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EC 102.01Instructors: Asst. Prof. Burçay ERUS and Dr. Burcu YAKUT-Ç[email protected], [email protected] phone: 359 7638 or 359 7652Office Hours: Tuesdays 15:00-17:00 and by
appointment 2 midterms (2*30%) + 1 Final (40%); NO MAKE-UP!!
OutlineCh 1 – Economic Activity in ContextCh 3 – What Economies Do (Sections 1,3,4), Ch 6 – Macroeconomic Measurement
Section 3 – Measuring Household ProductionSection 4 – Measuring Economic Well-Being
National income accounting with “the outsiders”
ThenCh 5 – Macroeconomic Measurement
Economic Activity in Context
What is economics? Study of the way people organize themselves to sustain life and enhance its quality resource maintenance, production, distribution and consumption of goods and services.
Micro vs. Macro Macro vs. Global
people = economic agents
Microeconomic vs Macroeconomic Questions
Microeconomic Macroeconomic
Should I go to summer school or take a job?
How many people are employed this summer?
What determines salary offered by Garanti Bank to Huseyin Kum, a recent Bogazici grad?
What determines overall salary level in the economy?
What determines the price of chocolate produced by Eti and Ulker?
What determines the level of prices in the overall economy?
What government policies are needed to make it easier for Roma students to enroll in schools?
What government policies should be adopted to promote employment and growth in overall economy?
What determines whether Akbank opens a branch in Berlin?
What determines overall trade in goods, services, and financial assets between Turkey and the rest of the world?
Economic Activity in ContextMacroeconomic Goals
positive vs. normative questionsConcept of “well-being”(i)Living standards – “keep living standards of the
individuals high enough to maintain long, healthy and enjoyable lives” economic growth + political freedom + social inclusion- economic development
Growth but: What is produced? How ? For whom?
Economic Activity in Context(ii) Stability – temporal dimension
fluctuations - boom vs. recessionbusiness/trade cycles – alternating periods of B/R
(iii) Sustainabilityfinancially? – “debt crises”socially? – “disparities in living standards”ecologically? – “catastrophic effects”
Need for a rethinking of economic growth
Economic Activity in Context
Share in national income
1987 1994 2002 2003 2004 2005 2006
Total Household Income 100 100 100 100 100 100 100
Lowest 20 % 5,2 4,9 5,29 6 6,04 5,1 5,8
Second 20 % 9,6 8,6 9,81 10,28 10,69 9,9 10,6
Third 20 % 14,1 12,6 14,02 14,47 15,22 14,8 15,2
Fourth 20 % 21,2 19 20,83 20,93 21,88 21,9 21,5
Highest 20 % 49,9 54,9 50,05 48,32 46,17 48,4 46,9
Gini coefficient 0,43 0,49 0,44 0,42 0,40 0,43 0,41
What Economies Do?
Goals (were): good stds of living, stability and sustainability – need to understand building blocks
Need to combine micro and macro perpectives to understand the functionings
Four essential economic activities:resource maintenance, production, distribution
and consumption of goods and services.
Essential Economic ActivitiesResource maintenance: tending to preserving or
improving the stocks of resources for preservation and quality of life
Capital stock – valuable for economic contribution!Types: natural (physical assets provided by nature),
manufactured (human productive activities added to natural), human (individual’s capacity fo labour – skills and knowledge), social (stock of trust, mutual understanding).
Essential Economic ActivitiesProduction: conversion of resources into useble
products – tangible/intangible, manufacturedInputs -> outputs + waste productsNeed to consider capital stocks
Distribution: sharing of products and resources among people
Markets facilitate exchange relationsTransfers - payments given without return
expectation (monetary/non-monetary – in kind)
Essential Economic ActivitiesConsumption: final use of goods and services by
individuals to satisfy needs.May choose to save for consumption in the following
periods. Flow of savings (either from individuals, business and
government) add to the stock of available financial assets.
Use of financial intermediaries help facilitate the savers to loan out to those who want to borrow
Some borrowed funds could be used for creation of new investment goods – aim to maintain resources
Distribution: Who gets what and how???Distribution in form of exchange and in form of
transfer – Main Q: who receive the incomes generated by production and the role of government, if any.
