Download EC102 Economics B

EC102EconomicsB Class1
Week3/LT 25.01.2016
SamiraBarzin
[email protected]
samirabarzin.jimdo.com
OfficeHoursEC102:Mon10:30–11.30
(32L1.30)
EC102
Class1:Q1
SamiraBarzin
WhichofthefollowingstatementsaboutGDPandRealGDP
arecorrect?
a)  GDPisthevalueofallgoodsproducedbytheeconomy
inagivenperiod
b)  GDPisthesumoftotalconsumpXonbyhouseholdsand
governments,investment(incl.newhouses),andnet
exports
c)  RealGDPcontrolsforinflaXonbyusingconstant-base
yearprices
d)  RealGDPcontrolsforinflaXonbyusingthepricesofa
basecountry
EC102
Class1:Q1
SamiraBarzin
GDP
TheGrossDomesXcProduct(GDP)isameasureoftheeconomic
performanceofacountryinagivenXmeperiod
TheGDPincludesthefollowing
•  ConsumpXon(byhouseholds)
•  Governmentexpenditures(bythegovernment)
•  Investments(byfirms)
•  Netexports:Exports–Imports
=>GDP=Y=C+G+I+(X–M)
-  importsarenotproducedinthecountry,hencetheyarenotpartofthe
GDP
-  Cvs.I:investmentsnormallyresultinareturninthelaterfuture,i.e.
outputgrowthduetoanewfactory,consumpXonisaoneXme
expenditurethatwillnotproduceanyreturns
EC102
Class1:Q1
SamiraBarzin
Source:TheWorldBank
EC102
Class1:Q1
SamiraBarzin
Source:TheWorldBank
EC102
Class1:Q1
SamiraBarzin
DifferenttypesofGDP
RealGDP
-  calculatedwithfixedprices
NominalGDP
-  calculatedwithcurrentprices
AdvantageofusingRealGDPtomeasureGDP:therealGDP
usespricesofabaseyear(i.e.pricesarefixed),sothatany
changesintheGDPoverXmeareonlyduetochangesin
output(andnotchangesinprice)
EC102
Class1:Q1
SamiraBarzin
Asmallexample:
Year1:10goodsareproducedintheeconomy,eachcosts£2
(year1isthebaseyear)
nominalGDP1:£20(10(goods)x£2(priceyear1))
realGDP1:£20(10(goods)x£2(priceyear1))
Year2:10goodsareproducedintheeconomy,eachcosts£3
nominalGDP2:£30(10(goods)x£3(priceyear2)
realGDP2:£20(10(goods)x£2(priceyear1))
->Thereisnochangeintheoutputproducedfromyear1to
2,howeverthereexistsanincreaseinprices.Hence,the
growthinnominalGDPisonlyduetopricechanges,realGDP
ismeasuredforbothyearswiththesamepricesandhence
realGDPisnotinfluencedbypricechanges.RealGDPgives
usamoreaccuratedescripXonoftheGDPgrowthoverXme.
EC102
Class1:Q1
SamiraBarzin
WhichofthefollowingstatementsaboutGDPandRealGDP
arecorrect?
a)  GDPisthevalueofallgoodsproducedbytheeconomy
inagivenperiod✖
b)  GDPisthesumoftotalconsumpXonbyhouseholdsand
governments,investment(incl.newhouses),andnet
exports✔
c)  RealGDPcontrolsforinflaXonbyusingconstant-base
yearprices✔
d)  RealGDPcontrolsforinflaXonbyusingthepricesofa
basecountry✖
(inflaXon:changeinthegeneralpricelevel)
EC102
Class1:GDPpercapita
Someoftherichest
countries(intermsof
percapitaGDP(PPP))
EC102
SamiraBarzin
SamiraBarzin
Class1:GDPpercapita
Someofthe
poorestcountries
(intermsofper
capitaGDP(PPP))
EC102
Class1:Q2
SamiraBarzin
TheEconomisthasbeenpublishingtheBigMac
PriceIndexsince1986.Theindexkeepstrackof
theaveragepriceofahamburgersoldindifferent
countries.Forexample,theaveragepriceofaBig
MacinAmericain2015was$4.93;inChinaitwas
only$2,68atthemarketexchangerates.The
graphshowstherelaXonbetweenGDPper
personandtheBigMacprices(allconvertedto
USD)acrosscountriesin2014.TherelaXonisvery
similarinallotheryear.
