Transcript Unit 1: Economic development

World economy & international markets
Lesson 1: Economic development.
Dr. Gonzalo Sanz-Magallón Rezusta
2016-2017
Unit 1
Unit 1: Economic development
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1. The definition of economic development
To differentiate between:
a. "economic growth"
(quantitative), understood as
the actual increase in
product or income,
b. "economic development"
(a qualitative phenomenon),
considered to be the
structural transformation
that improves the modes of
production and the standard
of living of a certain
economy
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1. The definition of economic development
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Japan
US
France
Germany
China
India
Italy
Britain
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1800-2015
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2. The brakes on development
2.1. Lack of capital
2.2. The problem of the population explosion and the unequal distribution
of income
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A
B
Gini index: A / A+B; (0,1)
0= perfect distribution
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1. The brakes on development
2.3. The absence of an institutional
framework favorable to growth
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4. Structural ratios: 1. Determinants of GDP p.h.
The GDP p.h. depends on:
1- Productivity (GDP / Hours worked)
2. Employment rate (Employment / working age population)
Two other variables:
3. Hours worked per employee
4. Dependency rate (working age population / total population)
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GDP p.h. Decomposition
A) GDP/Population = [GDP / Employment] x [Employment /Population ]
(Productivity)
GDP
(Employment ratio)
Employment
x
B) GDP / Population =
Employment
Working Age
Population
x
Working Age
Population
Population
(Productivity) (Employment ratio) (Dependency rate)
C) GDP / Pop. =
GDP
x
Total
Hours
Worked
Employment
x
x
Working Age
Population
Total
Employment Working Age
Population
Population
Hours
Worked
(Productivity) (Work-Leisure) (Employment ratio) (Dependency rate)
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GDP p.h. Decomposition
GDP / Population = [GDP / Employment] x
(Employment ratio)
Labour productivity
(Labour productivity)
[Employment / Population ]
Employment
ratio
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GDP p.h. Decomposition
Labour productivity (000 euros 2003)
Analyze the
graph, which
represents the
evolution of
per capita
income,
productivity
and
employment
rate in Spain in
recent years.
Identify and
describe the
main stages
within the
period 19602003
Spain: 1960-2003
Employment ratio
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GDP p.h. Decomposition
Analyze the
following graph and
draw conclusions
about the
performance of the
Spanish economy,
the Euro area
economy, and the
United States
economy during the
period 1960-2003
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3. The Global Competitiveness Report
 WEF publishes GCR (“benchmarking” indicators) so it’s possible to
compare each country position towards the main productivity
determinants, which are:
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GCI: Spanish position
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Exercise
Relate the following indicators with the pillars used to measure competitiveness by the
WEF
•
Pillars:
Enrollment
rate a(%)
in company
college
Time needed
to Population
create
new
Interest rates level
GDP
capitarate
Inflation
GDPper
1. Institutions
2. Infrastructure
3. Macroeconomic stability
4. Health and primary education
5. Higher education and training
6. Goods market efficiency
7. Labor market efficiency
8. Financial market sophistication
9. Technological readiness
10. Market size
Research & development expenditure / GDP
Number of engineers / 1,000 population
Current
Account
Balance
Quality
of local
suppliers
Exchange rate
Level of corruption
% Illiterate
Redundancy costs
Motorways (km)
Number of patents / population
11. Business sophistication
12. Innovation
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5. National accounts indicators
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Final Consumption: Consumption can be broken down into private and public
consumption
Private consumption: Consumer expenditures on final goods and services
Public consumption: is the sum of government expenditures on public services
(education, security, etc.). It includes salaries of public servants and purchases that are
necessary to produce the services. It does not include any investment expenditure and
transfer payments, such as social security or unemployment benefits
Intermediate consumption. The value of the goods and services consumed as inputs by
a process of production, excluding fixed assets whose consumption is recorded as
consumption of fixed capital. The goods and services may be either transformed or used up
by the production process.
Gross capital formation: all goods that are used to increase the stock of capital
Gross fixed capital formation: all goods that can be used repeatedly in the production
process. And also the value of the production of the building sector (including new houses,
upgradings and renovations)
Changes in inventories: includes raw materials, products in production line, products in
stock.
Fixed Capital Consumption. Loss of value of the stock of capital due to its use
Net value always means: Gross value – estimated Fixed Capital Consumption
i.e. Net Fixed Capital Formation = Gross Fixed Capital Formation – Fixed Capital
Consumption
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GDP : Total value of final goods and services produced within a
territory during a period of time.
Clarifications:
1. Only final goods and services: No double accounting of intermediate goods or
services.