Exchange relations: two agree to trade on the basis of mutuall agreed terms.
Goods and labour markets – monetary flow (L/K income)
Wages, rents, profits – controversial debate over which is the productive one!
Distribution: Who gets what and how???Taxes and transfers: funds flowing to and from gov.From – dependency needs not met elsewhere (care,
shelter, education, health services)Two main types of transfer programs – social insurance
and means-tested.Insurance- pool insurance (contributions) to hedge for
risksMeans-tested - non-contributory but
income/assets/wealth being testedTR: Social Insurance Institution, Unemployment Insurance
Fund, Social Assistance and Solidarity Fund
Distribution: Who gets what and how???Taxes and transfers: funds flowing to and from gov.To – collection of income and consumption/sales taxes
(e.g.VAT) – direct vs. indirect taxesProportional?? Progressive vs. regressiveTax system in TR relies heavily on indirect taxes: in 2008, 32.7
% of tax revenues come from income taxes while indirect taxes comprise of 63 % (OECD average 42 %).
Structure of taxation: share of tax revenues in TR constitutes only 24.5 % of GDP (OECD average: 35.8 %, EU-15: 38.8%)
Share of income taxes in GDP (2007) in TR 5.6% (OECD: 13.2%; EU 15: 14%)
Distribution: Who gets what and how???Distribution of Income - share of income received by the
population/householdsQuintiles – equal sized groupsDistribution of income in TR
Distribution: Who gets what and how???Measuring Inequality - need to describe the pattern of
inequality - Lorenz Curve
The more bended the curve, the greater the inequality of income
Gini Coefficient: ratio of area between the Lorenz Curve and diagonal
0 (perfect equality) < Gini < 1 (complete inequality)
Spheres of Economic ActivityCore Sphere – household, family, community that organize
resource management, production and consumption.work is rewarded directly by what it produceseg. Childcare, elderly care, decisions on labour supply,
decision on skills and education, allocation of consumption (and savings/investment)
Public-Purpose Sphere – governments, NGOs, international organizations
Exist for a specific purpose related to the “public good”, i.e. beyond individual and family interest.
eg. Regulation, direct provision
Spheres of Economic ActivityBusiness Sphere – firms, looking for opportunities to buy
and manage resources.Responds to demands for goods and services (as opposed
to core: direct needs; public-purpose: its constitutents)
Propriatorships, partnerships, cooperatives, corporationsOne clear goal : making profit! (most valuable outputs to
produce, produce at the least possible cost, innovation)
Less Developed Country Context – Informal SphereOutside government oversight and regulation – could be
illegal, illicit but not necessarily.
Measuring Household Production Significantly omitted in the calculation of national income
– activities like housecleaning, laundry, childcare, meal preparation etc. (domestic female labour!! )
Why? “households are unproductive” “hard to distinguish household production from consumption”
– third person criteria“GDP measures market production” – non-market prod’n “Including household production would make too big of a
change in the accounts” – countercyclicality!
Measuring Household Production Time-use surveys: might help to find out the time
spent in unpaid productive activities.Also: shows the different patterns of time-allocation
associated with gender, thus serves to highlight roles and conditions of women and men in family and social life
TR – Time-use Surveys do have a short history and the results were yet not utilized for valuation or policy purposes.
