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International
and
Domestic Macro
Comparisons
Basic Performance Measures
Winter 2001 - Economics 102
Mr. Smitka
GDP levels
• Y = C + I + G + X - M is our basic measure
– Represents final demand
• total production
• thus also total income
• How does the US fare?
– Income per capita?
– Income growth?
Comparing GDP Internationally
• Growth rates can be directly compared
• Still, in the long run distortions arise
• Growth levels cannot be directly compared
• Prices vary a lot across national borders
• Exchange rates don’t solve this problem
•
Forex rates aren’t set by trade
• Forex rates also can vary by 5% a week
• GDP clearly doesn’t rise and fall that rapidly!
PPP comparisons
• Instead of using nominal GDP data and
exchange rates a common set of prices must
be constructed
• Output quantities in each country can then
be used with such common “international”
prices
• PPP (purchasing power parity) is the jargon
GDP per capita
• The US leads (except for tiny Luxembourg)
• The EU is about 75% of the US level
– Developed Asia is similar (Japan, Australia, NZ)
– Iberia & Greece are at a bit lower
• The developing world has far lower output
– And according far lower incomes
– The citizens of Mexico, Turkey & Poland receive only
25% the average income of the US
– The rest of the world is poorer, often much poorer
GDP Growth Rates
5
4
3
Canada
2
Mexico
United States
Japan
1
Korea
0
-1
-2
98Q3
98Q4
99Q1
99Q2
99Q3
99Q4
00Q1
00Q2
00Q3
US Growth is strong, too
• US real growth - 4.1% pa - is well above average
• The EU grew slowly --Italy, Germany, France, the
UK - except for Spain
• Japan in fact did worse in 1990-99 as a whole
(and Korea did better)
• Ireland is the star -- a nice paper topic: why??
US cyclical performance
• Postwar real GDP grew 3.5% pa
• Output thus doubled every 20 years
. . . but short run growth ...
• The post-WWII recession reflected an end
to wartime I, not lower C
• The Great Depression remains anomalous
– … thankfully!!
– but such crises afflicted many developing countries
Inflation
• Mild since the Civil War
• Clear bouts associated with
–
–
–
–
–
WWI
WWII
Korean War
Vietnam War
1st & 2nd Oil Crises
Growth & Inflation?!
• Periods of sustained growth often are
accompanied by rising inflation
– 1954-57
– 1971-73
– 1964-69
– 1976-79
• But not booms in the late 1980s and 1990s
– other factors matter!
– plus the time lag varies!
OECD Inflation Comparisons
• US inflation is not high, but not low
• Japan is very different - deflation!!
• Mexican inflation rates are high
• if continued prices double in 6 years
• No country suffers hyperinflation
• Linked to war or political breakdown
- Russia (USSR “transition”)
- some LDCs
- Weimar Germany
Inflation composition
• Prices move in different directions for
different goods
• Energy has been very volatile, up and down
• Food prices also bounce around a lot
– Still, focusing on “core” inflation (non-food,
non-energy) can be misleading...
Unemployment
• During the last 20-odd years:
• European U is high
• Japanese U is low
• US is moderate
• Long-term unemployment also varies
• ∑ economic structure matters
• As do details of definitions of U and data collection
Women & youth
• Women generally suffer more U
• Youth suffer much higher U
• In the US male youth U is high - not female
• Such male youth U is geographically based
• It also correlates closely with crime
Unemployment variation
• It correlates with growth (surprise?!)
• Cyclical factors are not the only influence
• Hence we distinguish:
– Cyclical U
– Structural U
– Frictional U
Causation
• A sharp drop in investment
– “causes” higher U with a lag
– “causes” lower Y growth with a lag
• Y growth and U are more simultaneous
• The relationship is clearly complex, and is
affected by other factors
Causation
• So what “causes” variability
• “cause” is in parentheses for now -- it merely
indicates statistical correlation
• A starting point: how do the elements of
GDP vary
• As share of GDP
• In terms of growth rates
Shares of GDP
• Consumption is large but steady
– Some variation, and since large need to detail
– In fact, the puzzle is stability, not variation!
• Government is even steadier
– A one-time change with Korea & Cold War
– Secular shift from Federal to State & Local
– See next slide….
Trade
• One major shift: trade
– 4% of Y in 1950s
– 8% in 1973 with oil crisis
– 12%-14% today
• Net trade
– Remains smallish
– Shift from small surplus to 3+% deficit
– Some variability, too
Investment
• Far more volatile than C or G
– C & G are larger, but I is still 1/6th of GDP
• I is the proximate cause of business cycles
– See charts following…
– We’ll also see that shifts in I are amplified
• What parts of I vary?
– Business fixed investment
– Residential (housing)
Why the business cycle?
• Why does C not vary?
• Life cycle models
• Why does housing investment vary?
• Interest rates shift mortgage costs
• Why does business investment vary?
• “Animal spirits” (Keynes)
• Net trade? -- some impact of interest rates
• Government -- fiscal policy (taxing & spending) not central
Factors Driving Business Cycles
• All components of GDP shift over time
• C is the largest component
– It however tracks GDP (= national income)
– Indeed, the puzzle is why is it so stable?
• G varies primarily with war
– Also long-run shift from Federal to State/local
– Not a source of the business cycle
Investment
• Investment is by far the most volatile item
– At 1/6th of GDP, big enough to matter
– Residential investment volative
• Interest rates affect it
– Business plant & equipment investment
• Keynes’ “animal spirits” affect it
• Net trade now sometimes matters
• Interest rates shift forex, shifting levels
Contribution Graph
• In the previous graph, dark blue line is GDP
• Bar graphs reflect contribution to change in
GDP growth
– Portions below 0 are slowing growth
– Portions above 0 add to growth
• Drops in investment drive recessions
– Net trade declines contribute, too
Conclusions
• We are left with questions / hypotheses
– Why does investment vary?
– Why doesn’t consumption vary?
– How strong / constant is the link between
declines in growth and unemployment?
– What is the link between growth and inflation?
• Why do long-run growth / U etc vary across
countries?