EC102
Class1:Q2
SamiraBarzin
EC102
Class1:Q2
SamiraBarzin
Giventhegraph,whichofthefollowingstatementswould
betrue?
a)  BigMacstendtobemoreexpensiveinrichcountries
b)  ThereareopportuniXesforarbitraging(buyingatalow
price,sellingatahighprice)BigMacsacrosscountries
c)  WecancomparetheoutputofBigMacsacross
countriesbycompuXnglocalcurrencymarketvalueof
alltheBigMacsproduced,andmulXplybythemarket
exchangerate
d)  InpoorcountriesPPPconsumpXonofBigMacsexceeds
normalconsumpXon
EC102
Class1:Q2
SamiraBarzin
a)  BigMacstendtobemoreexpensiveinrichcountries✔
ThegraphshowsaposiXvecorrelaXonbetweenpercapitaGDPandthe
priceofaBigMac,sothehigherthepercapitaGDPthehighertheBigMac
price(percapitaGDP=averageincomeperperson)
b)  ThereareopportuniXesforarbitraging(buyingatalowprice,sellingat
ahighprice)BigMacsacrosscountries✖
Generallyarbitraging(buyingBigMacsfromacountrywheretheyare
cheapandsellingtheminacountrywheretheyareexpensive)ispossible,
howeverinthisBigMaccasea)imporXngmeatisaproblemb)if
arbitragingwouldresultinposiXveprofitsandmorepeoplewouldengage
inthis,asaconsequencedemandfortheofficialBigMacsinexpensive
countriesdecreases(andpriceswilldrop)andthedemandforunofficially
importedBigMacsincrease(pricewillrise).Sowecanseeanadjustmentof
prices.InthedatawewouldthenseeverysimilarpricesfortheBigMacs
acrosscountries,butwedonotseethisinthegraph.
EC102
Class1:Q2
SamiraBarzin
c)  WecancomparetheoutputofBigMacsacrosscountriesby
compuXnglocalcurrencymarketvalueofalltheBigMacs
produced,andmulXplybythemarketexchangerate✖
Thegeneralpricelevelisdifferentacrosscountries,andthis
calculaXondoesnottakethisintoaccount.Toillustrateassume
theBigMaccosts$5intheUSand£5intheUK,inboth
countries10BigMacsareproducedandthemarketexchange
rateis$1.30for£1.TheUS-Outputwouldbe:$50andtheUKOutputwouldbe£50,butonthemarket£50is$65(50x1.30).
YouwereledtobelievethatthereismoreoutputintheUKsince
$65>$50,butinrealtermsbothcountrieshadanequaloutput
of10BigMacs.
d)  InpoorcountriesPPPconsumpXonofBigMacsexceeds
normalconsumpXon✔
EC102
Class1:Q2
SamiraBarzin
Giventhegraph,whichofthefollowingstatementswouldbe
true?
a)  BigMacstendtobemoreexpensiveinrichcountries✔
b)  ThereareopportuniXesforarbitraging(buyingatalow
price,sellingatahighprice)BigMacsacrosscountries✖
c)  WecancomparetheoutputofBigMacsacrosscountries
bycompuXnglocalcurrencymarketvalueofalltheBig
Macsproduced,andmulXplybythemarketexchange
rate✖
d)  InpoorcountriesPPPconsumpXonofBigMacsexceeds
normalconsumpXon✔
EC102
Class1:Q3
SamiraBarzin
ThereisaposiXvecorrelaXonbetween
a)  GDPandlifeexpectancy
b)  GDPpercapitaandlifeexpectancy
c)  GDPpercapitaandinfantmortality
d)  GDPpercapitaandadultliteracyrate
(AposiXvecorrelaXonexistswhentwovariablesmoveinthesame
direcXon,e.g.xincreases&yincreasesandxdecreases&ydecreases)
*allthegraphsforthesoluXonsaregeneratedfromgapminder.org
EC102
Class1:Q3
a)  GDPandlifeexpectancy✖
SamiraBarzin
Analysingthedatatrends
overXme,itisobservable
thatlifeexpectancy
increasedoverXme,butthe
majorityofGDPsremained
constant.Thereappearsno
posiXvecorrelaXon
betweenthesetwo
variablesandwecannot
concludethatgrowthinlife
expectancyisfromGDP
growth,otherfactorscould
beatplay,i.e.global
advancesinmedicine,
vaccines,infrastructure.