Year 2006, survey with 5070 households, 11.815 individuals over the age of 15
Measuring Household Production Grafik 1. Cinsiyete göre ortalama faaliyet süresinin dağılımı (Saat)
10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10
Spor
Eğitim
Hobiler ve oyunlar
Gönüllü işler ve toplantılar
Hanehalkı ve ev bakımı
Seyahat ve diğer zaman kullanımı
Sosyal yaşam ve eğlence
Kitle iletişim araçları
Yemek ve diğer kişisel bakım
Çalışma ve iş arama
Uyku
Erkek Kadın
Measuring Household Production Tablo 1. Faaliyet türüne, cinsiyete ve çalışma durumuna göre ortalama faaliyet süresi (Saat)
Toplam Erkek Kadın Toplam Erkek Kadın Toplam Erkek Kadın
Yemek ve diğer kişisel bakım 02:42 02:45 02:38 02:40 02:42 02:34 02:43 02:52 02:40
Çalışma ve iş arama 02:47 04:27 01:08 05:39 06:08 04:19 00:02 00:07 00:00
Eğitim 00:22 00:24 00:20 00:05 00:05 00:06 00:38 01:14 00:25
Hanehalkı ve ev bakımı 03:05 00:51 05:17 01:37 00:43 04:03 04:29 01:12 05:43
Gönüllü işler ve toplantılar 00:46 00:37 00:54 00:30 00:29 00:31 01:00 00:57 01:02
Sosyal yaşam ve eğlence 01:54 01:50 01:57 01:32 01:33 01:30 02:14 02:35 02:07
Spor 00:07 00:10 00:04 00:05 00:06 00:02 00:08 00:19 00:04
Hobiler ve oyunlar 00:15 00:25 00:05 00:15 00:19 00:04 00:14 00:38 00:06
Kitle iletişim araçları 02:14 02:20 02:07 01:53 02:00 01:34 02:33 03:12 02:18
Seyahat ve belirlenmemiş zaman kullanımı 01:18 01:43 00:55 01:35 01:45 01:09 01:02 01:36 00:49
Uyku 08:32 08:27 08:36 08:08 08:08 08:07 08:55 09:18 08:46
Toplam 24:00 24:00 24:00 24:00 24:00 24:00 24:00 24:00 24:00
Çalışan ÇalışmayanFaaliyet adı
Toplam
Measuring Household Production Methods of valuing household production – need to
impute.Need to assign the monetary value to the time use
- Replacement cost method: hours spent are valued at what level would it cost to pay someone else to do the same job.- Opportunity cost method: wage rate the person would have earned in the market at a paid job is valued.
Neither method is perfect BUT better than nothing!
Measuring Economic Well-BeingRemember the goal! – well-being of the individualsOutput cannot be the measure for human well-being- Well-being reducing products: drugs, unhealthy
food- Well-being reducing production methods:
unpleasant working conditions- Defensive expenditures: armaments- Loss of leisure: overwork makes you tired :D- Unequal distribution: prevalence of poverty
Measuring Economic Well-BeingGenuine Progress Indicator (GPI)Personal Consumption Expenditure (corrected for
inequality) + benefits (estimates of unpaid work and services of
durables and public roads!) – social costs+ environment costs+ net capital investment – foreign borrowing- cost of durables
Measuring Economic Well-BeingHuman Development Index (HDI) – used by UNDPCapability Approach – Amartya SenLife expectancy at birth, adult literacy and secondary
education enrolment rates, GDP per capitaAnnually published in Human Development ReportHuman welfare on the basis of not only how much is
produced but also what is produced and how it is distributed
Country rankings wrt GDP and HDI may differ!
Measuring Economic Well-BeingHuman Development Index (HDI) – used by UNDP2010 report entitled “Real Wealth of Nations:
Pathways to Human Development”http://hdr.undp.org/en/reports/global/hdr2010/Grouping of countries (very high,high,medium,low)TR used to be in medium, now in high HD groupHDI rank 83 (out of 169), GDP rank – HDI rank = -26Interesting examples: Serbia HDI:60, GDP-HDI=+11UAE HDI:32, GDP-HDI=-28; Brazil HDI: 73, GDP-HDI=-3
Macroeconomic MeasurementAccounting for “outsiders” : household production
and economic well-beingNeed aggregate measures for making economic
policy choices at the national level.Use of “sectors” – households/institutions
(personal), business, government and foreignRemember: different types of capital (human, social,
natural, manufactured) – only manufactured is included in national accounting – fixed assets, inventories, durables
Gross Domestic ProductTotal value of final goods and services newly
produced in the country over a specified period of time (1 year)
Final goods – avoid double counting“Domestic” – within the borders of the country
Value of production = value of spending = value of income
Production – sum up value of all final goods and services produced in each sector
Spending – sum up value of spending by all sectorsIncome – sum up compensation received by all involved
in production and services.
