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What is economics and why should we study it? Global Economics Globalization is the process of integration of an economy into the world economy. This process involves output markets, labor markets, capital markets…. • • • • • • Immigration and Economic Development Technological Changes and Trade Outsourcing Foreign Investment and Currency Currency and Trade International Economic Shocks and Domestic Economics Stability » These are just some of the major venues through which world economy affects our economy Trade (% of GDP) 2003 World 47.84 Upper middle income 68.53 Middle income 61.98 High income 45.29 Lower middle income 57.10 Low income 44.61 Sub-Saharan Africa 64.28 South Asia 33.33 Middle East & North Africa 58.16 Latin America & Caribbean 45.53 European Monetary Union 68.25 East Asia & Pacific 74.17 United States 23.66 Definition: Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product. For the US see BEA The World Economy GDP (constant 2000 USD) % of World GDP in billions World High income Upper middle income Middle income Lower middle income Low income Sub-Saharan Africa South Asia Middle East & North Africa Latin America & Caribbean East Asia & Pacific European Monetary Union United States 35111 27820 2490 6244 3754 1052 390 755 521 2132 2344 6476 10764 Source: WDI: 2006, World Bank Population % of World Population GDP per capita (constant 2000 USD) GDP per capita, PPP (constant 2000 USD) 100 16 9 47 38 37 11 23 5 9 29 5 5 5516 27705 4322 2069 1538 449 537 522 1736 3906 1254 20934 36655 8187 28482 9614 6210 5422 2111 1781 2635 5346 7314 4920 25847 36465 in millions 100 79 7 18 11 3 1 2 1 6 7 18 31 6365 1004 576 3018 2442 2343 726 1447 300 546 1870 309 294 Income distribution in 2004 Lower income group: GNI per capita PPP< $1878 Lower middle income: GNI per capita PPP < $4244 Middle income group: GNI per capita PPP <7515 Upper middle income group: GNI per capita PPP < $18589 High income group: GNI per capita PPP > $18589 The planet Earth in the darkness of the night* * Image source: NASA (http://antwrp.gsfc.nasa.gov/apod/ap001127.html) 2003: Health expendit ures per capita (current USD) 2004: cases of TB per 100,000 2004: Internet Users per 1000 World 587.79 139.47 139.93 Upper middle income 279.96 112.15 Middle income 116.29 High income Mobile phone subscrib ers per 1000 Infant mortality rate per 1000 PCs per 1000 people 67.32 279.34 54.09 129.77 159.33 69.15 484.18 23.36 121.75 113.63 91.83 70.22 293.61 30.02 60.86 3449.40 17.11 544.93 78.74 771.72 6.12 574.14 Lower middle income 77.49 113.97 75.91 70.47 248.86 31.58 46.20 Low income 29.62 223.99 24.34 58.68 42.15 79.45 11.29 Sub-Saharan Africa 36.42 363.14 19.44 46.22 74.08 100.47 15.05 South Asia 23.78 177.21 26.14 63.41 41.31 66.41 12.14 Middle East & North Africa 92.41 53.91 58.00 69.35 128.61 44.09 48.55 Latin America & Caribbean 221.68 63.51 114.53 72.19 318.36 26.52 92.40 European Monetary Union 2552.10 13.00 443.22 79.38 904.19 4.11 420.84 64.11 137.75 73.79 70.28 243.47 29.16 38.19 5711.00 4.70 629.99 77.43 616.73 6.70 749.18 East Asia & Pacific United States Life expectan cy at birth Correlation between life expectancy and the standard of living as measured by the GDP per capita (PPP) is positive 0.63, see the stats table Health care expenditures per Life expetance at Physicians per 1000 capita (current USD) birth 2003 people, 2001 2002 % of population with improved water access 2002 Mexico Canada United States 73.64 79.34 77.41 1.71 2.10 379.00 2222.00 5274.00 91.00 100.00 100.00 France Germany Italy United Kingdom 79.26 78.33 79.83 77.63 3.29 3.62 6.07 2348.00 2631.00 1737.00 2031.00 100.00 100.00 100.00 100.00 Ukraine Russian Federation Belarus 68.29 65.71 68.17 2.97 4.17 4.50 40.00 150.00 93.00 98.00 96.00 100.00 Kenya Nigeria Tanzania Zimbabwe 45.41 44.91 42.67 38.53 19.00 19.00 13.00 118.00 62.00 60.00 73.00 83.00 Electric power consumption (KWH per capita) 2002 Internet users per 1000 people 2002 Television sets per 1000 people 2001 Mexico Canada United States 1659.70 15613.00 12183.00 98.48 512.83 551.38 281.96 690.63 937.51 France Germany Italy United Kingdom 6606.40 6046.00 4901.20 5618.00 313.83 436.17 352.44 423.10 631.92 637.41 Ukraine Russian Federation Belarus 2229.20 4291.20 2656.60 18.75 81.57 361.77 Kenya Nigeria Tanzania Zimbabwe 120.31 68.17 62.14 831.40 12.70 3.50 2.32 42.98 25.98 102.63 44.65 55.62 950.48 Economic development = quality of life Correlation with GDP per capita based on PPP Life expectancy at birth Child mortality rate Healthcare expenditures per capita % of population with improved water access Internet users per 1000 people 0.61554089 -0.597142331 