the global economy introduction. roadmap weekly discussion trends trade in goods and services...
TRANSCRIPT
The Global Economy
Introduction
Roadmap
• Weekly discussion
• Trends
• Trade in goods and services
• Fluctuations
• Inflation and output
• Course information
Weekly discussion
• First 10-15 minutes of class• Focus on topic from Bb discussion
– More on this later• A hook into current events
– Be reading! (The Economist, FT, …)– Interesting articles, anecdotes?
FOMC Statement (9/13/12)
• “To support a stronger economic recovery … the Committee agreed today to increase policy accommodation by purchasing additional agency MBS at a pace of $40 billion per month.”
• “If the outlook for the labor market does not improve substantially, the Committee … will undertake additional asset purchases … until such improvement is achieved in a context of price stability.
• “The Committee … currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”
• Why such an aggressive policy?
Where do we Stand?Output by cycle
Productivity by cycle
Labor by cycle
U.S. vs. Europe
Class participation
• A part of class – I expect everyone to participate: expect cold
calls– Answer a question– Make a comment– Share an experience– Post to Bb discussion
• Broad range of backgrounds– Expert: keep it short– Non-expert: don’t panic
Roadmap
• Weekly discussion
• Trends
• Trade in goods and services
• Fluctuations
• Inflation and output
• Course information
The big picture
Long-Run Performance
Production, Saving & Investment, Productivity, Institutions, Capital & Labor Markets, International Trade
Short-Run Performance
Inflation, Economic Indicators, Aggregate Supply & Demand,
Monetary Policy, Taxes & Deficits, Exchange Rates, Capital Flows,
Emerging Market Crises
First half:
Second half:
Long run: GDP per capita
USA Japan Ar-gentina
China India Ghana Burundi0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
ppp g
dp p
er
capit
a
Source: Penn World Tables 7.0.
Short run: US real GDP growth
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
an
nu
al
gro
wth
rate
(%
)
?
Trends
The wealth of nations
• U.S. GDP/capita > 100 x Burundi GDP/capita
• What explains these differences?
Long-run economic growthGDP per capita in Year 2000 international dollars
Source: Maddison, 2001; 2008 estimate based on Maddison tables.
Trends are important
1700 1750 1800 1850 1900 1950 20008
9
10
11
12
13
14
15
gdp p
er
capit
a (
1990 G
K$,
log b
ase
2)
United States
Argentina
China
Germany
Ghana
Source: Maddison, “Historical Statistics for the World Economy”
Do institutions matter?
500 5000 500001
2
3
4
5
6
7
8
9
10
per capita income (2008 U.S.$)
corr
up
tion
in
dex
China
Note: Size of circle is proportional to population. Data sources: World Bank and Transparency International.
U.S.
India
Do institutions matter?
499.999999999999 4999.99999999999 5000030
40
50
60
70
80
90
per capita income (2008 U.S.$)
con
tractu
al
freed
om
in
dex
India
Note: Size of circle is proportional to population. Data sources: World Bank and Heritage Foundation.
U.S.
China
Common culture, different institutions
Trade in Goods and Services
Who trades what, and why?
How do trade patterns evolve?
• Who are the U.S.’s largest trade
partners?
• What good is most traded? (value-
wise)
• How are trade patterns changing?
• Why are they changing?
US imports
1996 2001 2006 20110.00
0.05
0.10
0.15
0.20
0.25
shar
e of
tot
al im
por
ts
US imports
1996 1998 2000 2002 2004 2006 2008 20100.00
0.05
0.10
0.15
0.20
0.25
share
of
tota
l im
port
s Canada
Japan
China
Mexico
US exports
1996 2001 2006 20110.00
0.05
0.10
0.15
0.20
0.25
share
of
tota
l export
s Canada
Japan
China
Mexico
Short-run Fluctuations:
Business Cycles
Business cycles
Jan-50 Jan-60 Jan-70 Jan-80 Jan-90 Jan-00 Jan-102000
4000
6000
8000
10000
12000
14000
bil
20
00
US
D
Business cycles
0
2
4
year-
on
-year
gro
wth
rate
(%
)
avg. 1950q1-2012q2 = 3.2%
Inflation and Output
US inflation (annual)
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10-2
0
2
4
6
8
10
12
14
16
perc
en
t
Argentina inflation (annual)
1986 1987 1988 1989 1990 1991 19920
500
1000
1500
2000
2500
3000
3500
perc
en
t
Inflation and output: evidence 1959-69
-1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8-4
-3
-2
-1
0
1
2
3
4
f(x) = 3.25651157957769 x + 1.1930126369759R² = 0.393335294253362
surprise inflation (%)
GD
P d
evia
tion
s fr
om
tre
nd
(%
)
Inflation and output: evidence 1959-99
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3-6
-4
-2
0
2
4
6
f(x) = − 0.0136658099866183 x + 0.00708330177807901R² = 4.34617038901353E-05
surprise inflation (%)
GD
P d
evia
tion
s fr
om
tre
nd
(%
)
About the course
• Main data sources– Blackboard– Syllabus: on Bb– Announcements: on Bb– Course by session: on Bb
About me
• Originally from Madison, WI• PhD in Economics, U. Minnesota• Previous: U. Texas-Austin, Minneapolis FED • Research interests:
– International trade policy – Firm level export decisions – Emerging market crises
• Other interests:– Computers, running, beer
About the teaching assistant
• M: Saahil Sajnani– [email protected]
• T: Deger Atay– [email protected]
• W: Jasper Cooper– [email protected]
About class notes
• No textbook!• Theoretical background to class
discussion• Executive summaries: more concise than
a textbook• Custom designed for this course • Read them – preferably before class • Entire PDF is available for download from
Bb– Perfect for phone, tablet, etc.