Calculating its Value – Three ApproachesProduct Approach – Rather than looking at the
final sale, utilize a “value-added” approachQ: how much each industry contributes the the
value of the final good or service?Start from the raw material and see how much
market value is added at each stageValue of sold – value of intermediate inputs usedValue added at each stage must sum up to the
final value of the final productInput-Output tables
Calculating its Value – Three ApproachesUse of imputation to estimate the value of some
componentsEsp. Government production is imputed by
summing up the payments to workers, payments for intermediate goods and services, allowance for depreciation of assets
What about household production for own use? Not counted at all!
GDP = Business production + household and institutions production + government production
Calculating its Value – Three ApproachesSpending Approach – adding up the value of
newly produced goods and services bought by the sectors
Personal consumption expenditures – spending by households and institutions
Gross private domestic investment – spending by businesses on e.g. fixed assets
Net Spending by foreign sector – net exports of goods and services (NX = X – M)
Government consumption expenditures and gross investment – include e.g. defense expenditures
Calculating its Value – Three ApproachesIncome Approach – adding up production-related
domestic incomes (wages, rents, profits) earned by all individuals and organizations
Closed vs. open economyNeed to taken into account- Net income from RoW : to be deducted- Depreciation: consumption of fixed capital – to
be addedGDP = NI – Net income from RoW + Depreciation
Growth, Price Changes and Real GDPGDP Growth – changes in GDP over time,
percentage change in the value of GDP from one year to another.
Percentage change = [(Value2-Value1)/Value1]*100
Annual growth and quarterly growth
Growth, Price Changes and Real GDPNominal vs. Real GDPNominal GDP – total production valued at current
prices (current meaning the year in consideration)
!! Not only the level of output but also the price levels change from one year to another.
Real GDP – Actual value of goods and services produced which is net of price changes
GDP = Σ (P x Q)
Growth, Price Changes and Real GDPCalculate Real GDP using constant prices from a
base year/reference yearFor the base year Nominal and Real GDP are same!Use of price indices – to measure the changes in
prices as compared to another period.CPI – consumer price index: measuring changes in
prices of goods and services bought by households.
Weighted average of a bundle of goods and services
Growth, Price Changes and Real GDPUse changes in CPI to calculate for inflation!Inflation – growth rate of pricesWhen weights are constant, tend to overstate
inflation – because people may look for cheaper substitutes!
Updating the market basket periodically using information from household budget/expenditure surveys
Growth, Price Changes and Real GDPOther indices are used: e.g. PPI – using prices
facing domestic producersBaskets are different, inflation rates differ!GDP Deflator – implicit price deflatorGDP Deflator = (Nominal GDP / Real GDP) *100Reflects changes in all the prices of goods and
services included in GDP.
Growth, Price Changes and Real GDP
Growth, Price Changes and Real GDP
Chart – historic CPI inflation Turkey (yearly basis) – full term
Current CPI inflation Turkey (yearly basis) – last 12 months
CPI inflation Turkey (yearly basis) – Historical Trajectory
Growth, Price Changes and Real GDP
Chart – historic CPI inflation Turkey (yearly basis) – full term
Savings, Investment and Trade
National accounts – also show the savings-asset situation within an economy
GDP = Personal C + Priv. I + Gov. C + Gov. I + NXGDP – Personal C – Gov. C = Priv. I + Gov. I + NXSaving – excess of consumptionSavings = Investment + NXExcess of goods and services produced in the
economy not consumed can be investment goods or can be sold to foreign countries
Financing SpendingClosed economy – no trade; all resources not
spent for consumption are used for spending on investment goods Savings = Investment
Open economy – not straightforward Savings = Investment + NX
If domestically have extra savings, can loan to foreigners to purchase domestic goodsSavings = Investment + Net Foreign LendingSavings = Investment – Net Foreign Borrowing
Financing SpendingIf net foreign borrowing is positive, saving is less
than investmentQ: Is it problematic to be the “borrower”?Depends on the use of borrowed funds
if used for financing purchase of new investment goods, not so bad.if go to unproductive investments or finances high levels of consumption, problematic!
Debt crises facing the developing/less developed countries – e.g. HIPC: 40 countries (29 sub-Saharan African)
