Download 7_GDP_2009

Introduction to Economics
Egor Sidorov
1. Aggregate demand
2. Aggregate supply
3. Gross domestic product (GDP)
4. Nominal vs. real GDP
5. GDP critiques
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Aggregate Demand – AD
─ AD is an amount of products the
market agents are willing to buy
P
given the price level.
─ Aggregate demand consists of110
: %
─ Demand for final goods and services
100 %
by households (C),
─ Demand for production factors by
firms (Ig),
─ Demand for production factors by
government (G),
─ Demand for net exports by foreign
agents (X).
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AD
C
I
G
X
Q
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Factors influencing AD (1)
─ Consumption (C) is determined by disposable
income (personal income after taxes) and wealth of
consumers. If the price level goes up, the wealth
goes down. Demographical changes also influence
consumption.
─ Investment (I) is determined by such factors as
production level, capital costs and future
expectations of investors. Monetary policy influences
the investment level.
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Factors influencing AD (2)
─ Governmental expenditures (G) – their level is
determined by governmental decisions about
budgetary expenditures.
─ Net export (X) is a difference between export and
import. Main factors influencing net export are
relation between domestic and foreign price level
and exchange rates. Economic growth abroad
leads to increase of export.
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1. Aggregate demand
2. Aggregate supply
3. Gross domestic product (GDP)
4. Nominal vs. real GDP
5. GDP critiques
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Aggregate Supply – AS
─ AS is a total amount of product, which firms and
households are willing to supply given the price and
wage level.
─ The supply consists of:
P
─ Supply of goods and services by
110 %
firms,
─ Supply of production factors by 100 %
households,
─ Services of the state,
─ Foreign imports.
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AS
Potential product –
refers to the full
capacity of the given
economy with full
employment and full
resource use.
Qr
Qp
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Factors influencing AS and
potential product
─ Production factors (L, R, K),
─ Technology:
─ Increases potential product,
─ Price level and exchange rates,
─ Exchange rate depreciation makes national currency
relatively cheaper and increases export.
─ State economic policy:
─ E.g. high taxes may force part of suppliers to leave
the market, custom fees defend domestic producers.
─ Market agents’ expectations:
─ E.g. willingness to start business, to invest and to
save.
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AS curve shape.
Keynes vs. Neoclassics
─ 2 controversial economic schools:
─ Keynes's economics,
─ Neoclassical economics.
─ Outgoing points:
─ Main discussion is about wage P
and price flexibility.
─ and possibility of state to intervene
into economics.
AS
Qp
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Q
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Neoclassical school (1)
Traditional market economics. “Optimistic
viewpoint” stating that the economics is
healthy and is on its potential (Qp) ►
market mechanism efficiently allocates
production factors and market selfregulations enables long-run efficiency P
and performance with no need of state
interventions.
The main source of inefficiency
is state interventions, especially
those redistributing factors form
private to public sector
(supporting less efficient
governmental investments
instead of private investment).
AS
Classical
shape of AS
where wages
and prices
are flexible
Q
Qp
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Neoclassical school (2)
─ AD stimulation has no sense. With a view to the
fact that economy is on its potential (Qp), this
stimulation leads only to price level increase, i.e.
inflation.
─ In this respect
P
the government should
AD2
aim at providing the stable
AD1
110 %
economic environment
100 %
(motivate production,
business and savings).
Monetary policy is a
primary tool therefore.
AS
Q
Qp
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Keynesian school (1)
─ The Keynesian theory was developed at the
time of economic crisis between the two world
wars and therefore has a “pessimist” viewpoint
► assumes that the economy is under its
potential and is not able of allocating scarce
resources by using only market forces
(therefore e.g. unemployment exists) ► state
interventions are necessary.
John Maynard Keynes
1883-1946
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Keynesian AS curve:
short and long run
P
AS
─ (1) Within the short run some costs are
not flexible (e.g. wages), therefore the
growth of AD involves increase of AS
with no price level changes.
─ (2) In the state close to potential AS goes
up as long as firms are willing to increase
supply in reaction to growth of demand.
The price level also increases however.
─ (3) Within the long run AS is vertical:
costs are flexible and firms are adjusting
their prices in reaction to AD growth
(since they are on potential). In this way
only price level changes.
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(3)
(2)
(1)
Q
Qp
Keynesian AS curve – prices and
wages are flexible within the long
run. Within the short run they are
not as flexible, since e.g. longterm contracts exist.
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Keynesian school (2)
─ Due to low aggregate demand the
product is under potential,
unemployment and other unused
resources are present ► AD should
be stimulated by the means of fiscal
P
policy (e.g. governmental
expenditures); monetary policy may
be applied as well (discount rates).
State interventions are efficient
within the short run.
Presence of economies in
crisis still make Keynesian
ideas actual.
AS
Q
Qp
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1. Aggregate demand
2. Aggregate supply
3. Gross domestic product (GDP)
4. Nominal vs. real GDP
5. GDP critiques
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Economic performance:
Product of the society
─ “Measuring smth means knowing smth
about it; if one can’t express smth in
numbers, it means our knowledge isn’t
sufficient.”
Lord Kelvin (William Thomson)
1824 – 1907, UK
─ National economic performance is
reflected by the amount of goods and
service (in money units) produced
during the accounting period (e.g. a
year).
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System of national accounts (SNA)
─ Basic SNA accounts
─ Production acct
─ Generation of income acct
─ Distribution of income acct
─ Use of income acct
─ Capital acct
─ Financial acct
Production acct
Uses
Intermediate
consumption
Gross value
added (GDP)
Resources
Output
─ SNA data is used for:
─ Economic performance assessment,
─ Economic policy making,
─ Economic policy efficiency assessment.
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Gross domestic product (GDP)
─ Monetary value of final goods and services
produced during the accounting period (e.g. a year)
by production factors situated on the territory of the
country no matter who their owner is.
Gross National Product (or
Income) – total value of goods
and services produced by
production factors owned by the
nation.
Czech GDP
includes output of
Czech and foreign
companies on the
Czech territory.
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Calculating GDP
─ Production approach
─ Expenditure approach
─ Income approach
─ Production approach
CZK 100
CZK 150
CZK 200
─ GDP as a sum of final goods and services used for final
consumption.
─ GDP omits intermediate consumption, which reflects
value of products used for further production processes.
GDP =  Output –  inter. consumption =  Value Added
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Expenditure approach
─ All goods and services sold during the accounting
period; those include expenditures of
─ Households (C = consumption):
─ Households’ final consumption;
─ Consumer goods (excluding dwellings!).
─ Government (G = government expenditure):
─ Building infrastructure, defense, education, etc. (excluding
transfers – pensions, social support, etc.).
─ Firms – (Ig = Gross Investment):
─ Gross investments into machines, buildings, etc.
─ Net export (Ex-Im) = export minus import):
─ Difference between value of goods exported
and imported.
GDP = C + Ig + G + Ex-Im
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Income approach
─ Production and selling of every product is connected
with someone’s incomes as a price paid for
production factors:
─ Labor – wages and salaries,
─ Land – rent,
─ Capital – percent and profit.
Production approach
=
Income approach
=
Expenditure approach
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Notice! Arithmetic sum of incomes is not
equal to GDP, since GDP includes gross
investments and direct taxes and custom
fees among others.
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Capital services theory
─ Capital generates flow of services and
depreciates.
─ Depreciation equals to capital value loss
over accounting period.
Profit
Other costs
Renewing investments
(=depreciation) return capital
stock to initial level
Net
investments
increase capital
stock
GDP as a flow of capital
services
─ The stock of national capital generates flow of
goods and services, i.e. GDP.
─ Gross investment is equal to net investment plus
depreciation.
Depreciation + Net invetsment
GDP = C + Ig + G + Ex-Im
Capital stock
Services
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Gross domestic product vs.
Net domestic product
─ Net domestic product has a more representative
character
─ Net Domestic Product – NDP
─ NDP is calculated as GDP less depreciation.
─ NDP shows the net income, in other words the true
level of how the society is better off in this year
compared to previous accounting period.
NDP = GDP - Depreciation
NDP = C + In + G + Ex-Im
Only net investment
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1. Aggregate demand
2. Aggregate supply
3. Gross domestic product (GDP)
4. Nominal vs. real GDP
5. GDP critiques
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Nominal vs. real GDP
─ Nominal GDP is calculated in current prices;
─ Therefore these indicators are incomparable in time; the
solution is calculating GDP in basic prices.
1995
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>
=
<
2009
26
Deflator
─ Is a complex price index. Incorporates price
changes of all goods and services in the economy.
Price level 2009
Deflator = --------------------------------Price level 1995
PQ