About your grade
Participationoutliers/tiebreakers
Assignments 33%
Exam 1 30%
Exam 2 37%
About assignments
• 5 problem sets• PS #0: individual problem set• PS #1-4: group work is fine
– You chose the group– No more than 5 to a group– Group of 1 is fine
• Drop lowest score, average the rest• Submit via Bb dropbox
About assignments
• Weekly discussion board• A way to
– Participate– Keep up on current issues
• Once during the semester, you will post a “lead” comment– Details in handout
About help!
• Problem set help– Post to discussion board, I will answer
there
• Other help– Send me an email
– Stop by
– See the teaching assistant
About helping me
• Course works best if communication goes both ways
• If you have ideas, comments, questions, whatever: – Send an email – Speak to the teaching assistant – Post on the discussion board
Summary
As Haiku:
read notes before classif you need help ask for itBlackboard is knowledge
The Global Economy
Measurement
Roadmap
• FRED• Headline Data
– Gross Domestic Product (GDP)– Inflation
• How are they measured?• What are the basic facts?• Why care about GDP?
Your friend FRED
• Federal Reserve Economic Database (FRED)– Basic tutorials– Mobile apps– Excel add-ins for Windows and Mac
• Basic graph: Enter code in FRED search box
• Edit graph to change dates, frequency, appearance, units, etc.
• PDF of graph for homework• Download data into Excel spreadsheet
FRED data in Excel• Start at FRED home page• Graph the first data series that you wish
to download• Click “Edit Graph”
– (1) Adjust the date range, frequency, units– (2) Click “Add data series”– (3) Enter new data code in the search box, repeat step
1 and click “Redraw Graph”– (4) Repeat steps (1) to (3) until the series are all
graphed
• Click “Download Data in Graph” • Save the Excel file for further analysis of
data
Why worry about measurement?
• Need a common vocabulary• Small changes in definition make big
differences• Accurate forecasting requires
consistent measurements
GDP per capita (PPP adj, 2006 USD)
US France Japan China India Brazil Mexico0
10000
20000
30000
40000
50000
Source: PWT 7.0
Growth of GDP per capita (forecast for 2013)
US Japan France Mexico Brazil China India0
2
4
6
8
10
Source: OECD Economic Outlook, April 2012.
GDP
• GDP = Gross Domestic Product • Total value of production in an
economy– Sum of value-added by production units
• Equals: – payments to labor and capital (owners) – sales of final goods, minus imports – (almost) income
Expenditure flows
• Allocate GDP among purchasers of final goods:
Y = C + I + G + NX– Y = GDP
– C = sales to households
– I = sales of capital goods to firms
– G = purchases of goods and services by government
– NX = X-M net exports (net sales to other countries)
GDP identitiesFarmer
Sales = $10
Farm Rent = $3
Net Income = $7
Value Added =??
Brewer
Sales = $110
Factory Rent = $30
Wages = $70
Barley = $10
Value Added =??
Landlord’s income +wages + profits = ??
Value added farming + value added brewing = ??
Final production farming + final production brewing = ??
GDP identitiesFarmer
Sales = $10
Farm Rent = $3
Net Income = $7
Value Added =??
Brewer
Sales = $110
Factory Rent = $30
Wages = $70
Barley = $10
Value Added =??
Landlord’s income +wages + profits = ??
(3+30) + (70) + (7) = 110
Value added farming + value added brewing = ??
(10) +(100) =110
Final production of barley + final production of beer = ??
