Analysis of GDP Statistics. Eiichi Araki

Transcription

1 Analysis of GDP Statistics Eiichi Araki

2 The most important economic indicator By inspecting GDP statistics, we can appreciate various aspects of the world economy. Economic power of each country ( size of GDP ) Material prosperity of each nation ( GDP per capita ) Business conditions in each economy ( economic growth rate ) Characteristics of each economy ( Decomposition analysis )

3 Today s contents An overview of relevant terms Value-added, Nominal/Real GDP, GDP deflator, Economic growth rate GDP ranking International comparison PPP ( Purchasing Power Parity ) GDP per capita and economic growth Correlation Convergence theory

4 What is GDP? GDP ( Gross Domestic Product ) is... the total amount of value-added produced by all the companies located in a country for a certain period ( 1 year / 1 quarter ). n.b. value-added : noun[uncountable]

5 What is value added? value-added = sales of product expense for intermediate input sales = total revenue of the producer = price of product quantity sold The value-added of the farmer v1 = (the sales of the wheat) (the expense for the seeds) Similarly, V2 is the value-added of the mill. V3 is the value-added of the factory. The total amount of value-added (GDP) is v1+v2+v3.

6 Calculation of GDP Note! intermediate goods :seeds, wheat, flour final goods : bread As easily seen, without the loss of generality, total amount of the value-added = v1 + v2 + v3 = (the sales of bread) imports Therefore,... GDP = (the total sales of final goods in a country) - (the total costs of imports in a country)

7 Nominal and Real GDP Nominal GDP is evaluated by current prices Real GDP is evaluated by prices in a base year Note! Changes of nominal GDP reflect changes in both quantities and prices, Changes of real GDP reflect only changes in quantities. GDP deflator = Nominal GDP Real GDP frequently used as a price index, along with CPI (Consumer price index) or WPI (Wholesale price index).

8 Numerical examples

9 GDP ranking in 2006 (IMF) Gross world product 48,144,466 European Union 14,527,140 1 United States 13,244,550 2 Japan 4,367,459 3 Germany 2,897,032 4 People's Republic of China 2,630, United Kingdom 2,373,685 6 France 2,231,631 7 Italy 1,852,585 8 Canada 1,269,096 9 Spain 1,225, Brazil 1,067, Russia 979, South Korea 888, India 886, Mexico 840, Australia 754, Netherlands 663, Belgium 393, Turkey 392, Sweden 385, Switzerland 377,240 * Nominal GDP in millions of US dollars * All the estimates are based on the market exchange rate in 2006.

10 GDP ranking in PPP (IMF) * Nominal GDP in millions of US dollars * All the estimates are based on PPP.

11 The difference Japan s GDP is roughly 500 trillion, US GDP $13 trillion. To compare these two GDPs, we have to convert into $. Let e denote the market exchange rate, say 100/$1. Let p denote the PPP, say 110/$1. Both are conversion tools. e is used in the first table, p in the second. In terms of e, 500 tril. = $5 tril. = 500/( 100/$1) 2: Japan, 3:China, 4:Germany, 13:India In terms of p, 500 tril. = $4.55 tril. = 500/( 110/$1) 2: China, 3:Japan, 4:India, 5: Germany. Which table is more accurate? But before that, what s PPP?

12 What is PPP? PPP (Purchasing Power Parity) : the long term equilibrium exchange rate of two countries to equalize their purchasing power. Suppose Japan and the US are producing only Big-mac s and the prices of Big-macs in both countries are as follows; In this case, Japan US Price 200 $20 P P P = = 10 If $1 = 10, American people can buy a Japanese Big-mac at exactly the same price as in the US, and vice versa. In the real world, Japan s PPP is defined as the ratio of a price index in Japan to the same index in the US.

13 PPP and exchange rate PPP : a long-term equilibrium exchange rate. The market exchange rate is generally not equal to PPP, but it is said to have a tendency to converge to PPP. If e > p =10, then $20 > 200. Japanese Big-mac is cheaper than US Big-mac. American people will import Japanese Big-mac. The exports from Japan to the US will increase. The demand for the yen will increase. The value of the yen will rise. e will decrease ( approach to p ). If e < p =10, then vice versa.

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15 GDP conversion again Let Y e = GDP/e and Y p = GDP/p. Y e is used in the first GDP ranking table, Y p in the second. In Japan, Y e > Y p i.e., e < p, which means: * the yen is overestimated in the market * domestic(exporting) products are expensive * foreign(importing) products are cheap In China, Y e < Y p i.e., e > p, which means: * the yuan is underestimated in the market ( or maintained at a lower level by the government ) * domestic(exporting) products are cheap * foreign(importing) products are expensive Using p is appropriate? Then, we have a surprising forecast.

16 A forecast: GDP ranking Source: BBC article(3rd.mar.06) China to dwarf G7 states An american research company predicts: by the year of 2050,... China s economy to almost double. It could be 43% bigger than the US ( on a PPP basis ). Japan to be overtaken by India s economy. German, UK and French economies to be outstripped by Mexico and Brazil ( on a PPP basis ). But, actually we have evidence to the contrary.

17 GDP per capita in PPP (IMF)

18 Convergence theory 1. The convergence theory Every country s average income ultimately converges to the same level. The gap between rich and poor vanishes in the long run. 2. The dependency theory Poor countries totally depend on rich countries. The gap persists because the latter exploit the former. It seems difficult to confirm which theory is more plausible. But, before that, let s take an overview of economic growth rate.

19 The rate of economic growth equals to the growth rate of GDP Typical index of business conditions: boom, recession, depression, recovery Positively correlated with... price, production, wages, employment, income, consumption, interest rates, tax revenue, and so on. Negatively correlated with... unemployment, bankruptcy, government spending, budget deficit, issuance of deficit-financing bond, and so on.

20 The real economic growth rate

21 Correlation Let y denote the average income of each country. Let g denote the economic growth rate of each country. The convergence theory says: y converges to the same level. The country with a lower y has a higher g. y and g are in a negative correlation. Let s confirm it.

22 Exercise 1. Load the following file into Excel 2. Choose your favourite country to calculate the following * g: GDP per capita from 1970 to 2000 * y: Annual economic growth rate from 1971 to 2000 * g a : Average of g for each decade, i.e., 70s, 80s, 90s. * y a : Average of y for each decade.

23 Exercise (2) 3. Copy the equations which you already input to the other worksheets to apply the same calculation to the other countries. 4. Create a new worksheet. 5. Collect g a s and y a s of all the countries. Copy and paste them together into the new worksheet. 5. Calculate the correlation coefficient between g a and y a.

24 Calculation of average growth rate Suppose that GDP of a country: * was A in 1991 * was B in 2000 Let G denote the average growth rate in these 10 years. B = (1 + G) 10 A So, (1 + G) 10 = B A So, G =( B A ) We can use the excel function, =power( ). =power(b/a, 1/10) - 1