EC102
Class1:Q3
SamiraBarzin
b)  GDPpercapitaandlifeexpectancy✔
Fromthedatawecansee
thatthesetwovariables
bothincreaseoverXmeand
wecanseeobservea
posiXvecorrelaXonofthese
variables:asincomeper
personincreased,life
expectancyincreasetoo.
Wecannotmakeany
statementsastowhether
increasesinGDPpercapita
increasedlifeexpectancy
(weneedtoanalysemuch
moredataforthat),butwe
canobservethattheyhave
movedinthesame
direcXonoverXme.
EC102
Class1:Q3
SamiraBarzin
c)  GDPpercapitaandInfantmortality✖
Fromthedatawecanobserve
thatinfantmortalitydecreased
overXme,whereasincomeper
personincreasedoverXme,so
thesevariablesdidnotmovein
thesamedirecXonandhence
arenotposiXvelycorrelated.
WecanobserveanegaXve
correlaXoninstead(asone
variableincreased,theother
variabledecreased).
EC102
Class1:Q3
SamiraBarzin
d)  GDPpercapitaandadultliteracyrate✔
Fromthedatawecanobserve
thatbothadultliteracyrateand
GDPpercapitahaveincreased
overXmesowehaveaposiXve
correlaXonbetweenthesetwo
variables.Areasonbehindthis
couldbethatastheaverage
incomeperpersongrewina
givencountry,thecountryon
averagebecamericherand
increasedinvestmentsin
educaXon.
EC102
Class1:Q3
SamiraBarzin
PossiblereasonsforthesecorrelaXons
•  Governmentspendingonhealth(hospitals,
doctors,equipment,etc.)
•  R&DandeducaXon
•  Governmentspendingoninfrastructure
(beserroadstoreduceaccidents,beseraccessto
cleanwatertoreducewaterbornediseases)
EC102
Class1:Q3
SamiraBarzin
ThereisaposiXvecorrelaXonbetween
a)  GDPandlifeexpectancy✖
b)  GDPpercapitaandlifeexpectancy✔
c)  GDPpercapitaandinfantmortality✖
d)  GDPpercapitaandadultliteracyrate✔
EC102
Class1:Q4
SamiraBarzin
Whichofthefollowingstatementsaboutgrowthfacts
arecorrect?
a)  GDPperpersonhasbeenstagnantformostofhuman
historyandsignificantgrowthisarecent
phenomenon
b)  TheaverageBriXshresidenttodayalmostcertainly
livesingreatercomfortthananaristocratintheearly
18thcentury
c)  SomeAfricancountrieshavemeasuredGDPper
capitathatarelowerthanBritain’s1,000yearsago
d)  GrowthinGDPpercapitaisalwaysposiXve
EC102
Class1:Q4
SamiraBarzin
ThegraphbelowrepresentsthedevelopmentofGDPpercapitaover
XmeandhowitcomparestocurrentlevelsofGDPperpersonof
othercountries.
EC102
Class1:Q4
SamiraBarzin
a)  GDPperpersonhasbeenstagnantformostofhumanhistory
andsignificantgrowthisarecentphenomenon✔
Fromthegraphwecanread
offthatunXlapproximately
the18th–19thcentury,GDP
percapitahasremained
relaXvelystableataround
0.04.AstheverXcalaxis
measuredtoday’sGDPper
capita,wecanconcludethat
upunXlroughlythe19th
century,GDPpercapitawas
stableataround4%of
today’sGDPpercapita.
EC102
Class1:Q4
SamiraBarzin
b)  TheaverageBriXshresidenttodayalmostcertainlylivesin
greatercomfortthananaristocratintheearly18thcentury✔
ThegraphillustratesthatGDPper
capitahasremainedataround0.04
unXl18th/19thcentury.Wecanseean
increaseataroundthe18thcentury,so
theGDPpercapitaduringthe18th
centurywasapproximately0.1,i.e.10%
oftoday’sGDPpercapita.Theaverage
personinthe18thcenturycouldafford
10%ofwhattoday’saverageperson
can.Assumethatanaristocratwas
aroundthreeXmesricherthanthe
averageperson,then(s)hewouldhave
aGDPpercapitaof30%oftoday’s
income.Asthecountry’swere
generallynotdeveloped,
infrastructure,andthehealthsystem
werealsonotoncurrentlevels.