(0) +(110) =110
GDP identities: extended example
GDP C I G X M
GDP Ford Goodyear Spock LIC
GDP Ford Goodyear Spock LIC
GDP by expenditure:
GDP by value added:
GDP as payments to labor and capital:
GDP by industry
1950 1960 1970 1980 1990 2000 20100
5
10
15
20
25
30
shar
e of
GD
P (
%) manufacturin
g
FIRE
bus. services
agriculture
GDP by income type
1950 1960 1970 1980 1990 2000 20100
0.1
0.2
0.3
0.4
0.5
0.6
0.7
shar
e of
GD
P (
%)
labor compensation
corp. profits interest
rental income
GDP by expenditure
1950 1960 1970 1980 1990 2000 2010-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
share
of
GD
P (
%)
private consumption
government consumption
investment
net exports
Savings flows I
Allocate flows of assets:
Y – C – G = I + NX
S = I + NX • S = (gross) national saving (purchases of
assets)
• NX = net purchases of foreign assets
Savings flows II
• Allocate flows of assets:
(Y–C–T) + (T– G) = I + NX
Sp + Sg = I + NX – T = taxes net of transfers paid by households
to govt
• Beware: many measures of saving • Later in the course
– We’ll include income and transfers with foreign countries and replace NX with the “current account”
Saving
1980 1985 1990 1995 2000 2005 2010-0.10
-0.05
0.00
0.05
0.10
0.15
0.20
shar
e of
GD
P (
%) saving
investment
net exports
Personal saving
1980 1985 1990 1995 2000 2005 20100
2
4
6
8
10
12
14
share
of
dis
posa
ble
in
com
e
(%)
saving=personal income-taxes-personal consumption+net transfers
Household net worth
1960 1970 1980 1990 2000 20102.5
3.0
3.5
4.0
4.5
5.0
net
wort
h /
GD
P
Source: flow of funds
Household net worth
1960 1970 1980 1990 2000 20100.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0 350
400
450
500
550
600
650
savi
ngs
rat
e (%
)
net
wor
th /
dis
p. i
nco
me
(%)
Source: BEA
What about prices?
Nominal GDP (at current prices):
What happens when prices change?
...ipod ipod pizza pizza espresso espressoY P Q P Q P Q
Prices and quantities
• GDP measures output at market prices
• What if prices change? – If GDP rises, how much is higher quantity, how
much higher prices?
• Two measures– GDP at current prices
– GDP at constant prices (e.g. 2005 prices)
• Problem: many ways to do this
Two ways to measure inflation• Approach 1 (“fixed price”)
– Compute GDP at current prices (“nominal GDP”) – Compute GDP at constant prices (e.g., 1990) (“real
GDP”) – Compute price deflator = ratio of first to second – Inflation is rate of change of deflator
• Approach 2 (“fixed basket/quantity”)– Compute GDP at current prices (“nominal GDP”) – Compute price index as cost of a fixed “basket” of
products– Compute real quantity as ratio of nominal quantity to
index– Inflation is rate of change of index
Example
Fish Chips
Date PriceQuantit
yPrice
Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
What is the inflation rate?
What is real output growth?
Fixed price method (GDP deflator)
Fish Chips
Date Price Quantity Price Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
DateNominal
GDPReal GDP
Price Deflator
2004
2005
Growth rate
Base year: 2004
Fixed price method (GDP deflator)
Fish Chips
Date Price Quantity Price Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
DateNominal
GDPReal GDP
Price Deflator
2004 7.50 7.50 1.000
2005 13.00 8.00 1.625
Growth rate 55% 6.5% 48.6%
Base year: 2004
Fixed price method (GDP deflator)
Fish Chips
Date PriceQuantit
yPrice
Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
Base year: 2005
Date Nominal GDP Real GDPPrice
Deflator
2004
2005
Growth rate
Fixed price method (GDP deflator)
Fish Chips
Date PriceQuantit
yPrice
Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
Base year: 2005
Date Nominal GDP Real GDPPrice
Deflator
2004 7.50 12.50 0.600
2005 13.00 13.00 1.000
Growth rate 55% 3.92% 51.1%
How important was IT in the 1990s?
• Features: – Output grew rapidly (60%/year)– Prices fell– Output quality improved
• Result: when base year was updated, real growth fell– Why?
• Approaches: – Chain weighting – Adjust prices for quality change (easier said than done)
Fixed quantity method (CPI)
Fish Chips
Date PriceQuantit
yPrice Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
DatePrice Index
(2004 Basket)Price Index
(2005 Basket)
2004
2005
Growth rate
Fixed quantity method (CPI)
Fish Chips
Date PriceQuantit
yPrice Quantity
2004 0.50 10 0.25 10
2005 0.75 12 0.50 8
DatePrice Index
(2004 Basket)Price Index
(2005 Basket)
20047.50/7.50*100=100
.08.00/13.00*100=61
.5
200512.50/7.50*100=16
6.713.00/13.00*100=1
00.0
Growth rate 51.1% 48.6%
Details, details
• Not in GDP – Capital gains, (houses, equity) – Interest on government debt
• Government services are valued at cost• Home production not counted• Black market transactions not counted• GNP = GDP + net foreign factor income
– Difference a fraction of a percent in US – Larger for countries with substantial foreign investment
Why worry about GDP?
• The obvious– GDP is income
– GDP is correlated with employment, investment,…
• The less obvious– GDP is highly correlated with
human development
– GDP is (inversely) correlated with poverty rates
GDP and quality of life
Per capita GDP: $41,000 Per capita GDP: $31,000
Avg weekly hours: 35 Avg weekly hours: 29
Summary
• GDP is: output, income, and expenditure
• Measuring real GDP is tricky– Fixed weight index– Fixed price index– Neither is perfect
Summary
• Composition by industry – Manufacturing shrinking– Services growing
• Payments to factors– Labor share near 2/3, rest payments to
capital– Shares constant
• Expenditure– Private consumption: 60% to 70% of
GDP– Private investment: 15% to 20% of GDP
Something for the ride home
• How would you adjust social security payments to ensure a constant real payout?– What is the big picture?– What are the issues?