Transcript What is economics and why should we study it?

What is economics and why
should we study it?
Global Economics
Globalization is the process of integration of an economy into the world
economy. This process involves output markets, labor markets, capital
markets….
•
•
•
•
•
•
Immigration and Economic Development
Technological Changes and Trade
Outsourcing
Foreign Investment and Currency
Currency and Trade
International Economic Shocks and Domestic
Economics Stability
» These are just some of the major venues through which
world economy affects our economy
Trade (% of GDP)
2003
World
47.84
Upper middle income
68.53
Middle income
61.98
High income
45.29
Lower middle income
57.10
Low income
44.61
Sub-Saharan Africa
64.28
South Asia
33.33
Middle East & North Africa
58.16
Latin America & Caribbean
45.53
European Monetary Union
68.25
East Asia & Pacific
74.17
United States
23.66
Definition:
Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product.
For the US
see BEA
Income distribution in 2005: GDP per capita based on PPP
Less than 1806.50
1806.50 – 4052.40
4052.40 – 7088.70
7088.70 – 19111.60
Greater than 19111.60
No Data Available
World Economy in 2005
GDP (USD)
population
GDP per capita
GDP per capita
in millions of $
in millions
Atlas method
PPP method
World
44645000
6438
6935
9529
High income
34687000
1011
34316
Upper middle income
3673800
600
Middle income
8553700
Lower middle income
% of
% of
World Pop.
World GDP
3.48
100
100
32725
2.66
77.70
15.70
6125
11174
5.52
8.23
9.32
3075
2782
7348
6.42
19.16
47.76
4879800
2475
1972
6442
7.03
10.93
38.44
Low income
1416200
2352
602
2499
8.04
3.17
36.54
Sub-Saharan Africa
621880
743
837
1994
5.69
1.39
11.54
South Asia
1016300
1470
691
3137
8.65
2.28
22.83
Middle East & North Africa
625310
306
2043
6126
4.26
1.40
4.75
Latin America & Caribbean
2461000
551
4468
8410
4.49
5.51
8.55
East Asia & Pacific
3040000
1886
1612
6052
8.95
6.81
29.29
European Monetary Union
9984100
314
31807
29162
1.30
22.36
4.88
United States
12417000
296
41891
41891
3.20
27.81
4.60
Source: WDI for 2007
GDP growth
The planet Earth in the darkness of the night*
* Image source: NASA (http://antwrp.gsfc.nasa.gov/apod/ap001127.html)
2003: Health
expendit
ures per
capita
(current
USD)
2004: cases of
TB per
100,000
2004: Internet
Users
per 1000
World
587.79
139.47
139.93
Upper middle income
279.96
112.15
Middle income
116.29
High income
Mobile phone
subscrib
ers per
1000
Infant mortality
rate per
1000
PCs per 1000
people
67.32
279.34
54.09
129.77
159.33
69.15
484.18
23.36
121.75
113.63
91.83
70.22
293.61
30.02
60.86
3449.40
17.11
544.93
78.74
771.72
6.12
574.14
Lower middle income
77.49
113.97
75.91
70.47
248.86
31.58
46.20
Low income
29.62
223.99
24.34
58.68
42.15
79.45
11.29
Sub-Saharan Africa
36.42
363.14
19.44
46.22
74.08
100.47
15.05
South Asia
23.78
177.21
26.14
63.41
41.31
66.41
12.14
Middle East & North Africa
92.41
53.91
58.00
69.35
128.61
44.09
48.55
Latin America & Caribbean
221.68
63.51
114.53
72.19
318.36
26.52
92.40
European Monetary Union
2552.10
13.00
443.22
79.38
904.19
4.11
420.84
64.11
137.75
73.79
70.28
243.47
29.16
38.19
5711.00
4.70
629.99
77.43
616.73
6.70
749.18
East Asia & Pacific
United States
Life
expectan
cy at
birth
Correlation between life expectancy and the standard of living as measured by the
GDP per capita (PPP) is positive 0.63, see the stats table
Health care
expenditures per
Life expetance at Physicians per 1000 capita (current USD)
birth 2003
people, 2001
2002
% of population
with improved
water access
2002
Mexico
Canada
United States
73.64
79.34
77.41
1.71
2.10
379.00
2222.00
5274.00
91.00
100.00
100.00
France
Germany
Italy
United Kingdom
79.26
78.33
79.83
77.63
3.29
3.62
6.07
2348.00
2631.00
1737.00
2031.00
100.00
100.00
100.00
100.00
Ukraine
Russian Federation
Belarus
68.29
65.71
68.17
2.97
4.17
4.50
40.00
150.00
93.00
