To analyze an economy: some starting points

Simple indicators

Gross National Product

Balance of Payments

Ari Kokko

How do you describe an economy?

GDP Growth Unemployment Inflation Interest rates Exchange rate Balance of

Payments Economic policy

Development Welfare Quality of life Income distribution Rule of law Democracy Sustainability

Ari Kokko

Basics Gross national product (GDP)

– the value of all goods and services produced in an economy during a year (aggregated value added)

– rought proxy for ”development” or ”welfare”

national produkt = nationalvincome– since value added is what the firm pays to

employees and capital owners

Ari Kokko

How good a measure is GDP?

Includes mainly market transactions (unpaid home work and ”black markets” excluded)

evaluation based on market (or based on cost, as in the case of public services)

does not say anything about income distribution, environment, quality of life

…but no simple alternatives available

Ari Kokko

Some identities

GDP = Consumption (C) + Investment (I) + [Exports (X) - Imports (M)]

Sometimes simpler to reshuffle and state as

GDP + M = C + I + X

(supply = alternative uses)

Ari Kokko

Identities

Can be further manipulated to state the relation between internal and external balance

S - I = X - M

(internal balance = current account)

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Current account

Not only a measure of external balance, but also reflection of internal balance

Deficits may or may not be serious depending on– why a deficit has been generated– how the deficit is financed

Ari Kokko

Balance of payments

Trade balance (X - M for goods)

+ Service balance (X - M for services)

+ In and outflows of capital incomes

+ In and outflows of transfers and gifts

= Current account

= Capital balance (with opposite sign) that shows how a deficit is financed or how a surplus is invested

Ari Kokko

Capital balance

Capital balance = foreign direct investment + portfolio investment + loans + changes in foreign reserves + errors and omissions

Should always equal the current account but with the opposite sign

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Example: Sweden 1992 and 19951992 1995

Trade balance 36,5 114,8Service balance -15,0 -12,0Capital income -57,2 -45,0Transfers -13,5 -22,2Current account -49,2 35,6FDI inflows -0,2 103,1FDI outflows -2,4 -80,0Portfolio investment 30,7 -16,6Loans 30,6 -37,1Capital balance 58,7 -30,69Reserves 14,0 9,9E&O -23,5 -14,9