global econ - intro to the global economy - lecture

8/9/2019 Global Econ - Intro to the Global Economy - lecture

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Introduction to the Global Economy

Dr. Katherine Sauer

Global Economic Issues

ECON 241

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A. Measuring the Size of an Economy

An economy is measured by the value of the goods and services it

produces.

Gross Domestic Product (GDP) = the total market value of all

final goods and services produced within a country's borders in agiven time period

Does not include:

- home production

- illegal activities- used goods

- environmental destruction

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2007 GDP

Source: World Bank3


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Gross National Product (GNP) = the total market value of all final

goods and services produced by citizens of a country in a given time

period (aka Gross National Income , GNI)

GNP = GDP + net income from assets abroad

US GDP and GNP (billions of $)

Source: BEA -- National Income and Product Accounts Tables Table 1.7.5

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B. Comparing GDP across time

Nominal GDP (NGDP) is calculated using current market prices.

Real GDP (RGDP) is adjusted for inflation.

[inflation = an increase in the overall price level]

It is only meaningful to compare RGDP figures across time.

2001Q2 2001Q3

US NGDP $10,128.9b $10,135.1b

US RGDP $9,905.9b $9,871.1b

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C. Comparing GDP across countries

NGDP 2005

US $12,455.8 billionChina 13,308.5 billion

Which economy is really larger?- convert them to the same currency to see

Side note on exchange rates:

The exchange rate (e) specifies how much one country's currencyis worth in terms of another country's currency.

If e = 8.2768 / $ 1 , then one dollar can be exchangedfor 8.2768 yuan.

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If the exchange rate is 8.2768 / $1, then it is equivalently

$0.12082/ 1, meaning one yuan can purchase about 12 cents.

Suppose that in March, e = 8.2768 / $1.

Suppose that inApril, e = 10.2768 / $1.

- Since it takes more yuan to buy one dollar the yuan hasdepreciated against the dollar.

-Similarly, the dollar has appreciated against the yuan.

The purchasing power of a dollar (in terms of the foreign currency

it can buy) has increased.

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Back to our example

13,308.5 billion x $1

8.2768

= $1,607.9 billion

NGDP 2005

US $12,455.8 billion

China $1,607.9 billion

The US economy is much larger than Chinas economy.

But what if instead, e = 10.2768 / $1 ?

Then, 13,308.5 billion x $110.2768

= $1,295.0 billion

the size of Chinas economy in US$ is now even smaller! 9


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Changes in exchange rates can distort GDP comparisons!

The Purchasing Power Parity (PPP) calculation of GDP can

reduce exchange rate distortions.

GDP(PPP) 2005US 12,277.6 billion PPP dollars

China 9,412.4 billion PPP dollars

After accounting for purchasing power, the US economy is still

larger than China's, but the disparity is not as large as when using

regular GDP.

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But what about the fact that population differs by country?

GDP per capita = GDP / population

GDP per capita is a rough measure of the average person's well-

being in a given economy.

GDP per person in the US is much larger than GDP per person in

China.

Pop GDP(PPP)

US 296.5 m 12,277.6 b

China 1,303.7 m 9,412.4 b

GDP per capita

41,408.43

7,219.76

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Rank Country Population

World 6,671,226,000

1 China 1,322,245,331

2 India 1,169,016,000

3 United States 303,321,825

4 Indonesia 231,627,000

5 Brazil 187,644,256

6 Pakistan 161,598,500

7 Bangladesh 158,665,000

8 Nigeria 148,093,000

9 Russia 142,499,000

10 Japan 127,718,000

2007 population

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D. Economic Growth

Economic growth is measured by the percent change in RGDP

over a time period.

%X = X2 X1 . 100

X1

2005 RGDP 2006 RGDPChina: 7,898.742 b 8,743.908 b

US: $11,048.625 b $11,413.625 b

%RGDP from 2005 to 2006

China 10.7%US 3.3%

Economic growth can be negative. (recession)

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E. Classifying Countries by Income

World Bank - Atlas method

2007 GNI per capita

Low Income: $935 or less

Lower-Middle Income: $936 - $3,705

Upper-Middle Income: $3,706 - $11,455

High Income: $11,456 or more

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Source: World Bank 15


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Source: World Bank 16


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Snapshot of the Global Economy (2007)

Source: World Bank World Development Indicators

GDP GNI population GNI per capita

(trillions $) (trillions $) (billions) ($)

World 54.3 52.6 6.6 7,958

Low income 0.8 0.7 1.3 578

Lower middle income 6.9 6.5 3.4 1,887

Upper middle income 6.5 5.7 0.8 6,987

High income 40.2 39.7 1.1 37,566

Low & middle income 14.2 13.0 5.6 2,337

East Asia & Pacific 4.4 2.7 0.4 2,180

Europe & Central Asia 3.2 2.7 0.4 6,051

Latin America & Caribbean 3.4 3.1 0.6 5,540

Middle East & North Africa 0.8 0.9 0.3 2,794

South Asia 1.4 1.3 1.5 880Sub-Saharan Africa 0.8 0.8 0.8 952

US 13.8 13.9 0.3 46,040

EMU 12.2 11.6 0.3 36,329

LDCs 0.4 0.4 0.8 496

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global econ - intro to the global economy - lecture

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