The Global Economy Introduction

Transcription

1 The Global Economy Introduction

2 Roadmap Big Picture Emerging markets and long run performance Business cycles and short run performance Foreign exchange and capital markets Course information 2

3 The big picture First half: Long-Run Performance Production, Saving & Investment, Productivity, Institutions, Capital & Labor Markets, International Trade Second half: Short-Run Performance Business cycles, Economic Indicators, Aggregate Supply & Demand, Monetary Policy and Inflation, Taxes & Deficits, Exchange Rates, Capital Flows 3

4 Long run: GDP per capita The U.S. is 70 times richer than Burundi. Why? United States Japan Argentina China India Ghana Burundi 4

5 Trends are important United States Germany Argentina China Ghana Source: Maddison, Historical Statistics for the World Economy 5

6 Institutions are important 10 9 corruption index India China U.S per capita income (2008 U.S.$) Note: Size of circle is proportional to population. Data sources: World Bank and Transparency International.

7 Modeling emerging market growth Korean GDP per capita (1953=1.0) Data Model with TFP Growth Model No TFP Growth

8 Understanding emerging economies Why are countries rich? Poor? How can we model long run growth? Key institutions: International trade Labor markets Capital markets Legal systems 8

9 The short run: business cycles

10 Business cycles average = 3.2% 10 growth rate (%)

11 Monetary policy and interest rates 20.0 Federal funds rate 15.0 Next FOMC meeting: 9/16-9/ Taylor rule

12 Monetary policy: Fed balance sheet assets (trillion USD) What does this have to do with QE?

13 Everest Capital Global Fund Marko Dimitrijevic 1990: $8 mil 2015: $830 mil Jan 17: bust!

14 Exchange rates: floating vs. fixed Swiss Francs per Euro

15 The short run Short term fluctuations in GDP How do we model business cycles? Short run issues Monetary policy Taxing and government spending Exchange rates 15

16 Course information Course website Syllabus Overview (course by session) Quizzes (ungraded; emphasize fundamentals) Problem sets: graded Practice problems: not graded 16

17 Textbook Custom designed for this course More concise than a typical textbook Theoretical background to class discussion Read assigned chapter(s) before class Entire PDF is available for download Perfect for smartphone, tablet, etc. 17

18 Slides Here to guide discussion Not meant as stand-alone notes Will not always cover them all I bring printouts each class Also post online after class 18

19 Your grade Option 1 Option 2 Problem sets 1%) 5% 5% Exam 1 40% 20% Exam 2 55% 75% Participation Outliers and tie-breaks 19

20 Problem sets Five graded problem sets: check, check, check+ PS #0 = Individual work Your own words and calculations PS #1 through PS #4 = Group work Groups of no more than 5 One submission from group members All members receive same grade Bring submission to class Submit one printout Organization and neatness help! 20

21 Exams Two exams October 28 December 16 Exams are 80 minutes Exams are not cumulative More details in a few weeks 21

22 Important part of class Class participation Everyone is expected to participate Answer a question, make a comment, share an experience Specific groups will be asked to prepare for discussion of case studies Broad range of backgrounds Expert: keep it short Non-expert: don t panic 22

23 Help! Easiest way: me or the teaching assistant Luba Pogorelova My office hours: by appointment 23

24 Takeaways First part of course: the long run Why are countries rich? Poor? How can we forecast long run growth? Second part of course: the short run How do we understand business cycles? How does policy respond to cycles? Course website: Source for all class materials Most up-to-date schedule 24

25 The Global Economy Measurement

26 Action items Complete problem set #0 Solo problem set Due September 30 No class 9/23 FRED resources FRED: Basic tutorials: Stern videos: Look over course website 26

27 Roadmap Headline Data Gross Domestic Product (GDP) Inflation How are they measured? What are the basic facts? 27

28 What can GDP tell us? The U.S. is becoming a service-based economy (What jobs are out there?) The U.S. is borrowing from the rest of the world. (How is this related to net exports?) The U.S. labor force is losing ground to corporate profits. (Is it?) 28

29 GDP GDP = Gross Domestic Product Total value of production in an economy Equals sum of : value-added by production units payments to labor and capital (almost income) sales of final goods 29

30 GDP as value added Value added = sales material input costs Material input costs Goods used up in production (cogs) Doesn t include capital purchases Doesn t include labor Value added is paid to labor and capital

31 GDP as final expenditure Allocate GDP among purchasers of final goods: Y = C + I + G + NX Y = GDP C = sales to households I = sales of capital goods to firms G = purchases of goods and services by government NX = net exports (net sales to other countries) Why only final goods? 31

