Macroeconomics & Global Economics Presentation 5 Barbara Annicchiarico

Measures Key variables Gross domestic product (GDP): a measure of the value of all of the goods and services (exluding intermediate goods) produced in a country in a year (computed as either the value of the output produced or as the total income). Synonym of national income and output. Let Y denote income. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Measures GDP growth rates: gy=(Yt+1-Yt)/Yt This implies that Yt+n = Yt (1+ gy )n Average growth rate in n-years: gy=(Yt+n/Yt)(1/n)-1 REMARK (in log scale): log Yt+n = logYt + nlog(1+ gy ) logYt + ngy Hence: log Yt+1 - logYt =g y Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Measures Measuring and comparing GDP of one country at different points in time: Use price index to express GDP at constant prices (nominal variables change as a result of inflation) NB: Measuring and comparing GDP of two countries more difficult. 1) Conversion from one currency to another (exchange rates are very volatile) 2) Prices of non tradeable goods tend to be low in developing countries and high in advanced economies Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Measures To overcome this problem we use artificial exchange rates: purchasing power parity (PPP) exchange rates which are based on the prices of a standardized basket of goods and services. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Example Assume a common natural basket of goods 1 TV set and 10 haircuts Assume an exchange rate E equal to 1. P=Price Basket in Richland=10+20=30; P*=Price Basket in Poorland=10+10=20. The real exchange rate is then found to be EP/P* 30/20=1.5 Converting the GDP of Richland using the real exchange rate we have 120/1.5=80 which is only 4 times the GDP of Poorland. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Example Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Example From the example: Japan’s currency overvalued relative to PPP. Using market exchange rate Japanese GDP in 2009 was 89% of the US level, while using the PPP, it was 73% of the US level. What do you notice for India, Mexico and Argentina? Why? Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Fact #1 There is enormous variation in per capita GDP across countries. The poorest countries have per capita income that are less than 5 percent of per capita incomes in the richest countries. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Top Ten Countries in Year 2009 According to Three Different Measures Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Remarks Some countries have high total income GDP simply because they have a large population. What about per capita GDP? Among the top 11 oil producers (Qatar, UAE, Norway, Kuwait, Brunei) and tax havens (Macau, Bermuda). Since 2005….important changes in these rankings!!! Great recession…. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Top Ten Countries in Year 2005 According to Three Different Measures Copyright © 2009 Pearson Education, Inc. Publishing as Pearson Addison-Wesley

GDP 2011 - $ constant 2005 price – Source: Penn World Table Output-side real GDP at chained PPPs (in mil. 2005US$) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Fact #2 Growth rates vary substantially across countries. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Figure 1.6 The Distribution of Growth Rates, 1975–2009

Remarks Like income levels, growth rates vary substantially across countries. Growth rates of mature economies: 1.5%-2% Growth miracles (China, Equatorial Guinea which is an oil producer) Growth disasters (most of them involved in conflict) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Annual growth rates- 1990-2010 up to <0 Annual growth rates- 1990-2010 up to <0.5% - low growth rates -Source: Penn World Table Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Annual growth rates- 1990-2010 > 2 Annual growth rates- 1990-2010 > 2.4% - high growth rates - Source: Penn World Table Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Fact #3 Growth rates are not generally constant over time. At world level: growth rates were close to zero over the most history, but have increased sharply in the twentieth century. At country level: growth rates change over time. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Source: elaboration on WB data

Remarks Huge instability of the growth rate over time Roughly speaking: higher first and then lower Booms and bursts…. That’s the business cycle!!! (Main driving forces: tech shocks, monetary shocks, oil shocks, external shocks etc….) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Historical Perspective Maddison dataset: http://www.ggdc.net/MADDISON/oriindex.htm Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Source: Lucas, 2003, The Industrial Revolution: Past and Future Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Source: Elaboration on Maddison Data Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Fact #4 A country’s relative position in the world distribution of per capita incomes is not immutable. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Remarks Since 1820 the gap between rich and poor has widened. The pace of growth has accelerated Changes in the relative positions of country group (see Japan, China). Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Convergence and divergence. Source C. I Convergence and divergence. Source C.I. Jones elaborations on Penn World Tables. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Convergence – Source Blanchard, Macroeconomics. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Convergence and divergence in the Euro Area- AMECO data – Per Capita GDP in Germany =100 Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Quoting Robert E. Lucas: “I do not see how one can look at figures like these without seeing them as representing possibilities. Is there some action a govermnent of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly? If not, what is it about the 'nature of India' that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.” On the mechanics of economic growth, JME, 1988, p. 5. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.