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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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