98.00
96.00
100.00
Kenya
Nigeria
Tanzania
Zimbabwe
45.41
44.91
42.67
38.53
19.00
19.00
13.00
118.00
62.00
60.00
73.00
83.00
Electric power
consumption
(KWH per capita)
2002
Internet users per
1000 people 2002
Television sets per
1000 people 2001
Mexico
Canada
United States
1659.70
15613.00
12183.00
98.48
512.83
551.38
281.96
690.63
937.51
France
Germany
Italy
United Kingdom
6606.40
6046.00
4901.20
5618.00
313.83
436.17
352.44
423.10
631.92
637.41
Ukraine
Russian Federation
Belarus
2229.20
4291.20
2656.60
18.75
81.57
361.77
Kenya
Nigeria
Tanzania
Zimbabwe
120.31
68.17
62.14
831.40
12.70
3.50
2.32
42.98
25.98
102.63
44.65
55.62
950.48
Economic development = quality of
life
Correlation with GDP per capita based on PPP
Life expectancy at birth
Child mortality rate
Healthcare expenditures per capita
% of population with improved water access
Internet users per 1000 people
0.61554089
-0.597142331
0.898003539
0.542805766
0.87013155
Evaluating Economic Activity
Output – production, the process of income creation
•GDP - the total market value of all final goods and services produced by factors of production
located within a nation’s borders over a period of time
•GNP - the total market value of all final goods and services produced by factors of production
owned by a nation over a period of time
Relation of Gross Domestic Product and Gross National
Product [Billions of dollars]
www.bea.gov
1994
Gross domestic product
2000
2001
2002
2003
2004
7,072.20
9,817.00
10,128.00
10,469.60
10,971.20
11,734.30
Plus: Income receipts from the rest of the world
186.4
382.7
322.4
305.7
343.7
415.4
Less: Income payments to the rest of the world
160.2
343.7
278.8
275
275.6
361.7
7,098.40
9,855.90
10,171.60
10,500.20
11,039.30
11,788.00
Equals: Gross national product
Output and Income
GDP and GNI
•GDP is a measure of production, and production represents
economic activity. Note that the sale of output is simply a transfer of
ownership (or wealth), while the production of output is the process
of generating wealth. The production generates incomes to the
factors of production, which are then distributed to the inputs:
-pay wages to employees
-pay interest to lenders
-pay profit to capital owners etc.
•Therefore total value of output is equal to total income. In what we
can consume we are limited by what we produce.
•Therefore GDP per capita (GDP/population) is a measure of
average income in a country.
Understanding GDP
• How should the following count?
– Purchase of MSFT shares through e-trade broker
– Purchase of a previously owned house
– Purchase of a new house from a construction
company
– Purchase of a used car from a private individual
– Purchase of a used car from a used car dealer
– Purchase of a class at GSU
– Build up of dealer inventories?
– Cooking your own meal?
– Going out to a restaurant?
Understanding the GDP II
• How should the following count?
– Purchase by Ford Comp. of new tires from a tire supplier?
– Purchase by me (private car owner) of new tires from a tire
supplier
– Purchase of oil by an American oil company from another
American oil company (oil is domestically extracted)
– Purchase of oil by an American oil company form a foreign
supplier of oil
– Receipt of dividends by a US resident from a Russian company
– Production of new Nissan Altima cars by a US based Nissan
Facility
– Production of new VW Jetta cars by a Mexico-based VW facility
Comparing Incomes Across Countries
Real PPP GDP per capita as a measure of the standard
of living.
Standard of living: Income/Prices
• Read GDP as a measure of income
• Adjustment for the cost of living: difference in prices
Purchasing Price Parity – adjustment for the cost
of living. Prices differ across countries creating
differences in purchasing power of money. For
instance, 1000 USD buys more (today, probably less) in
Moscow than in Atlanta.
