Analyses of GDP. Eiichi Araki

Transcription

1 Analyses of GDP Eiichi Araki

2 Today s theme: GDP By looking over GDP statistics, we can learn various aspects of the world economy. Economic power of each country Current situation of each economy Material prosperity of each nation Characteristics of each economy or the causes of economic problems can be clarified, sometimes.

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

4 What s value added? Value added Intermediate input v3 value-added = sales expense for intermediate input sales = total revenue of the producer = price of product quantity sold Sales of seeds v1 c1 v2 c2 c3 seeds wheat flour bread ( import ) ( farm ) ( mill ) ( factory ) Sales of bread The value-added of the farmer v1 = (the sales of the wheat) (the expense for the seeds) The value-added of the mill v2 = (the sales of the flour) (the expense for the wheat) The value-added of the bread factory v3 = (the sales of the bread) (the expense for the flour) So, the total amount of value-added is v1+v2+v3.

5 Calculation of GDP Value added Intermediate input v2 v3 Note! intermediate goods :seeds, wheat, flour final goods : bread v1 seeds wheat flour bread ( import ) ( farm ) ( mill ) ( factory ) 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)

6 Nominal/Real GDP quantity price quantity price Seeds Wheat Flour Bread Nominal GDP Real GDP = = = = 883 Nominal GDP is evaluated by current prices. Real GDP is evaluated by prices in a base year ( in this case, the base year is 1995 ). Note that changes of nominal GDP reflect changes in both quantities and prices, while changes of real GDP reflect only changes in quantities.

7 GDP Deflator, Economic Growth Rate quantity price quantity price Seeds Bread Nominal GDP Real GDP Nominal Economic Growth Rate Real Economic Growth Rate GDP Deflator = = = = = 883 ( ) 930 = 0.04 ( ) 930 = = GDP Deflator is frequently used as a price index, along with CPI (Consumer price index) or WPI (Wholesale price index).

8 GDP ranking GDP GDP per capita ( million US dollars ) ( US dollar ) U.S. 9,817,000 11,004,100 34,446 37,424 Japan 4,744,665 4,302,557 37,409 33,727 Germany 1,870,278 2,403,160 22,731 29,136 U.K. 1,441,144 1,797,677 24,555 30,341 France 1,309,840 1,759,029 22,088 29,249 Italy 1,074,719 1,468,284 18,678 25,571 China 1,079,386 1,412, ,083 IMF, International Financial Statistics Yearbook 2004 These figures show nominal GDP of each country converted into US.dollar by the current exchange rate. HongKong is not included in China.

9 A forecast: GDP ranking From a BBC s article(3/mar/2006), China to dwarf G7 states, PricewaterhouseCoopers predicts that by 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 economies. German, UK and French economies to be outstripped by Mexico and Brazil ( on a PPP basis ). PPP: Purchasing Power Parity Cf. The convergence theory of economic growth.

10 The rate of economic growth = the growth rate of GDP. Typical index of business conditions: boom, recession, depression, recovery Highly correlated positively with... price indices, production, wages, employment, income, consumption, interest rates, tax revenue and so on... Highly correlated negatively with... unemployment, bankruptcy, government spending, budget deficit, issuance of deficit-financing bond and so on...

11 The real economic growth rate The real rate of economic growth forecast forecast Japan US Canada Germany France Italy UK South Korea Taiwan Hong Kong Brasil Russia India China Eastern Europe Africa IMF, World Economic Outlook, 2005 Sep. Note again, the convergence theory of economic growth.

12 The historical performance of the Japanese Economy The period of miracle growth Economic growth rate Plaza Accord 240/$1(1985.9) 150/$1(1986.2) The bubble The lost decade The oil crises

13 The bubble

14 The lost decade Japan was under a severe depression during 1990s. It was said to be the first debt-deflationary depression in an advanced economy since WW2. The Causes seem not to be fully clarified. Burst of the bubble Decline of the technical progress Failure of the macroeconomic policy

15 Distribution of Value-added s Every company divides its value-added into the following categories: 1. Wage payment to employees 2. Dividend payment to shareholders 3. Interest payment to creditors 4. Internal Reserve 5. Indirect Tax payment to government 6. Depreciation And most companies get some subsidies. So, for each company, Value-added + Subsidies =

16 National Income Because the previous equation holds for every company, throughout the economy, we have GDP + s = Wages + Profits GDP: total amount of value-added s: total amount of subsidies Wages: total amount of 1 Profits: total amount of : total amount of 5 6: total amount of 6 (Wages + Profits) is defined as National Income

17 Labour share and Capital share NI = Wages + Profits We define Labour share as Wages/NI and Capital share as Profits/NI. Labour share shows how much of NI is distributed to workers, and capital share shows how much to capitalists.