2. Domestic: produced in the Spanish territory.
Gross National Product: production of the residents in Spain.
3. Two kind of services: a) Market services (no problem)
b) Non-market services or public services (defense, education). There is no
market price. They are included in the GDP by calculating the cost of production.
4. Activities that are not included in the GDP due to the difficulty to quantify them:
Housewife production (Pigou’s paradox)
5. Secondhand transactions: They are only included if there is a middleman or
intermediary that receives a commission.
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There are three ways to calculate the GDP:
Production, Revenue, and Expenditure
Firms and consumers are interrelated in two different ways:
-Firms pay income to consumers because they own the factors of production
- Consumers pay firms for the final goods and services that they provide
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Expenditure= Final expenditure of the owners of the factors of production
Private consumption
Final consumption
Public consumption
Gross capital formation (GCF):
Domestic demand
+
+
a) Investment in equipments; b) Building sector.
+ Exports of goods and services.
GDP
Trade balance
- Imports of goods and services.
Value added: Value created through production process
+ VA agriculture
+ VA Construction
+ VA Industry
+ VA Services
Value added = Production - Intermediate consumption
GDP
Revenue = Value distributed among factors of production
+ Compensation of employees (Wages)
+ Gross operating surplus (Capital Profits)
GDP
(Profits, mixed income –self employed-, rental payments, interests, etc.)
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Exercise: Calculate the GDP (expenditure, value added, revenue) and labour productivity
(of the total economy and the values for each sector of activity):
• A farmer produces and sells wheat to the industry at a price of 100 MU
(Pays wages: 40 MU, land rental: 30 MU –paid to a Foreigner-, profits: 30 MU;
num. Employees: 10).
The industry sells flour to a bakery at a price of 250 MU (wages: 90, interest: 30 MU,
Profits: 30 MU; num. Employees 3).
•The bakery produces bread that is sold at a price of 450 MU: 400 domestic market, 50 exports;
(wages: 130 MU; profits: 70 MU; Num. Employees: 5).
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GDP:
Transfers: one-way transfers of assets, without counterpart:
• Capital transfer: increase the stock of capital
• Current transfer: employed in current expenses: pension, dole.
• National transfer: among national agents
• International transfer: with nonresidents
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Exercise: Classify the following transactions into Intermediate consumption, Private
Consumption, Gross Fixed Capital Formation, or Exports:
. A family buys shoes
· Purchase of gasoline by a taxi driver
· Purchase of a washing machine by a family
· Purchase of a washing machine by a laundry company.
· Purchase of a washing machine by a foreigner.
· Purchase of crude oil to use in a refinery.
· Purchase of an automobile by a driving school.
· Providing dental services to individuals.
· Renting of a car by foreign tourists.
· Acquisition of a new home by a family
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Classify the following distribution operations into: Compensation of
employees, Gross Operating Surplus, Taxes on production and imports,
Production Subsidies, Current Transfers:
•Payments to workers for overtime
•State payments to pensioners
•Payment of a fee of 7 per 100 on the value of an imported commodity
•Sending of money by Spanish emigrants living abroad
•Payment of VAT by employers
•Public Administration Grants to cover operating costs
•Productivity bonus payments to workers
•Corporations earnings
•Payments of unemployment insurance by the Public Administration
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Identify the impact on GDP and GNDI of the following:
• The company X produces 100 um of corn, with the GVA
generated of 40 um
• Mr. X sells to Mr. B a used vehicle worth 30 um
• A family purchases stocks worth 50 um through a middleman who
charges a fee of 2 um
• The municipality X increases spending on the police service in 30 um
• The Social Security pays unemployment benefits totalling 70 um
• The Ministry of Public Works invests in Barajas Airport 80 um
· 200 Spanish laborers receive in France 80 um as workers in the
Bordeaux grape harvest.
· 200 Algerians laborers in Spain receive 80 um as workers in the La Rioja
grape harvest
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Circle “True” or “False” in the following statements.
“Purchase of an automobile by a driving school” is an “intermediate consumption” True
transaction
False
“Acquisition of a new home by a family” is a “private consumption” operation
True
False
“State payments to pensioners” is a “capital transfer”
True
False
“Corporations earnings” are included in the Gross Operating Surplus
True
False
“Sending of money by Spanish emigrants living abroad” is a compensation of True
employees operation
False
GDP is the difference between Total output and Gross Operating Surplus
True
False
GNDI includes transfers received from the rest of the world
True
False
Gross Savings is the difference between GNDI and Private Consumption
True
False
Net Borrowing/lending capacity is the difference between Gross Savings and Gross True
Capital Formation
Net Borrowing/lending capacity equals the Current Account Balance
True
False
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False