0.898003539 0.542805766 0.87013155 Evaluating Economic Activity Output – production, the process of income creation •GDP - the total market value of all final goods and services produced by factors of production located within a nation’s borders over a period of time •GNP - the total market value of all final goods and services produced by factors of production owned by a nation over a period of time Relation of Gross Domestic Product and Gross National Product [Billions of dollars] www.bea.gov 1994 Gross domestic product 2000 2001 2002 2003 2004 7,072.20 9,817.00 10,128.00 10,469.60 10,971.20 11,734.30 Plus: Income receipts from the rest of the world 186.4 382.7 322.4 305.7 343.7 415.4 Less: Income payments to the rest of the world 160.2 343.7 278.8 275 275.6 361.7 7,098.40 9,855.90 10,171.60 10,500.20 11,039.30 11,788.00 Equals: Gross national product Output and Income GDP and GNI •GDP is a measure of production, and production represents economic activity. Note that the sale of output is simply a transfer of ownership (or wealth), while the production of output is the process of generating wealth. The production generates incomes to the factors of production, which are then distributed to the inputs: -pay wages to employees -pay interest to lenders -pay profit to capital owners etc. •Therefore total value of output is equal to total income. In what we can consume we are limited by what we produce. •Therefore GDP per capita (GDP/population) is a measure of average income in a country. Understanding GDP • How should the following count? – Purchase of MSFT shares through e-trade broker – Purchase of a previously owned house – Purchase of a new house from a construction company – Purchase of a used car from a private individual – Purchase of a used car from a used car dealer – Purchase of a class at GSU – Build up of dealer inventories? – Cooking your own meal? – Going out to a restaurant? Understanding the GDP II • How should the following count? – Purchase by Ford Comp. of new tires from a tire supplier? – Purchase by me (private car owner) of new tires from a tire supplier – Purchase of oil by an American oil company from another American oil company (oil is domestically extracted) – Purchase of oil by an American oil company form a foreign supplier of oil – Receipt of dividends by a US resident from a Russian company – Production of new Nissan Altima cars by a US based Nissan Facility – Production of new VW Jetta cars by a Mexico-based VW facility Comparing Incomes Across Countries Real PPP GDP per capita as a measure of the standard of living. Standard of living: Income/Prices • Read GDP as a measure of income • Adjustment for the cost of living: difference in prices Purchasing Price Parity – adjustment for the cost of living. Prices differ across countries creating differences in purchasing power of money. For instance, 1000 USD buys more (today, probably less) in Moscow than in Atlanta. Constructing a cost of living index • Fixing a market basket • Tracking that market basket through different locations GNI per capita in 2001, PPP method (current international $) World Bank Development Indicators for 2003 Less than 1710 1710-3560 3560-6250 6250-15110 Over 15110 No data available Income distribution in 2004 Lower income group: GNI per capita PPP< $1878 Lower middle income: GNI per capita PPP < $4244 Middle income group: GNI per capita PPP <7515 Upper middle income group: GNI per capita PPP < $18589 High income group: GNI per capita PPP > $18589 Real GDP growth rate in 2000 World Bank Development Indicators 2003 Less than –0.6 -0.6 < . < 0.8 0.8 < / <2.1 2.1 < . < 4.2 Over 4.2 No data available Real GDP growth rate in 2001 World Bank Development Indicators 2003 Less than –0.6 -0.6 < . < 0.8 0.8 < / <2.1 2.1 < . < 4.2 Over 4.2 No data available Evaluating economic activity - Inflation • Inflation – the rate of growth in the average of all prices • Measuring inflation: – Price Index • CPI • PPI • Core Index • Real versus Nominal measures • US statistics: www.bls.gov Real versus Nominal i N GDP i 1 PiQi Nominal GDP growth rate = output growth rate + price level growth rate Growth in Nominal vs Real GDP Nominal GDP USA Real GDP 8.0 7.0 6.0 level of growth 5.0 4.0 3.0 2.0 1.0 0.0 1995 1996 1997 1998 1999 2000 year 2001 2002 2003 2004 Characteristics of Recent US inflation • Low level • Non-uniform • Impact of dollar exchange rate/weaknesses in foreign economies in the 1990’s; a characteristic of globalization in the output markets • Recent impact of the price of Oil Impact of Inflation • • • • Menu costs Redistribution of wealth Instability of relative prices Currency value – the law of one price for