EC102
Class1:Q4
SamiraBarzin
c)  SomeAfricancountrieshavemeasuredGDPpercapitathatare
lowerthanBritain’s1,000yearsago✔
Fromthegraphwecanreadof
theGDPpercapitalevelsof
somecountriescomparedto
theGDPpercapitaofBritain.
MadagascarhasaGDPper
capitaofaround0.02,thatis
2%oftoday’sGDPpercapita
inBritain.Attheyear1000,
Britainhadanapproximate
GDPpercapitaof0.03of
today’sGDPpercapita(larger
than0.02ofMadagascar
today).
EC102
Class1:Q4
SamiraBarzin
d)  GrowthinGDPpercapitaisalwaysposiXve✖
Source:TheWorldBank
ThegraphshowsGDPpercapitagrowthontheverXcalandXmeonthehorizontalaxis.Allcountries
shownhaveexperiencedadropinGDPpercapitagrowthwiththeglobaleconomiccrisisof2008/2009,
somecountrieshaverecoveredaver.
GDPpercapita=GDP/populaXon,soGDPpercapitacandecreaseifGDPdecreasesorpopulaXon
increases.PopulaXondoesnotfluctuateyearly(itmightdecrease/increaseoverlongXmehorizons),so
mostchangesinthegrowthrateofGDPpercapitaareduetoGDPfluctuaXons.IfGDPpercapita
decreases(itwillsXllbeposiXve),thatmeansitshrunk,sothegrowthrateisnegaXve.
EC102
Class1:Q4
SamiraBarzin
Whichofthefollowingstatementsaboutgrowthfactsare
correct?
a)  GDPperpersonhasbeenstagnantformostofhuman
historyandsignificantgrowthisarecentphenomenon✔
b)  TheaverageBriXshresidenttodayalmostcertainlylives
ingreatercomfortthananaristocratintheearly18th
century✔
c)  SomeAfricancountrieshavemeasuredGDPpercapita
thatarelowerthanBritain’s1,000yearsago✔
d)  GrowthinGDPpercapitaisalwaysposiXve✖
EC102
Class1:Q5
SamiraBarzin
WhichofthefollowingwouldbeapossiblesoluXon
totheshortageofnon-renewableresources?
a)  SubsXtuXontowardsrenewableresources
b)  Increaseefficiencyintheuseofnon-renewable
resources
c)  Recyclingofnon-renewableresources
d)  HoldGDPatcurrentlevels
EC102
Class1:Q5
SamiraBarzin
ThisquesXonaskswhichpossibleopXoncanbeusedto
reduceouruseofnon-renewableresources.
a)  SubsXtuXontowardsrenewableresources✔
UsingmorerenewableresourcesasanalternaXveallowsfora
reducXontheuseofnon-renewableresources(e.g.use
energyfromwindinsteadofenergyfromoilorcoal)
b)  Increaseefficiencyintheuseofnon-renewableresources
✔
Increasedefficiencyallowstoproducethesameoutputwith
lessinput,soincreasedefficiencyintheuseofnon-renewable
resourcesallowstoproducethesameamountofoutputwith
lessnon-renewableresources.
EC102
Class1:Q5
SamiraBarzin
c)  Recyclingofnon-renewableresources✔
Recyclingofnon-renewableresourcesallowstousemoreof
therecycledmaterialsasanalternaXvetoaddiXonalnonrenewableresources,hencereducingtheamountofnew
non-renewableresourcesrequired.
d)  HoldGDPatcurrentlevels✖
IfGDPremainsconstant,thesameamountofnon-renewable
resourcesisalsorequiredtoproduceit,hencethiswouldnot
beareducXonintheuseofnon-renewableresources.