Constructing a cost of living index
• Fixing a market basket
• Tracking that market basket through different locations
GNI per capita in 2001, PPP method (current international $)
World Bank Development Indicators for 2003
Less than 1710
1710-3560
3560-6250
6250-15110
Over 15110
No data available
Income distribution in 2004
Lower income group: GNI per capita PPP< $1878
Lower middle income: GNI per capita PPP < $4244
Middle income group: GNI per capita PPP <7515
Upper middle income group: GNI per capita PPP < $18589
High income group: GNI per capita PPP > $18589
Real GDP growth rate in 2000
World Bank Development Indicators 2003
Less than –0.6
-0.6 < . < 0.8
0.8 < / <2.1
2.1 < . < 4.2
Over 4.2
No data available
Real GDP growth rate in 2001
World Bank Development Indicators 2003
Less than –0.6
-0.6 < . < 0.8
0.8 < / <2.1
2.1 < . < 4.2
Over 4.2
No data available
Evaluating economic activity - Inflation
• Inflation – the rate of growth in the average
of all prices
• Measuring inflation:
– Price Index
• CPI
• PPI
• Core Index
• Real versus Nominal measures
• US statistics: www.bls.gov
Real versus Nominal
i N
GDP  i 1 PiQi
Nominal GDP growth rate = output growth rate + price level growth rate
Growth in Nominal vs Real GDP
Nominal GDP
USA
Real GDP
8.0
7.0
6.0
level of growth
5.0
4.0
3.0
2.0
1.0
0.0
1995
1996
1997
1998
1999
2000
year
2001
2002
2003
2004
Characteristics of Recent US
inflation
• Low level
• Non-uniform
• Impact of dollar exchange rate/weaknesses in
foreign economies in the 1990’s; a characteristic
of globalization in the output markets
• Recent impact of the price of Oil
Impact of Inflation
•
•
•
•
Menu costs
Redistribution of wealth
Instability of relative prices
Currency value – the law of one price for internationally traded
goods
• Increased costs associated with forward looking financial
arraignments
Sources of Inflation
• Tight labor market
– Overheated economy: US in the late 1990’s
• Strong Monetary Expansion
– Germany in the 1920’s; Russia in the early 1990’s
• Rapid increases in input costs (other than labor)
– US economy today and the price of Oil
• Currency depreciation
– Recent dollar depreciation, particularly against the currency of China
Short international comparison
Inflation, consumer prices (annual %) 2000, selected high income countries, source: World Bank
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
4.48
2.35
2.55
2.75
2.92
3.37
1.7
1.95
3.15
5.16
5.56
2.54
Japan
Korea, Rep.
Luxembourg
Netherlands
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
United States
-0.67
2.25
3.15
2.52
2.62
3.09
2.87
3.43
1
1.58
2.93
3.38
Aruba
Bahamas, The
Bahrain
Cyprus
Hong Kong, China
Israel
Kuwait
Netherlands Antilles
Qatar
Singapore
Slovenia
4.04
1.61
-0.7
4.14
-3.75
1.12
1.81
5.82
1.68
1.36
10.85
Evaluating economic activity Unemployment
• Defining labor force, unemployment, labor
force participation rate
• Measuring unemployment
• US unemployment statistics: www.bls.gov
• Structural and cyclical unemployment
Labor Market Conditions in a few selected economies in 2001 (Unemployment Rate
is for 2000)
(Females as % of Unemployment
Labor Force (mil)
Labor Force
Rate
United States
146.711
46.1
4.1
United Kingdom
29.418
44.21
5.3
Switzerland
3.893
40.64
2.7
Russian Federation
77.616
49.22
11.4
Pakistan
53.482
29.05
5.9
India
460.533
32.39
..
France
26.849
45.2
10
Mexico
41.319
33.48
..
