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Level and growth rate of per capita GDP • Gross domestic product (GDP) is a measure of economic activity: value of all goods and services produced and sold in the market less the value of goods or services used in their creation • Level of per capita GDP (expressed in Purchasing Parity Standards) • Change of per capita GDP (before and after the 2008 crisis) • In terms of level and rate of change of GDP the performance across EU countries (and regions) is remarkably different 1 Purchasing Parity Standard (PPS) • In order to compare the GDP per capita of different countries in a given year the basic figures are expressed in PPS, i.e. a common currency that eliminates the differences in price levels between countries • These figures are intended for cross-country comparisons rather than for temporal analyses (in that case GDP at constant prices is needed) because, over time, the level of prices may change differently between countries 2 3 • “The use of PPS series rather than the euro-based series tends to have a levelling effect, as those regions with very high GDP per inhabitant in euro terms also tend to have relatively high price levels (for example, the cost of living in central Paris or London is generally higher than the cost of living in rural areas of France or the United Kingdom).” • “Calculations for GDP per inhabitant that are based on PPS series instead of euro series can result in considerable differences when ranking regions. For example, in 2009, the Swedish region of Ostra Mellansverige was recorded as having a GDP per inhabitant of EUR 26.600, ranking above the Italian region of Marche, with EUR 25.600. However, in PPS terms, Marche, at 24.600 PPS per inhabitant, was above of Ostra Mellansverige, at 23.800 PPS.” Eurostat Regional Yearbook 2012 (page 28) 4 Decomposition of per capita GDP GPD GPD Employment * Population Employment Population GPD Employment Working Age Population * * Employment Working Age Population Population Working Age Population: 15-64 (International standard and Eurostat definition) (Europe 2020: 20-64) Labour Productivity (per person employed)* Employment Rate*Working age population share 5 Decomposition of per capita GDP GPD Total Hours Worked * * Total Hours Worked Employment Employment Working Age Population * * Working Age Population Population Labour Productivity (per hour worked)*Hours per worker*Employment Rate*Working age population share 6 2012 (OECD data) Austria Belgium Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom United States Euro area GDP per head GDP per hour of population, worked, current USD prices, USD 43848 40068 26706 42176 23625 38282 36249 41231 25309 22011 43579 33117 43146 22167 25275 25323 27493 32081 43176 37446 51689 36205 53.7 61.8 31.0 59.5 27.8 49.0 59.5 58.3 34.5 28.3 71.2 46.7 60.2 28.1 34.0 34.7 39.2 50.0 54.7 48.5 64.1 52.9 Hours worked per head of population 817 648 862 708 850 782 609 708 734 779 612 709 717 790 744 730 702 642 789 772 806 684 7 GDP at constant prices • The calculation of the annual growth rate of GDP volume is intended to allow comparisons of the dynamics of economic development both over time and between economies of different sizes • For measuring the growth rate of GDP in terms of volumes, the GDP at current prices are valued in the prices of the previous year; then, the computed volume changes are imposed on the level of a reference year; this is called a chain-linked series • Accordingly, price movements will not inflate the growth rate 8 9 GDP growth rates • Annual rate of change: (GDPt1-GDPt0)/GDPt0 =%∆GDP which can also be expressed as difference of natural logarithms ∆lnGDP= lnGDPt1- lnGDPt0 • The difference between two annual observations of the natural logarithm of a variable [ln(zt1) - ln(zt0)] corresponds, with a minimal margin of error, to the percentage rate of change of the same variable over the same tame interval: [ln(zt1) - ln(zt0)] (zt1-zt0)/zt0 10 Percentage rate of change and log difference • Given a variable z, we take the natural log of it ln(z) and, then, differentiate (compute the first derivative) • dln(z)/dz= 1/z • Thus, the differential (or infinitesimal variation) of the natural log of a variable is equal to its percentage infinitesimal variation: • dln(z)=dz/z • Considering time variations and assuming ln(z) dln(z), i.e. relative small variations of natural logs, we can write • ln(z) z/z, which is precisely (zt1-zt0)/zt0 11 Decomposition of growth rates • If z = x*y, (e.g. GDP per capita= GDP per employee times employees over population) • dln(z)= dln(x*y)= dln(x)+dln(y) • dz/z=dx/x + dy/y z/z x/x + y/y (zt1-zt0)/zt0 [(xt1-xt0)/xt0]+ [(yt1-yt0)/zt0] • %∆(GDP/Population) = %∆(GDP/Employment) + %∆(Empl/Pop) or • ∆ln(GDP/Population) = ∆ln(GDP/Employment) + ∆ln(Empl/Pop) 12 Annual average rate of change Annual rate of change in a given period: more informative than the total variation between the initial and the final year – Mean of the annual rates of changes (or mean of the annual log differences) – Compound annual growth rate: requires only data for the initial (t1) and final year (tn): [(GDPtn/GDPt1)1/(n-1) - 1]*100 – Linear regression of the natural log of GDP at constant prices on time (uses all the annual data; it is suitable when the period of time considered is sufficiently long) 13 GDP, employment and productivity: percentage change on previous year 1996 1997 1998 1999 2000 Average 19952000 GDP 1.7 2.7 2.9 3.0 3.8 2.8 Employment 0.6 1.1 1.8 1.9 2.2 1.5 Labour productivity 1.1 1.6 1.1 1.1 1.6 1.3 EU (15 countries) 14 Finland Germany Austria Slovenia France EU28 Spain Hungary Italy Poland Romania R&D intensity (total expenditures on GDP) 2012 2020 target 3.55 4.00 2.98 3.00 2.84 3.76 2.80 3.00 2.29 3.00 2.07 3.00 1.30 2.00 1.30 1.80 1.27 1.53 0.90 1.70 0.49 2.00 Annual average growth (compound) 2012-2020 1.50 0.08 3.57 0.87 3.43 4.75 5.53 4.15 2.36 8.27 19.22 Compound annual growth rate= [(Rdint20/Rdint12)1/8 -1]x100 15