national accounting and the wealth of...
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IntroductionNational accounting and the wealth of nations
Lecture 1Nicolas Coeurdacier
nicolas.coeurdacier@sciencespo.fr
Understanding the World Economy
Master in Economics and Business
Course website
http://econ.sciences-po.fr/staff/nicolas-coeurdacier
Link to Master E&B
Contact
nicolas.coeurdacier@sciencespo.fr
No office hours but meetings can be easily organized. Just drop me an email.
Practical matters
Suggested textbooks
• Macroeconomics, S. Williamson, 4th edition.
• Macroeconomics, Charles. I. Jones, 2nd edition.
Other material
Slides for the course as well as additional readings/references
posted on my website.
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 5 pages (max) document, provide a critical
answer to the question.
– 60% final exam: Multiple choice, short exercise(s), short
essay.
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?
• Is the euro too strong?
• 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 macrotopics covered in class! Avoid very broad questions. Please contact me once you have chosenyour question.
Practical matters
6
1. What is macroeconomics?
2. Defining GDP
3. Welfare & Income
4. GDP: The production function
Lecture 1 : Introduction
National accounting and the wealth of nations
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
Micro and Macro
8
Macroeconomic discussion often focuses on the short/medium term…
What will happen
to house prices?
Outlook for the
World Economy?
Should ECB raise
interest rates?
Will governments
increase deficits ?
Will unemployment
fall next year?
Macroeconomic discussion often focuses on the short/medium term…
US business cycle fluctuations
(% deviations from trend)
Source: Federal Reserve Economic Data
US
…but also long term-issues
…but also long term-issues
• 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)
Course Syllabus
13
1. What is macroeconomics?
2. Defining GDP
3. Welfare & Income
4. GDP: The production function
Lecture 1 : Introduction
National accounting and the wealth of nations
• 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
Definition of GDP
Real income per capita, in 2000 USD
Copyright©2004 South-Western
Output has grown faster than population so GDP per capita has risen sharply although
not at the same rate across countries
• 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
Measuring GDP: National Income Accounting
Private sector
Production Price Labour Capital Taxes
Restaurant 250
coconut soups
@$20 each 2000 800 200
Coconut
Producer
1000 coconuts @$2 each 1000 800 200
Measuring GDP: National Income Accounting
Government
Tax revenues 400
Wages to soldiers 400
Three different ways to compute GDP
1. Expenditure approach
2. Income approach
3. Value added approach
Measuring GDP: National Income Accounting
• GDP = total spending on all final goods and services
produced in the economy
Y = C + I + G + NX
• Y : Nominal GDP
• C: Consumption Expenditures
• I : Investment Expenditures
• G: Government Expenditures
– Transfer payments not included. Why?
• NX : Net exports NX = total export of goods & services minus total imports of goods & services
Expenditure approach
• Expenditure approach in the coconut economy
GDP = Final consumption by clients & government
GDP = C + G
GDP = $ 5000 + $ 400
GDP = $ 5400
Expenditure approach
U.S and China expenditure components
(% of GDP, 2007-2011 average)
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Personal consumption
expenditures
Government
consumption
expenditures
Private domestic
investment
Net exports
U.S. China
Source: Bureau of Economic Analysis and United Nations
• GDP = all income received by economic agents
contributing to production
– Taxes are government income.
• Income approach in the coconut economy
GDP = all income received by agents contributing to production
GDP = Labour income after taxes + Capital income after taxes + Taxes
GDP = $ 3400 + $ 1600 + $ 400
Income approach
The U.S. labour share (1929-2012)
50%
60%
70%
80%
19
29
19
34
19
39
19
44
19
49
19
54
19
59
19
64
19
69
19
74
19
79
19
84
19
89
19
94
19
99
20
04
20
09
U.S. Compensation of employees (% of GDP)
Source: Bureau of Economic Analysis
• 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 = $ 2000 + $ 3000 + $ 400
– Remark: Government production is not sold at market prices
Value added of the government = cost of the inputs to production
GDP as value-added
Firms valued added
Value added across sectorsTop 750 European companies, 2007
• Graph on value added?
Source: Value added scoreboard, 2007
• 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.
GDP and GNI
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
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
From GDP to GNI
Source: OECD Main Economic Indicators and Quarterly National Accounts, International Monetary Fund, 2009.
Difference between GDP and GNI (% of GDP, 2009)
-15 -10 -5 0 5 10 15 20
Bangladesh
Poland
Japan
Ireland
United States
% 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.
Some important issues with GDP
Size of the underground economy: estimates(% of GDP, 1999-2006 average)
Source: World Bank
0
10
20
30
40
50
60
70B
oliv
ia
Ge
org
ia
Th
aila
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Gu
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Za
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Ivo
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Sri L
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Ph
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Ma
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Bra
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Co
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Tu
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Ve
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Me
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Gre
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Hu
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Ch
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ny
Ca
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Au
stra
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Ne
the
rla
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Sin
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re UK
Jap
an
Au
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Swit
zerl
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USA
• According to international statistics, (real) consumptiongrowth has been 1% over the period 1991-2004. Lower thanworld average (roughly 2% and much lower than manydeveloping 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 realconsumption of durables, health, housing equipment.Important discrepancy with International Statistics.
• African growth over the period might have been between 3%and 3.5%. Africa is converging, although at a slower pace,despite large variations across countries.
Issues with measuring GDP
The African Growth Miracle?