internationally traded goods • Increased costs associated with forward looking financial arraignments Sources of Inflation • Tight labor market – Overheated economy: US in the late 1990’s • Strong Monetary Expansion – Germany in the 1920’s; Russia in the early 1990’s • Rapid increases in input costs (other than labor) – US economy today and the price of Oil • Currency depreciation – Recent dollar depreciation, particularly against the currency of China Short international comparison Inflation, consumer prices (annual %) 2000, selected high income countries, source: World Bank Australia Austria Belgium Canada Denmark Finland France Germany Greece Iceland Ireland Italy 4.48 2.35 2.55 2.75 2.92 3.37 1.7 1.95 3.15 5.16 5.56 2.54 Japan Korea, Rep. Luxembourg Netherlands New Zealand Norway Portugal Spain Sweden Switzerland United Kingdom United States -0.67 2.25 3.15 2.52 2.62 3.09 2.87 3.43 1 1.58 2.93 3.38 Aruba Bahamas, The Bahrain Cyprus Hong Kong, China Israel Kuwait Netherlands Antilles Qatar Singapore Slovenia 4.04 1.61 -0.7 4.14 -3.75 1.12 1.81 5.82 1.68 1.36 10.85 Evaluating economic activity Unemployment • Defining labor force, unemployment, labor force participation rate • Measuring unemployment • US unemployment statistics: www.bls.gov • Structural and cyclical unemployment Labor Market Conditions in a few selected economies in 2001 (Unemployment Rate is for 2000) (Females as % of Unemployment Labor Force (mil) Labor Force Rate United States 146.711 46.1 4.1 United Kingdom 29.418 44.21 5.3 Switzerland 3.893 40.64 2.7 Russian Federation 77.616 49.22 11.4 Pakistan 53.482 29.05 5.9 India 460.533 32.39 .. France 26.849 45.2 10 Mexico 41.319 33.48 .. European Monetary Union 142.162 41.341 9.763 In 2001 EMU included Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, The Netherlands, Spain, Portugal Supply - Demand • Market – Product definition – Geographical boundaries • Demand: Q = F (P, all other relevant factors) – Law of demand: as Price increases quantity demanded decreases – Relevant factors • Income – Normal: Income increases demand increases – Inferior: income increases demand decreases • Related in consumption goods – substitutes: Px increases demand for Y increases » MARTA and GSU parking – Complements: Px increases demand for Y decreases » GSU parking and gasoline use • And many other factors… – Interesting demand functions: • Vertical demand: no price sensitivity – Gasoline demand in the short-run – Your demand for this class if you are one class away from graduation Supply - Demand • Supply: Q = F (P, all other relevant factors) – Law of supply: as Price increases quantity supplied increases – Relevant factors • Cost of production – Cost of factors of production » Wages, interest rate – Production technology » Productivity and cost of production • Related in production goods – Substitutes in production » Same resources can be used to produce either good » Condos versus single family homes – Complements in production Market equilibrium (private goods with no externalities) • Quantity demanded = quantity supplied – Market clearing • No excess supply or shortage • Properties of the Market Equilibrium – Stability – Efficiency: • Welfare to society – Consumer surplus – Producer surplus Supply-Demand Example: The ForEx Market How Many Dollars Buy One Euro? Foreign Exchange Rates Series: EUR (European Monetary Union Euro) 10 AM 1/4/2006 7/4/2005 1/4/2005 7/4/2004 1/4/2004 7/4/2003 1/4/2003 7/4/2002 1/4/2002 7/4/2001 1/4/2001 7/4/2000 1/4/2000 7/4/1999 1/4/1999 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 USD exhcnage rate against the Canadian Dollar Source: FRB, NY 1/2/2006 1/2/2005 1/2/2004 1/2/2003 1/2/2002 1/2/2001 1/2/2000 1/2/1999 1/2/1998 1/2/1997 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Should We Be Concerned With The Fluctuating Dollar? • TRADE and Currency Fluctuations – Price Changes – Standard of Living – Commodity Prices Date USD per EURO USD Price of OIL Euro Price of OIL March 1, 2002 0.8652 22.40 25.89 March 3, 2003 1.0835 35.88 33.11 March 1, 2004 1.2431 36.86 29.65 March 1, 2005 1.3189 51.68 39.18 % change over the period 52.44 130.71 51.35 The ForEx Market • Supply of the USD – Imports to the US • Goods (trade) • Services (tourism) – US investment abroad • Foreign Financial Markets • Direct investment abroad – Central Banks – Speculation • Demand for the USD – US Exports • Goods • Services (tourism) – Foreign Investment into US • US Financial markets • Direct investment – Central Banks – Speculation The Interesting 90’s • 1991-92: Collapse of the USSR Block, beginning of the Transitional Recession in Eastern Europe • 1994 Mexican Currency Crisis • 1991(2)-95 