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 recent financial crisis worldwide? Should Greece leave the eurozone? (or should Iceland, U.K. 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

11 but also long term-issues

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

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 Fictional Island Economy Coconut Producer, Restaurant, Consumers, Government Coconut producer collect coconuts Restaurant: buys coconuts to the coconut producer and serves coconut soup to its client Consumers: consume coconut soup, lend capital and work Government: collects taxes and provides national defense

18 Measuring GDP: National Income Accounting Private sector Production Price Labour Capital Taxes Restaurant 250 coconut each Coconut Producer 1000 each Government Tax revenues 400 Wages to soldiers 400

19 Measuring GDP: National Income Accounting Three different ways to compute GDP 1. Expenditure approach 2. Income approach 3. Value added approach

20 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

21 Expenditure approach Expenditure approach in the coconut economy GDP = Final consumption by clients & government GDP = C + G GDP = $ $ 400 GDP = $ 5400

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 GDP = all income received by economic agents contributing to production Income approach in the coconut economy GDP = all income received by agents contributing to production GDP = Total labour income (wl) + Total capital income (rk) GDP = $ $ $400 GDP = $ 5400

24 Capital and Labour Shares Capital share= ; Labour share= with capital incomes(rk), labour incomes(wl) and output (Y) 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?

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

26 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).

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

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

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

30 GDP as value-added GDP = sum of value-added to goods and services across all productive units in the economy Value Added = increase in the value of goods as a result of the production process Value Added = Value of production- Value of intermediate goods Value added approach in the coconut economy GDP = Value added of coconut producers, restaurants & government GDP = $ $ $ 400 Remark: Government production is not sold at market prices Value added of the government = cost of the inputs to production

31 Firms valued added

32 Value added across sectors Top 750 European companies, 2007 Graph on value added? Source: Value added scoreboard, 2007

33 GDP and GNI 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.

34 From GDP to GNI Add transfers from overseas [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 from overseas [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

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

36 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.

37 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

38 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.

39 Nominal and Real GDP Production Year 1 Production Year 2 Price Year 1 Price Year 2 Restaurant 250 coconut soups 250 coconut each Coconut Producer 1000 coconuts each Between year 1 and year 2: Real GDP unchanged = 250 coconut soups Nominal GDP has increased by 20%, from 5000$ to 6000$ Inflation = 20%

40 Nominal and Real GDP Production Year 1 Production Year 2 Price Year 1 Price Year 2 Restaurant 250 coconut soups 275 coconut each Coconut Producer 1000 coconuts each Between year 1 and year 2: Real GDP has increased by 10%, from 250 coconut soups to 275 Nominal GDP has increased by 32%, from 5000$ to 6600$ Inflation = 20%

41 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. Example: suppose GDP made of computers and coconuts. In 1900 and 2000, country produces 1000 coconuts sold at 1 USD. No computer are produced in 1900 but 10 are produced in 2000 soldatprice1000usd.realgrowthbetween 1900and2000?

42 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.

43 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.

44 120% 100% 80% 60% 40% 20% 0% GDP per capita, PPP-adjusted and in current USD, in 2011 (% of U.S. GD 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

45 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 45

46 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

47 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

48 UN s HDI, Selective countries (2013) 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 81,5 12,6 17, Australia 0,933 82,5 12,8 19, Switzerland 0,917 82,6 12,2 15, Netherlands 0,915 81,0 11,9 17, United States 0,914 78,9 12,9 16, United Kingdom 0,892 80,5 12,3 16, China 0,719 75,3 7,5 12, India 0,586 66,4 4,4 11, Sierra Leone 0,374 45,6 2,9 7, Chad 0,372 51,2 1,5 7, Central African Republic 0,341 50,2 3,5 7, Congo (Democratic Republic of the) 0,338 50,0 3,1 9, Niger 0,337 58,4 1,4 5,4 873 Source: UN Human Development Index.

49

50 200 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

51 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?

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

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

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

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

56 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 56

57 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.

58 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): / =' = ( / ) = (% )

59 Higher capital stock per capita increases output per capita Output per worker y ' =% Capital per worker %

60 Higher TFP increases output per capita Output per worker y ' =% Capital per worker %

61 Growth Accounting = ( ) ( )! Take log- of both sides and first time difference: log &-. & =log / &-. / & +$log &-. & +(1 $)log &-. & = / +$ +(1 $) Output growth comes from TFP growth / and growthininputs and. Output per capita: ' = (% ) 3 = / +$ 4

62 Growth Accounting in China and India ( ) China India Employment Physical Capital Education TFP Employment Physical Capital Education TFP Shares of the different factors of growth Source: Bosworth & Collins, 2007 Accounting for growth: Comparing China and India

63 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.