18 Labour share

19 GDE (Gross Domestic Expenditure ) GDP = (the total sales of final goods in a country) - (the total costs of imports in a country) By the way, who buys the final goods? Consumers, Companies, Government, People in other countries Usually, we divide the total amount of sales of final goods into the following categories: C : total amount of Japanese consumers expenditure ( CONSUMPTION ) I : total amount of investment expenditure to build houses/factories or to install various industrial equipments ( INVESTMENT ) G : total amount of Japanese GOVERNMENTAL EXPENDITURE ( public works etc. ) : total sales to foreign countries (EXPORTS) X

20 Then, we have GDE - continued GDP = C + I + G + X M Where M denote the total amount of IMPORTS and the RHS of this equation is called GDE. ( Some caveats ) 1. Actually, INVESTMENT includes INVENTORIES. Inventory represents the total amount of unsold products stored in companies warehouses. 2. Actually, C includes the Japanese consumer s spending to foreign products. Similary, I and X includes the spending to them. But they were offset because they are also included in M.

21 The determinants of GDP 1. ( Demand side theory ) The fluctuation of GDP crucially depends on the fluctuations of the components of GDE: C, I, G, X, and M. The amount of production (GDP) depends on the amount of demand (GDE). For instance, if C increases, i.e., if consumers begin to spend more to buy, the production of goods will increase. The equation, GDP = C + I + G + X M, is usually called the equation to determine GDP, which implies the RHS ( total spending/demand ) decides the LHS ( total production ). 2. ( Supply side theory ) The size of GDP of a country depends on the quantity and quality of the capital assets, the workforce and the technical knowledge that the country has accumulated so far.

22 Demand-side Macroeconomics Both theories are right. There has been a history of severe discussion about which is the fundamental engine. But, in the short run, we had better pay more attention to the demand-side, with the supply-side given fixed. Usually, we denote GDP by a letter Y, which means yield. Y = C + I + G + X - M C+I+G Domestic Demand Y X-M (Net) Demand from abroad = Trade Surplus

23 IS-Balance theory Y = C + I + G + X M Y C = I + G + X M. Note (Y-C) = (S+T), where S means total amount of nation s savings and T means total amount of government tax revenue. ( S I ) = ( G T ) + ( X M ) ( Excessive Savings ) = ( Government Deficit ) + ( Trade Surpluses) (Japan) S - I > 0, G T < 0, X M > 0 (US.) S - I < 0, G T < 0, X M < 0

24 Trade Imbalance and Beggar-my-Neighbor Policy ( S I ) = ( G T ) + ( X M ) 1. For Japan, X M > 0 and the trade surpluses have been the primary engine for its economic growth. 2. For the US, X M < 0 and the trade deficit has been a cause for stagnant domestic growth. 3. The US has been the largest buyer of Japanese exports. 4. Therefore, US has been accusing Japan of its beggar-myneighbour policy, saying that Japan is exporting unemployment to the US through some unfair trade strategies; dumping of exporting goods, closing its own market by tariff barrier, and so on.

25 Trade negotiations between 1960: Treaty of mutual cooperation and security Japan and the US Japan-US textile agreements Economic growth rate Japan-US agricultural negotiation Structural Impediments Initiative; SII Arrangement concerning trade in semiconductor

26 US: The engine of the global economy The US consumers have been said to be the primary engine for the world s economic growth. Because other countries have achieved economic growth through selling their products to American consumers, i.e. exports to the US. For instance, between Japan, Asia and the US, there has been a strong triangle trade structure. Japan exports industrial machines to Asian countries, Asian countries produce final goods by using Japanese machines, and the US buys the final goods from Asia. When the US sneezes, the rest of the world catch a cold.

27 The Alternative Engine --- The Economist, Oct.21 st 2006 American consumers have been the main engine of global growth. Yet the importance of America s role in global growth is often exaggerated. Now the real engine of the world economy is Asia. When America sneezes, the rest of the world s economies may no longer catch a cold.

28 Exercise