EC102
Class1:Q5
SamiraBarzin
WhichofthefollowingwouldbeapossiblesoluXon
totheshortageofnon-renewableresources?
a)  SubsXtuXontowardsrenewableresources✔
b)  Increaseefficiencyintheuseofnon-renewable
resources✔
c)  Recyclingofnon-renewableresources✔
d)  HoldGDPatcurrentlevels✖
EC102
SamiraBarzin
Class1:EssayQuesXon
AccordingtoWorldBankesXmates,in2014the
nominalGDPoftheUSandChinawere$17.42trio
and$10.36triorespecXvely.Inthesameyear,the
PPPGDPoftheUSandChinawere$17.42and
$18.03triorespecXvely(thusmakingChinathe
largesteconomyintheworldintermsofPPPGDP).
EC102
SamiraBarzin
Class1:EssayQuesXon
a)  WhyarethenominalandPPPGDPsoftheUSthe
same?
WhatdoesPPPstandfor?
•  PowerPurchasingParity
WhydoweusePPP?
•  UsingPPPallowsforadirectcomparisonofthe
purchasingpowerofacurrencycomparedtoanotherin
realterms;i.e.howmuchofacurrencytoweneedin
eachcountrytobuyafixedamountofgoods
EC102
SamiraBarzin
Class1:EssayQuesXon
a)  WhyarethenominalandPPPGDPsoftheUSthe
same?
•  Globally,theUS$isgenerallyusedasthebasecurrency
againstwhichallothercurrenciesarecomparedto
•  Hence1US$buysyouasexactlyasmuchas1US$
(e.g.fortheUKthePPPwouldbecalculatedassuch:how
muchmore/lesscanyouaffordwith1£intheUK
comparedto1US$intheUSorifabasketof10bananas
costsUS$10,howmuch£doyouneedtobuythisinthe
UK?
EC102
SamiraBarzin
Class1:GDPpercapita
Source:TheWorldBank
EC102
SamiraBarzin
Class1:GDPpercapita
Source:TheWorldBank
EC102
SamiraBarzin
Class1:GDPpercapitaPPP
Source:TheWorldBank
EC102
SamiraBarzin
Class1:GDPpercapitaPPP
Source:TheWorldBank
EC102
SamiraBarzin
Class1:WhydoweneedPPP?
Burundivs.Norway&GDPp.c.vs.GDPp.c.PPP
(theGDPpercapitaandPPPareconverted$foreasiercomparison)
GDPpercapita
-Norway–GDPpercapita:$97,307vs.Burundi–GDPpercapita:$286
TheaverageNorwegianas340Xmesaremuchincomeastheaverage
Burundian.
GDPpercapitaPPP
-Norway–GDPpercapitaPPP:$64,856vs.Burundi–GDPpercapitaPPP:
$770
TheaverageNorwegianhas84XmestheincomeofanaverageBurundian
PPP.
InNorwaythepricesaremuchhigherthaninBurundi,PPPincludesthis
informaXonanddoesnotonlyconvertstheGDPp.c.usingtheconversion
ratebetweenthecurrenciesbutalsoincludestheinformaXonastohow
muchcanyouaffordwiththecurrencyofacountryinthatcountry.
Theaveragecanafford84XmesaremuchinNorwayastheBurundiancanin
Burundi(sXllalotmore,butnotasmuchas340Xmesmore).
EC102
SamiraBarzin
Class1:EssayQuesXon
b)  WhyistheChineseeconomy’sGDPPPPlargerthan
itsnominalGDP
•  NominalGDP:measuredincurrentprices
•  GDPPPP:measuredinUS$PPP
•  PricesinChinatendtobemuchlowerthanintheUS,
hencethenominalvalueisbasedonthelowprices
whereifChineseoutputismeasuredinUS$PPPand
hencemuchlarger
EC102
SamiraBarzin
Class1:EssayQuesXon
c)  WhyistheChineseeconomy’sPPPGDPlargerthanthe
US’sPPPGDP?
•  TwofactorsinfluencethiscalculaXon
–  Economy/GDP
–  Prices
TocomparetheChineseGDPandtheUS’sGDP,weneedto
expresstheminacomparableunit.Adirectcomparisonof
GDPs(evenifbothareexpressedinUS$)doesnottakethe
pricelevelofthecountryintoaccount,PPPtakesthelower
pricelevelinChinaintoaccount.
ChineseoutputinphysicalquanXXesismuchlargerthanthe
US’sGDP,henceChina’sGDPPPPislargerthanUS’sGDP
PPP.