5%

36 Nominal and Real GDP Production Year 1 Production Year 2 Price Year 1 Price Year 2 Retailer 10 tables 12 each Between year 1 and year 2: Real GDP increased by 20% Nominal GDP has increased by 35%, from4000$ to 5400$ Inflation = 12.5%

37 Issues with deflating Quality? Quantity produced and prices can stay constant despite growth and innovation. Happens if goods quality increases. Think of computers. Real GDP needs to be adjusted for goods quality (increase in quality=equivalenttoafallinprice). New goods? Similar issue arises with new goods (cf. Brad de Long (2000)). Difficult to compare prices across time and thus real GDP if new goods.

38 Issues with deflating Cross country comparisons Comparison in the same currency GDP per capita in the US in US dollars = Sum price of goods in US ($) x output of goods in US / US population GDP per capita in India in Rupees= Sum price of goods in India (Rupees) x output of goods in India / Indian Population GDP per capita in India in US dollars = GDP per capita in India in Rupees x Dollar/Rupee exchange rate Might mask price differences across countries for same goods. Adjustment for prices differences PPP-adjusted GDP per capita. Particularly important adjustment for countries with different standards of living since prices tend to be lower in poorer countries.

39 PPP-adjustment: a simple example Output is made of coconuts. Coconuts costs 1 USD in the US and 20 rupees in India. Exchange rate is 40 rupees per USD. An Indian worker produces 4000 coconuts/year while a US worker produces coconuts/year. in USD, GDP per worker in India = 4000 x 20 /40 = 2000 USD (compared to USD in the US). In PPP terms, the Indian worker is only 10 times poorer and not 20.

40 120% 100% 80% 60% 40% 20% 0% GDP per capita, PPP-adjusted and in current USD (% of U.S. GDP per capita) Real GDP per capita PPP / U.S. Real GDP per capita USD / U.S. Niger Madagascar Benin Senegal India Egypt Uzbekistan China Colombia Thailand Peru Malaysia Argentina Lithuania Czech Republic France Canada United States Source: Penn World Tables and World Bank, 2011 data.

41 Lecture 1 : Introduction National accounting and the wealth of nations 1. What is macroeconomics? 2. Defining GDP 3. Welfare& Income 4. GDP: The production function 41

42 Some conceptual failure of GDP Gross National Happiness is more important than Gross National Product. Bhutan s King Jigme Singye Wangchuk The gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud to be Americans. U.S. Senator Robert F. Kennedy, 1968

43 Measuring Welfare The UN s Human Development Index HDI is defined as L = (Life Expectancy 20)/(85-20) where S = 1 2 S1=((Mean years of schooling of adults >25)/15 S2=((Mean expected years of schooling of adults <25)/18 I = (log(gdp per capita USD PPP) log(100))/(log(75000) log(100)) The HDI (and each of components) is scaled between 0 and 1 Note that the HDI is linear in Life Expectancy and Education but not in income: a 10% increase in health or education always has the same impact but not a 10% rise in income

44 UN s HDI, Selective countries (2014) HDI rank Country Human Development Index (HDI) Life expectancy at birth Mean years of schooling Expected years of schooling GNI per capita (2011 PPP $) 1 Norway 0,944 81,6 17,5 12, Australia 0,935 82,4 20,2 13, Switzerland 0,930 83,0 15,8 12, Denmark 0,923 80,2 18,7 12, Netherlands 0,922 81,6 17,9 11, United States 0,915 79,1 16,5 12, China 0,727 75,8 13,1 7, India 0,609 68,0 11,7 5, Sierra Leone 0,400 56,7 10,1 2, Chad 0,392 51,6 7,4 1, Central African Republic 0,391 63,7 4,1 3, Congo (Democratic Republic of the) 0,350 50,7 7,2 4, Niger 0,348 61,4 5,4 1,5 908 Source: UN Human Development Index

45 Human Development Index, 2013 data

46 200 GDP and HDI Rank by GDP per capita Rank by HDI (excl. GDP per capita) The correlation between GDP rank and HDI rank (excl. GDP)=0.87! GDP per capita is on average a good measure of welfare but clearly measures diverge for some countries. HDI data of 2013

47 Welfare and income across countries Source: Jones and Klenow, AER 2016 (2007 data)

48 GDP per capita and welfare highly correlated Source: Jones and Klenow, AER 2016 (2007 data)

49 Welfare and Income Growth, Per capita GDP growth and welfare growth highly correlated Source: Jones and Klenow, AER 2016

50 Income and Happiness In richer countries there is increasing interest in happiness rather than income as a focus on policy The relationship between income and happiness gets weaker as people get richer. Relationship holds better across countries and individuals than across time within a given country. Is GDP really flawed and redundant as a policy concept?

51 Happiness and income across countries Life satisfaction and real GDP per capita across countries, 2010 Source: Gallup World Poll

52 Happiness and income across individuals in the U.S.

53 Happiness and income across time in the U.S. Source: U.S. General Social Survey

54 Does money buy happiness? Source: Layard, R (2005), Happiness: Lessons from a new science

55 Lecture 1 : Introduction National accounting and the wealth of nations 1. What is macroeconomics? 2. Defining GDP 3. Welfare& Income 4. GDP: The production function 55

56 The neoclassical production function Output (at date t) is produced using inputs (capital and labour ) more or less efficiently. Production function: = ( )! ( ) "#! is an efficiency parameter (think technology ). Also called Total Factor Productivity (TFP). 0<&<1: share of capital in value added. is increasing in inputs and and efficiency.

57 The neoclassical production function = ( )! ( ) "#! Constant returns to scale with respect to both inputs. Double and, double. Decreasing returns to scale to each input (0<&<1): each additional unit of input brings less and less output. Output per capita (with ' = ( ( =capital per capita): / =) = ( / )! = (' )!

58 Higher capital stock per capita increases output per capita Output per worker y )= '! Capital per worker '

59 Higher TFP increases output per capita Output per worker y )= '! Capital per worker '

60 Growth Accounting = ( )! ( ) "#! Take log- of both sides and first time difference: log (/0 ( =log 1 (/0 1 ( +&log (/0 ( +(1 &)log (/0 ( = 1 +& +(1 &) Output growth comes from TFP growth 1 and growthininputs and. Output per capita: ) = (' )! 4 = 1 +& 5

61 Growth Accounting in China and India Source: Bosworth & Collins, 2007 Accounting for Growth: Comparing China and India

62 Summary Macroeconomics is about short/medium-term fluctuations of the main aggregate economic variables but also about longterm issues, such as long-term economic development. GDP is the most regarded aggregate variables. It describes the quantity of goods and services produced in a given economy and can be measured looking at incomes of residents, their expenditures on final goods and services or the value added of the different producers. When measured per capita, GDP provides a good approximation of welfare. The neoclassical model describes GDP as the outcome of a production process mixing inputs (capital & labor) and a given technology (TFP). GDP growth comes from the growth of these inputs or TFP improvements.