European Monetary Union
142.162
41.341
9.763
In 2001 EMU included Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg,
The Netherlands, Spain, Portugal
Supply - Demand
• Market
– Product definition
– Geographical boundaries
• Demand: Q = F (P, all other relevant factors)
– Law of demand: as Price increases quantity demanded decreases
– Relevant factors
• Income
– Normal: Income increases  demand increases
– Inferior: income increases  demand decreases
• Related in consumption goods
– substitutes: Px increases  demand for Y increases
» MARTA and GSU parking
– Complements: Px increases  demand for Y decreases
» GSU parking and gasoline use
• And many other factors…
– Interesting demand functions:
• Vertical demand: no price sensitivity
– Gasoline demand in the short-run
– Your demand for this class if you are one class away from graduation
Supply - Demand
• Supply: Q = F (P, all other relevant factors)
– Law of supply: as Price increases quantity supplied increases
– Relevant factors
• Cost of production
– Cost of factors of production
» Wages, interest rate
– Production technology
» Productivity and cost of production
• Related in production goods
– Substitutes in production
» Same resources can be used to produce either good
» Condos versus single family homes
– Complements in production
Market equilibrium
(private goods with no externalities)
• Quantity demanded = quantity supplied
– Market clearing
• No excess supply or shortage
• Properties of the Market Equilibrium
– Stability
– Efficiency:
• Welfare to society
– Consumer surplus
– Producer surplus
ForEx
Average Daily Volume of Bank Foreign-Exchange Market Activity
(Source: Basel: Bank for International Settlements, September 2004)
billions of dollars
percentage share
Spot
621
35
Swaps
944
53
Forwards
208
12
Total
1773
100
Defining the Market:
Institutions facilitating the market:
Major Private Banks
Central Banks
Market Participants:
Banks, Central Banks, Corporations, Investors, even
consumers.
Brief History of the International
Monetary System
Gold Standard: 1880 - 1914
Dates of adoption of a gold standard
•1695: United Kingdom at £1 to 113 grains (7.32g) of gold.
•1818: Netherlands at 1 guilder to 0.60561g gold
•1854: Portugal at 1000 reis to 1.62585g gold
•1871: Germany at 2790 Goldmarks to 1kg gold
•1873: Latin Monetary Union (Belgium, Italy, Switzerland, France) at 31 francs to 9g gold
•1873: United States de facto at 20.67 dollars to 1troy oz
•1875: Scandinavian monetary union: (Denmark, Norway and Sweden) at 2480 kroner to 1kg gold
•1876: France internally
•1876: Spain at 31 pesetas to 9g gold
•1878: Finland at 31 marks to 9g gold
•1879: Austria 1893: Russia at 31 Roubles to 24g gold
•1897: Japan at 1 yen to 1.5g gold
Price Stability
Simplified conversion
No Future markets
1918-1939
• Great Depression and lack of international
cooperation
• 1925 -1931 UK operates on Gold
Standard
• US remains on Gold Standard till 1933
• Fixed exchange system
Post WWII era
• Bretton Woods
– IMF and the Gold Exchange Standard
• Gold Exchange Standard
–
–
–
–
–
–
Fixed system with limited (1% allowable adjustments)
Dollar is convertible into gold at 35 USD per 1 Oz
Very few monetary reforms are undertaken by member states
1950’s – 1960’s
August of 1971 USD is no longer a convertible currency
The Smithsonian Conference of December of 1971
• 38.02 USD = 1 oz
• Dollar remains inconvertible
• Increased allowable adjustment to 2.25%
• March of 1973 FLOAT begins
Spot market
•
http://www.federalreserve.gov/releases/h10/Update/default.htm
•
Ask and Bid prices and the spread
–
–
–
–
•
Ask – Bank’s asking (bank’s sales price)
Bid – Bank’s purchase price
Spread – return to the market maker, in this case the bank
Consider the following rouble quote: Ask Price: $0.0425; Bid Price: $0.0420
Alignment of exchange rates
–
Arbitrage
•
•
•
–
Simple setting (2 or more currencies):
– Consider two banks quoting the rouble:
» Bank I: $0.0425 - $0.0430.
