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Macroeconomics
&
Global Economics
Presentation 5
Barbara Annicchiarico
Measures
• Key variables
– Gross domestic product (GDP): a measure of
the value of all of the goods and services
(exluding intermediate goods) produced in a
country in a year (computed as either the value of
the output produced or as the total income).
Synonym of national income and output.
– Let Y denote income.
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Measures
– GDP growth rates: gy=(Yt+1-Yt)/Yt
– This implies that Yt+n = Yt (1+ gy )n
– Average growth rate in n-years: gy=(Yt+n/Yt)(1/n)-1
– REMARK (in log scale): log Yt+n = logYt + nlog(1+
gy ) logYt + ngy
– Hence: log Yt+1 - logYt =g y
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Measures
– Measuring and comparing GDP of one country at
different points in time: Use price index to express
GDP at constant prices (nominal variables change
as a result of inflation)
– NB: Measuring and comparing GDP of two
countries more difficult.
1) Conversion from one currency to another
(exchange rates are very volatile)
2) Prices of non tradeable goods tend to be
low in developing countries and high in advanced
economies
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Measures
– To overcome this problem we use artificial
exchange rates: purchasing power parity
(PPP) exchange rates which are based on
the prices of a standardized basket of
goods and services.
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Example
Assume a common natural basket of goods 1 TV set and 10 haircuts
Assume an exchange rate E equal to 1.
P=Price Basket in Richland=10+20=30; P*=Price Basket in
Poorland=10+10=20.
The real exchange rate is then found to be EP/P* 30/20=1.5
Converting the GDP of Richland using the real exchange rate we have
120/1.5=80 which is only 4 times the GDP of Poorland.
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Example
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Example
From the example: Japan’s currency
overvalued relative to PPP. Using market
exchange rate Japanese GDP in 2009 was
89% of the US level, while using the PPP, it
was 73% of the US level.
• What do you notice for India, Mexico and
Argentina?
• Why?
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Fact #1
• There is enormous variation in per
capita GDP across countries. The
poorest countries have per capita
income that are less than 5 percent of
per capita incomes in the richest
countries.
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Top Ten Countries in Year 2009
According to Three Different
Measures
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Remarks
•Some countries have high total income GDP
simply because they have a large population.
•What about per capita GDP? Among the top 11
oil producers (Qatar, UAE, Norway, Kuwait,
Brunei) and tax havens (Macau, Bermuda).
•Since 2005….important changes in these
rankings!!! Great recession….
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Top Ten Countries in Year 2005 According to
Three Different Measures
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GDP 2011 - $ constant 2005 price – Source: Penn
World Table
United States
China
India
Japan
Germany
Russia
France
United Kingdom
Brazil
Italy
Mexico
Korea, Republic of
Spain
Canada
Turkey
Indonesia
Iran
Australia
Taiwan
Poland
Saudi Arabia
Netherlands
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
Output-side real GDP at chained PPPs (in mil. 2005US$)
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Fact #2
• Growth rates vary substantially across
countries.
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Figure 1.6 The Distribution of Growth
Rates, 1975–2009
Remarks
• Like income levels, growth rates vary substantially
across countries.
• Growth rates of mature economies: 1.5%-2%
• Growth miracles (China, Equatorial Guinea which is
an oil producer)
• Growth disasters (most of them involved in conflict)
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Annual growth rates- 1990-2010 up to <0.5% low growth rates -Source: Penn World Table
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
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Annual growth rates- 1990-2010 > 2.4% high growth rates - Source: Penn World
Table
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Fact #3
• Growth rates are not generally constant
over time.
• At world level: growth rates were close
to zero over the most history, but have
increased sharply in the twentieth
century.
• At country level: growth rates change
over time.
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GDP per capita growth rates in France
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Source: elaboration on WB data
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Remarks
• Huge instability of the growth rate over
time
• Roughly speaking: higher first and then
lower
• Booms and bursts…. That’s the
business cycle!!! (Main driving forces:
tech shocks, monetary shocks, oil
shocks, external shocks etc….)
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Historical Perspective
• Maddison dataset:
http://www.ggdc.net/MADDISON/oriindex.htm
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Source: Lucas, 2003, The Industrial Revolution: Past and Future
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Source: Elaboration on Maddison Data
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Fact #4
• A country’s relative position in the world
distribution of per capita incomes is not
immutable.
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Remarks
• Since 1820 the gap between rich and
poor has widened.
• The pace of growth has accelerated
• Changes in the relative positions of
country group (see Japan, China).
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Convergence and divergence. Source C.I. Jones
elaborations on Penn World Tables.
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Convergence – Source Blanchard, Macroeconomics.
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Convergence and divergence in the Euro Area- AMECO
data – Per Capita GDP in Germany =100
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Quoting Robert E. Lucas:
“I do not see how one can look at figures like these
without seeing them as representing possibilities. Is
there some action a govermnent of India could take
that would lead the Indian economy to grow like
Indonesia's or Egypt's? If so, what, exactly? If not,
what is it about the 'nature of India' that makes it so?
The consequences for human welfare involved in
questions like these are simply staggering: Once one
starts to think about them, it is hard to think about
anything else.”
On the mechanics of economic growth, JME, 1988, p. 5.
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