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2 The Global Macroeconomy (Fach) / Lecture 1 - GDP, HDI (Lektion)

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  • GDP Gross Domestic Product (GDP) denotes value of output of goods and services produced within a country (including nationals and resident foreigners). Measures value added in the country. Flow variable measured usually during a yearly or a quarterly period 1) Real GDP - Inflation: Time series of GDP  No Actual increase in production Need to measure GDP at constant pices  MEASUREMENT: GDP Deflator = nominal GDP/real GDP 2) PPP-adjusted GDP per capita - Different Purchasing Power across countries Comparisons across countries may be masked by price differences. One way of comparing:  Y(US)USD vs. Y(India)Rupees • eUSD/ eRupees PPP-adjustment *Use same price level when comparing across countries) takes into account Standard of Living PPP-Adjusted GDP per capita (India) USD = PUSD • OutputIndia 3) Measure Value Added - Do not double or triple Count! a) Final Expenditure Way: Compute Final Sales Value b) Sector Level Way: Compute Value Added at each Link of the process Y = Y(Sector 1) + Y(Sector 2) c) National Income Way: Compute components of national Income Y = Labour + Capital  -> They should be the same
  • Sector Value Added US Finance 24% Government 15% Professional and Business services 15% Construction 5% Wholesale trade 7% Retail trade 7% Manufacturing 13% Information 5% Kenya Agriculture 23% Transport 11% Trade, restaurants, hotels 12% Education 4% Healthu Manufacturing 11%
  • GNI Gross National Income (GNI) denotes value of output of goods and services produced by the nationals of a country (excluding foreign residents remittances but including remittances from nationals resident abroad). Measures income of country’s citizens Add transfers from abroad [nationals] to GDP + profits from domestic firms foreign operations+ interest payments and dividends received from investments abroads+ transfers from residents to home+ grants received from foreign governments Deduct transfers to foreign country [non nationals] - profits from foreign firms - interest payments & dividends received by foreigners- transfers of residents based abroad to their HC- grants paid by government
  • Comparison GDP & GNI Across Countries Ireland: GDP > GNI  17% Poland: GDP > GNI 3% US: GDP <= GNI  Bangladesh GDP < GNI Japan GDP < GNI (11%) GDP - based on location Products produced within country’s geographical limits Indicator of country’s economic strength GNI Aggregate Output produced by firms owned by the country’s nationals  Indicator of economic strength of the residents of the country. GNI lays emphasis on the income generated by the country’s citizens.
  • Failures of GDP GDP does not include - Underground Economy Non-Market Activity (Home Production) Black Market Activity Capital Gains on Assets  GDP does not attempt to measure - Conceptual Failures Environmental Quality Natural Resource Depletion Income Distribution Crime & Safety Happiness Life Expectancy & Health Education  “Capability to partake in an active life”  CONCEPT: Green GDP
  • Importance of Natural Capital in comparison to Produced Capital More wealth per capita is derived from produced capital relative to natural capital when income increases.  Low income countires 40% vs. 60% Middle income countries 60% vs. 40% High income countries 90% vs. 10%
  • How we calculate Genuine Investment or Saving this in practice in a closed economy? GDP - Total Consumption = Gross Investment (I) [or Gross Savings (S)] -  Capital Depreciation + Education Expenditure (Investment in Human Capital) - Energy Depletion - Mineral Depletion - Forest Depletion - CO2 Damages = “Genuine Investment [or Savings]”
  • World Inequality Report 2018 Western Europe Bottom 50% account for 25% of national income Top 1% accounts for 12% of national income US Bottom 50% account for 12% of national income Top 1% accounts for 20% of national income
  • Top 10% income shares across the world Rising inequality almost everywhere, but at different speeds Middle East 60% India 55% Brazil 55% Sub-Saharan Africa 555 US_Canada 47% Russia 46% China 40% Europe 37%
  • Measuring Welfare: The UN’s Human Development Index (Amartya Sen) The HDI (and each of components) is scaled between 0 and 1 HDI is defined as (L + S + I)/3 where L = (Life Expectancy –25)/(85-25) S = 0.67 x Literacy Rate + 0.33 x School Enrollment Rate I = (log(GDP per capita) –log(100))/(log(40,000) – log(100)) Note that the HDI is linear in Life Expectancy and Education but not in income: a 10% increase in health or education always has the same impact but not a 10% rise in income Highest: Norway 0.92 Australia Switzerland  Germany Denmark Lowest Gunies-Bissau Niger central African Republic 0.35
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  • Another Way to Measure HDI HDI is defined as (L x S x I)^(1/3) where L = (Life Expectancy at birth –20)/(85-20) S = (Mean Years of Schooling / 15) + (Expected Years of Schooling / 18) I = (log(GDP per capita) –log(100))/(log(75,000) – log(100))  Mean Years of Schooling = years that a person aged 25 or older has spent in formal education. Expected years of schooling = total expected years of schooling for children under 18 years of age. The HDI (and each of components) is scaled between 0 and 1  

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