» Bank II: $0.0435 - $0.0440
Price difference falling within the spread
Setting 2: implied exchange rate (3 or more currencies):
– Consider tw banks providing the following quotes:
» Bank I:
Between Rouble and Dollar: R1 = $0.0425
Between Rouble and Euro: R1 = EUR 0.030
Implied USD/EUR rate is: USD1 = 0.7059
» Bank II
Between Rouble and Dollar: R1 = $0.0425
Between Rouble and Euro: R1 = EUR 0.031
Implied USD/EUR rate is: USD1 = EUR0.7294
Are profits from arbitrage possible?
Currency Index: USD Index by the FED
Economy
Euro area
Canada
China
Japan
Mexico
United Kingdom
Korea
Taiwan
Hong Kong
Malaysia
Singapore
Brazil
Switzerland
Thailand
Australia
Sweden
India
Philippines
Israel
Indonesia
Russia
Saudi Arabia
Chile
Argentina
Colombia
Venezuela
Total
weight in percentage
1997
2003
17.49
16.92
6.58
14.27
8.5
5.73
3.68
3.77
2.65
2.25
2.87
1.82
1.43
1.59
1.31
1.22
0.88
1.18
0.84
1.25
0.78
0.8
0.53
0.61
0.49
0.58
100
18.8
16.43
11.35
10.58
10.04
5.17
3.86
2.87
2.33
2.24
2.12
1.79
1.44
1.43
1.25
1.16
1.14
1.06
1
0.95
0.74
0.61
0.49
0.44
0.41
0.3
100
change
1.31
- .49
4.77
- 3.69
1.55
- .56
0.18
- .90
- .32
- .01
- .75
- .03
0.01
- .16
- .06
- .06
0.26
- .12
0.16
- .30
- .04
- .19
- .05
- .18
- .08
- .27
0
USD weights
Source: FED
Source: FED
Recent performance of the USD
1.8
$/Euro
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
Source: FederalReserve.gov: http://www.federalreserve.gov/releases/h10/Hist/
1/3/2008
7/3/2007
1/3/2007
7/3/2006
1/3/2006
7/3/2005
1/3/2005
7/3/2004
1/3/2004
7/3/2003
1/3/2003
7/3/2002
1/3/2002
7/3/2001
1/3/2001
7/3/2000
1/3/2000
0
USD exhcnage rate against the Canadian Dollar
Source: FRB, NY
1/2/2006
1/2/2005
1/2/2004
1/2/2003
1/2/2002
1/2/2001
1/2/2000
1/2/1999
1/2/1998
1/2/1997
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Role of the exchange rate in the
price of oil
USD Price of Oil
$/Euro
Euro Price of Oil
3-Mar-08
102.42
1.521
67.34
5-Mar-07
60.05
1.3094
45.86
6-Mar-06
62.46
1.2002
52.04
7-Mar-05
53.9
1.3203
40.82
8-Mar-04
36.53
1.2371
29.53
3-Mar-03
36.1
1.0835
33.32
4-Mar-02
22.55
0.8652
26.06
change in the price
79.87
% change (inflation)
354.1906874
41.27
75.7975
Source for historical oil price data – US Dept. of Energy, http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_d.htm
158.36
The ForEx Market
• Supply of the USD
– Imports to the US
• Goods (trade)
• Services (tourism)
– US investment abroad
• Foreign Financial
Markets
• Direct investment
abroad
– Central Banks
– Speculation
• Demand for the USD
– US Exports
• Goods
• Services (tourism)
– Foreign Investment
into US
• US Financial markets
• Direct investment
– Central Banks
– Speculation
The Interesting 90’s
• 1991-92: Collapse of the USSR Block, beginning of the Transitional
Recession in Eastern Europe
• 1994 Mexican Currency Crisis
• 1991(2)-95 The Balkan Wars
• 1998 Recession in Japan
• 1997 (July) Beginning of the Asian Financial Crisis
• 1998 major Rouble Crisis
US ECONOMY
average % rates
19922000
20012004
Real GDP
3.7
2.5
Gross Domestic Private
Investment
8.7
1.8
Non-Residential Investment
9.1
0.2
The market for USD in the 90’s
P of USD
Influx of investment stimulated Demand
D
S
Increase in imports stimulated Supply
Demand Effect Dominated
(thus positively effecting consumers’
standard of living)
The post 90’s era
• United Europe
– 10 New Countries Entered the Union on May 1st of
2004, bringing the total number of member states to
25, with combined population of over 430 million (US
population is 293 million).