D
P Q
1
1
0
1
20 1

111
20
Deflator = -------------- = 1,81 = 181 %
11
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Real GDP
─ One can use deflator to calculate the real GDP
Nominal GDP in current 2009 prices
Real GDP 2009 = -----------------------------------------------Deflator 2009/1995
20
Real GDP 2009 = ------------- = 11 Kč
1,81
=
1995
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2009
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1. Aggregate demand
2. Aggregate supply
3. Gross domestic product (GDP)
4. Nominal vs. real GDP
5. GDP critiques
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GDP
─ Is an important indicator of economic activity,
─ Shows if the country is a developed or developing,
─ Enables getting support from international
organizations.
─ Is generally (however mistakenly) regarded to be an
indicator of well-being.
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GDP critiques
HDP = C + Ig + G + Ex-Im
─ GDP reflects only those human activities, which are
part of market transactions.
─ GDP ignores everything beyond money exchange.
─ E.g. environmental services are not traded in the market.
Yearly environmental
services = 500 x GDP
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GDP critiques
─ Omits goods and services produced for own
consumption
─ Omits goods and services produced on the black
market
─ Illegal activities as drug dealing, prostitution, media piracy,
etc.
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GDP critiques
─ GDP makes no difference between productive and
destructive activities.
─ It grows before and after the war, it goes up in connection
with natural disasters, divorces, criminal activity,
environmental pollution and abatement, etc.
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Alternative indicators
─ e.g. Net Economic Welfare (NEW) – is an adjusted
measure of well-being improving some
shortcomings of GDP.
─ NEW = GDP +
+ value of the free time
+ black market production value
+ goods and services for own consumption
+…
– natural resource depletion
– non-productive commercials
– commuting expenses
–…
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GDP: conclusion
─ GDP is an important indicator of economic activity.
─ GDP growth, however, doesn’t necessarily mean
that the nation is better off.
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Thank you for attention!
Refernces:
SAMUELSON, P. A., NORDHAUS, W. D. Ekonomie 18. vydání.
Praha: Svoboda, 2005.
KRAFT, J., RITSCHELOVÁ, I. Ekonomie pro environmentální
management. Ústí n. L.: UJEP, 2003.
MCDOUGAL LITTELL. Economics: Concept and Choices. Canada:
McDougal Littell, 2008.
www.iHNed.cz