Production
Year 1
Production
Year 2
Price
Year 1
Price
Year 2
Restaurant 250
coconut soups
250
coconut soups
@$20 each @$24 each
Coconut
Producer
1000 coconuts 1000 coconuts @$2 each @$2 each
Nominal and Real GDP
Between year 1 and year 2:
Real GDP unchanged = 250 coconut soups
Nominal GDP has increased by 20%, from 5000$ to 6000$
Inflation = 20%
Production
Year 1
Production
Year 2
Price
Year 1
Price
Year 2
Restaurant 250
coconut soups
275
coconut soups
@$20 each @$24 each
Coconut
Producer
1000 coconuts 1100 coconuts @$2 each @$2 each
Nominal and Real GDP
Between year 1 and year 2:
Real GDP has increased by 10%, from 250 coconut soups to 275
Nominal GDP has increased by 32%, from 5000$ to 6600$
Inflation = 20%
• Quality?
– Quantity produced and prices can stay constant despite growthand innovation.
– Happens if goods quality increases. Think of computers.
– Real GDP needs to be adjusted for goods quality (increase inquality = equivalent to a fall in price).
• New goods?
– Similar issue arises with new goods (cf. Brad de Long (2000)).Difficult to compare prices across time and thus real GDP if newgoods.
– Example: suppose GDP made of computers and coconuts. In1900 and 2000, country produces 1000 coconuts sold at 1 USD.No computer are produced in 1900 but 10 are produced in 2000sold at price 1000 USD. Real growth between 1900 and 2000?
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.
Issues with deflating
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 40 000 coconuts/year.
in USD, GDP per worker in India = 4000 x 20 /40 = 2000 USD
(compared to 40 000 USD in the US).
In PPP terms, the Indian worker is only 10 times poorer and
not 20.
GDP per capita, PPP-adjusted and in current USD, in 2011
(% of U.S. GD per capita)
0%
20%
40%
60%
80%
100%
120%N
ige
r
Ma
da
ga
sca
r
Be
nin
Sen
eg
al
Ind
ia
Eg
ypt
Uzb
eki
sta
n
Ch
ina
Co
lom
bia
Th
aila
nd
Pe
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Ma
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Arg
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tin
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Lith
ua
nia
Cze
ch R
ep
ub
lic
Fra
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Ca
na
da
Un
ite
d S
tate
s
Real GDP per capita PPP / U.S. Real GDP per capita USD / U.S.
Source: Penn World Tables and World Bank
40
1. What is macroeconomics?
2. Defining GDP
3. Welfare & Income
4. GDP: The production function
Lecture 1 : Introduction
National accounting and the wealth of nations
“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
Some conceptual failure of GDP
• HDI is defined as (L + S + I)/3 where
L = (Life Expectancy –25)/(85-25)
S = 0.67 x Literacy Rate + 0.33 x School Enrollment Rate
I = (log(GDP per capita) –log(100))/(log(U.S. GDP per capita)– 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
Measuring WelfareThe UN’s Human Development Index (Amartya Sen)
UN’s HDI, Selective countries (2009)
HDI L S I1 Norway 0.987 0.925 0.989 1.0482 Australia 0.970 0.940 0.993 0.9773 Iceland 0.969 0.945 0.980 0.9814 Canada 0.966 0.927 0.991 0.9825 Ireland 0.972 0.912 0.985 1.018
13 United States 0.964 0.902 0.968 1.02221 United Kingdom 0.947 0.905 0.957 0.97892 China 0.772 0.798 0.851 0.665
134 India 0.612 0.640 0.643 0.553169 Liberia 0.442 0.548 0.562 0.215172 Mozambique 0.402 0.380 0.478 0.347176 Congo (Democratic Republic of the) 0.389 0.377 0.608 0.182179 Central African Republic 0.370 0.362 0.419 0.328180 Sierra Leone 0.365 0.372 0.403 0.320
Source: UN Human Development Index.
GDP and HDI
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.
0
20
40
60
80
100
120
140
160
180
0 20 40 60 80 100 120 140 160 180
Rank by HDI excluding GDP
Ra
nk
by
GD
P p
er
Ca
pit
a
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?
Source: Gallup World Poll
Happiness and income across countries
Life satisfaction and real GDP per capita across countries, 2010
Happiness and income across individuals in the U.S.
Happiness and income across time in the U.S.
Source: U.S. General Social Survey
Does money buy happiness?
Source: Layard, R (2005), ‘Happiness: Lessons from a new science’
51
1. What is macroeconomics?
2. Defining GDP
3. Welfare & Income
4. GDP: The production function
Lecture 1 : Introduction
National accounting and the wealth of nations
• 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 ��.
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):
��/�� = �� = ��(��/��) = ��(��)
The neoclassical production function
Higher capital stock per capita increases output per capita
Output per worker y
Capital per worker �
� = ��
Low � high �
Higher TFP increases output per capita
Output per worker y
Capital per worker �
� = ��
�
Increase in �
�� = ��(��)(��)
��
Take log- of both sides and first time difference:
log ������
= log ������
+� log ������
+(1 − �) log ������
!� = !� + �!� +(1 − �)!�
Output growth !� comes from TFP growth !� and
growth in inputs !� and !� .
Output per capita:�� = ��(��)
!# = !� + �!$
Growth Accounting
Growth Accounting in China and India (1993-2004)
Employment
Physical Capital
Education
TFP
Employment
Physical Capital
Education
TFP
Source: Bosworth & Collins, 2007 ‘Accounting for growth: Comparing China and India’
Shares of the different factors of growth
China India
• Macroeconomics is about short/medium-term fluctuations of
the main aggregate economic variables but also about long-
term 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.
Summary
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