The Balkan Wars • 1998 Recession in Japan • 1997 (July) Beginning of the Asian Financial Crisis • 1998 major Rouble Crisis US ECONOMY average % rates 19922000 20012004 Real GDP 3.7 2.5 Gross Domestic Private Investment 8.7 1.8 Non-Residential Investment 9.1 0.2 The market for USD in the 90’s P of USD Influx of investment stimulated Demand D S Increase in imports stimulated Supply Demand Effect Dominated (thus positively effecting consumers’ standard of living) The post 90’s era • United Europe – 10 New Countries Entered the Union on May 1st of 2004, bringing the total number of member states to 25, with combined population of over 430 million (US population is 293 million). • Growth in Russia and China nearing double digits • Emerging Economies of Brazil and India • Threat of Terrorism to the US • Continuous Growth in US Trade Deficit The market for USD in the post 90’s era P of USD D S Supply effect appears to be dominating The demand effect The BIG picture • • • • Rise in Imports Increase in Supply Depreciation Rise in Exports Increase in Demand Appreciation Influx of Investment Increase in Demand Appreciation Outflow of Investment Increase in Supply Depreciation Modern Economic Systems • A modern Mixed Economy: Capitalism with elements of Socialism • An economic system – Capitalism – Socialism – Communism • An economic system and economic efficiency – What? How? For Whom? – Market Economy versus Command Economy General government final consumption expenditure (% of GDP) 30.00 26.91 25.00 23.40 21.27 21.52 20.00 16.67 15.00 14.23 General government final consumption expenditure (% of GDP) 10.00 5.00 0.00 United States Sw eden Russian Federation Data for 2001, source: World Bank Norw ay Finland France Market Economy Prices play two roles: signaling mechanism and distribution mechanism Consumer and producer surpluses: Welfare economics Income effect on the demand Consumer sovereignty (voting with dollars) Price controls and lack of adjustment on the part of the market Market efficiency Presence of government in the production process Competition Versus Monopoly Mixed industry: GSU versus Emory Can GSU be viewed as a competitive firm? Large presence of the government in an industry: Primary education Government Monopoly: Provision of some public utilities in certain areas, such as water services in Fulton county Soft Budget Constraint Command Economy Command Economies of Eastern Europe and USSR • History: 1917, 1945, 1985, 1989-1991 50’s 60’s 70-75 75-80 80-85 GNP growth 5.7 5.2 3.7 2.6 2.0 Productivity Growth 1.6 (1.4) 1.5 (0.9) 0 (1.5) -0.4 (-0.8) -0.5 (-1.2) • Structure of command economy: – – – – – – – Central planning versus price mechanism State ownership versus private entities State monopoly versus competition Quality versus quantity Pricing of raw materials (USSR and the Eastern Block) Emphasis on industrialization (USSR) Principal-Agent problem Industry value added as % of GDP 60.000 50.000 40.000 Poland Romania Russian Federation 30.000 Ukraine France Germany 20.000 10.000 0.000 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: World Bank Economies in Transition: Real GDP growth rates 10.00 5.00 0.00 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Poland -5.00 Romania Russian Federat ion Ukraine Unit ed St at es -10.00 France Germany -15.00 -20.00 -25.00 Reforms in Transitional Economies planning is great if you have the opportunity to do it • Privatization • What’s the value of state enterprises? • How should the shares of those enterprises be allocated? – Poland (intermediate funds), Czech Republic (vouchers), Yugoslavia (worker-control), Russia (combination of vouchers, management control…) – Effect of the scheme on the scope of restructuring - income distribution - government budget - differences between the economies of the USSR and those of Eastern Europe • Price liberalization • Shock therapy versus gradual approach - Poland (January 1, 1990) versus Hungary and the experience of Russia • Sequence of reforms (political and economic) and income inequality • Financial Stability and exchange rate Principles of Trade • Absolute Advantage: total cost • Comparative Advantage: relative (opportunity) cost Consider two economies (A, B), each endowed with 200 worker-hours. Consider that there are only two goods being produced (X, Y). Consider that in country A the hourly wage is $A10, while in country B it is $B20, for simplicity assume that $A=$B. Table below shows costs in each country: A B X 1 ($A10) 1 ($B20) Y 3 ($A30) 2 ($B40) What can be said about the absolute and comparative advantage principles in this case? Productivity and trade (education, physical capital…) Currency and Trade