• Growth in Russia and China nearing double
digits
• Emerging Economies of Brazil and India
• Threat of Terrorism to the US
• Continuous Growth in US Trade Deficit
The market for USD in the post
90’s
era
P of USD
D
S
Supply effect appears to be dominating
The demand effect
The BIG picture
•
•
•
•
Rise in Imports  Increase in Supply  Depreciation
Rise in Exports  Increase in Demand  Appreciation
Influx of Investment  Increase in Demand  Appreciation
Outflow of Investment  Increase in Supply  Depreciation
Modern Economic Systems
• A modern Mixed Economy: Capitalism with
elements of Socialism
• An economic system
– Capitalism
– Socialism
– Communism
• An economic system and economic efficiency
– What? How? For Whom?
– Market Economy versus Command Economy
General government final consumption expenditure (% of GDP)
30.00
26.91
25.00
23.40
21.27
21.52
20.00
16.67
15.00
14.23
General government final consumption
expenditure (% of GDP)
10.00
5.00
0.00
United States
Sw eden
Russian
Federation
Data for 2001, source: World Bank
Norw ay
Finland
France
Market Economy
Prices play two roles: signaling mechanism and distribution mechanism
Consumer and producer surpluses: Welfare economics
Income effect on the demand
Consumer sovereignty (voting with dollars)
Price controls and lack of adjustment on the part of the market
Market efficiency
Presence of government in the production process
Competition Versus Monopoly
Mixed industry: GSU versus Emory
Can GSU be viewed as a competitive firm?
Large presence of the government in an industry: Primary education
Government Monopoly: Provision of some public utilities in certain areas,
such as water services in Fulton county
Soft Budget Constraint
Command Economy
Command Economies of Eastern Europe and
USSR
• History: 1917, 1945, 1985, 1989-1991
50’s
60’s
70-75
75-80
80-85
GNP growth
5.7
5.2
3.7
2.6
2.0
Productivity
Growth
1.6 (1.4)
1.5 (0.9)
0 (1.5)
-0.4 (-0.8)
-0.5 (-1.2)
• Structure of command economy:
–
–
–
–
–
–
–
Central planning versus price mechanism
State ownership versus private entities
State monopoly versus competition
Quality versus quantity
Pricing of raw materials (USSR and the Eastern Block)
Emphasis on industrialization (USSR)
Principal-Agent problem
Industry value added as % of GDP
60.000
50.000
40.000
Poland
Romania
Russian Federation
30.000
Ukraine
France
Germany
20.000
10.000
0.000
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Source: World Bank
Economies in Transition: Real GDP growth rates
10.00
5.00
0.00
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Poland
-5.00
Romania
Russian Federat ion
Ukraine
Unit ed St at es
-10.00
France
Germany
-15.00
-20.00
-25.00
Reforms in Transitional Economies
planning is great if you have the opportunity to do it
• Privatization
• What’s the value of state enterprises?
• How should the shares of those enterprises be
allocated?
– Poland (intermediate funds), Czech Republic
(vouchers), Yugoslavia (worker-control), Russia
(combination of vouchers, management control…)
– Effect of the scheme on the scope of restructuring
- income distribution
- government budget
- differences between the economies of the USSR and
those of Eastern Europe
• Price liberalization
• Shock therapy versus gradual approach
- Poland (January 1, 1990) versus Hungary and
the experience of Russia
• Sequence of reforms (political and economic) and income
inequality
• Financial Stability and exchange rate
Principles of Trade
• Absolute Advantage: total cost
• Comparative Advantage: relative (opportunity) cost
Consider two economies (A, B), each endowed with 200 worker-hours. Consider
that there are only two goods being produced (X, Y). Consider that in country
A the hourly wage is $A10, while in country B it is $B20, for simplicity assume
that $A=$B. Table below shows costs in each country:
A
B
X
1 ($A10)
1
($B20)
Y
3 ($A30)
2
($B40)
What can be said about the absolute and comparative advantage principles
in this case?
Productivity and trade (education, physical capital…)
Currency and Trade