1. Macroeconomics & Global Economics Presentation 5
Barbara Annicchiarico

2. 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.
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3. 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
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4. 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
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5. 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.
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6. 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.
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7. Example
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8. 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?
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9. 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.
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10. Top Ten Countries in Year 2009 According to Three Different Measures
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11. 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….
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12. Top Ten Countries in Year 2005 According to Three Different Measures
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13. GDP 2011 - $ constant 2005 price – Source: Penn World Table
Output-side real GDP at chained PPPs (in mil. 2005US$)
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14. Fact #2 Growth rates vary substantially across countries.
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15. Figure 1.6 The Distribution of Growth Rates, 1975–2009

16. 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)
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17. Annual growth rates- 1990-2010 up to <0
Annual growth rates up to <0.5% - low growth rates -Source: Penn World Table
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18. Annual growth rates- 1990-2010 > 2
Annual growth rates > 2.4% - high growth rates - Source: Penn World Table
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19. 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.
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20. Source: elaboration on WB data

21. 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….)
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22. Historical Perspective
Maddison dataset:
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23. Source: Lucas, 2003, The Industrial Revolution: Past and Future
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24. Source: Elaboration on Maddison Data
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26. Fact #4
A country’s relative position in the world distribution of per capita incomes is not immutable.
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27. 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).
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28. Convergence and divergence. Source C. I
Convergence and divergence. Source C.I. Jones elaborations on Penn World Tables.
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29. Convergence – Source Blanchard, Macroeconomics.
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30. Convergence and divergence in the Euro Area- AMECO data – Per Capita GDP in Germany =100
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31. 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.
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