32 GDP identities Farmer Sales of wheat = $10 Farm Rent = $3 Net Income = $7 Value Added =?? Baker Sales of bread = $110 Factory Rent = $30 Wages = $70 Wheat = $10 Value Added =?? Landlord s income + wages + profits =?? Value added farming + value added baking =?? Final production farming + final production baking =?? 32

33 GDP identities Farmer Sales of wheat = $10 Farm Rent = $3 Net Income = $7 Value Added =?? Baker Sales of bread = $110 Factory Rent = $30 Wages = $70 Wheat = $10 Value Added =?? Landlord s income + wages + profits =?? (3+30) + (70) + (7) = 110 Value added farming + value added baking =?? (10) + (100) = 110 Final production of wheat + final production of bread =?? (0) + (110) =

34 GDP identities: extended example GDP by value added: GDP Ford Goodyear Spock LIC GDP by expenditure: GDP C I G X M GDP as payments to labor and capital: GDP Ford Goodyear Spock LIC 34

35 GDP: value added by industry 30 manufacturing 25 share of total GDP (%) FIRE 5 bus. services 0 agriculture

36 GDP by income type labor compensation 0.6 share of total GDP prop. income rental income corp. profits interest

37 GDP by expenditure private consumption share of total GDP government consumption investment net exports

38 Savings flows I Allocate flows of assets: Y C G = I + NX S = I + NX S = (gross) national saving (purchases of assets) NX = net purchases of foreign assets 38

39 Saving investment share of total GDP saving net exports

40 Details, details Not in GDP (do not reflect current production) Capital gains, (houses, equity, land, used cars) Interest on government debt Government services are valued at cost Home production not counted Black market transactions not counted GNP = GDP + net foreign factor income Difference a fraction of a percent in US Larger for countries with substantial foreign investment 40

41 What about prices? Nominal GDP (at current prices): What happens when prices change? 41

42 Prices and quantities GDP measures output at market prices What if prices change? If GDP rises, how much is higher quantity, how much higher prices? Two measures GDP at current prices GDP at constant prices (e.g prices) Problem: many ways to do this 42

43 Two ways to measure inflation Approach 1 ( fixed weight/price ) ( Paasche ) Compute GDP at current prices ( nominal GDP ) Compute GDP at constant prices (e.g., 2009) ( real GDP ) Compute price deflator = ratio of first to second Inflation is rate of change of deflator Approach 2 ( fixed basket/quantity ) ( Laspeyres ) Compute GDP at current prices ( nominal GDP ) Compute price index as cost of a fixed basket of products Compute real quantity as ratio of nominal quantity to index Inflation is rate of change of index 43

44 Example Fish Chips Date Price Quantity Price Quantity What is the inflation rate? What is real output growth? 44

45 Fixed price method (GDP deflator) Fish Chips Date Price Quantity Price Quantity Date Nominal GDP Real GDP Growth rate Price Deflator Base year:

46 Fixed price method (GDP deflator) Fish Chips Date Price Quantity Price Quantity Date Nominal GDP Real GDP Price Deflator Growth rate 8.34% 1.65% 6.69% Base year:

47 Fixed price method (GDP deflator) Fish Chips Date Price Quantity Price Quantity Date Nominal GDP Real GDP Price Deflator Growth rate 8.34% 1.27% 7.08% 2013 BY rate 8.34% 1.65% 6.69% Base year:

48 How important was IT in the 1990s? Features: Output grew rapidly (60%/year) Prices fell Output quality improved Result: when base year was updated, real growth fell Why? Approaches: Chain weighting Adjust prices for quality change (easier said than done) 48

49 Fixed quantity method (CPI) Fish Chips Date Price Quantity Price Quantity Date Growth rate Price Index (2013 Basket) Price Index (2014 Basket) 49

50 Fixed quantity method (CPI) Fish Chips Date Price Quantity Price Quantity Date Price Index (2013 Basket) Price Index (2014 Basket) / = / = / = / =100.0 Growth rate 7.08% 6.69% Normalize to = 100 in base year 50

51 GDP is Output Income Expenditure Takeaways Measuring real GDP is tricky Fixed weight index Fixed price index Neither is perfect 51

52 Takeaways Composition by industry Manufacturing shrinking Services growing Payments to factors Labor share near 2/3, rest payments to capital Shares constant over time Expenditure Private consumption: 60 70% of U.S. GDP Private investment: 15 20% of U.S. GDP 52