Finance 30220: Macroeconomics Introduction to The US Economy.
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Transcript of Finance 30220: Macroeconomics Introduction to The US Economy.
Finance 30220: Macroeconomics
Introduction to The US Economy
How do we measure a country’s size? Total production would be a good start, but the global economy complicates things….
Choose the “American” Product
BMW X5IPhone
Canada
China
Egypt
India
MexicoJapan
South Africa
USA
Germany
Where do BMWs come from?
Spartanburg, South Carolina• 8,000 Employees• Produces 300,000 vehicles annually• Produces ALL X3, X4, X5, and X6
models (even for export to Europe)
Where does your IPhone come from?
Imports of the iPhone in 2009 contributed $1.9 billion to the U.S. trade deficit with China.
Two measures of a country’s production
Gross Domestic Product represents the total current market value of all goods and services produced within a country over the course of some time period
Gross National Product represents the total current market value of all goods and services produced by a country’s citizens over the course of some time period
VS
By the Standard of GDP, a BMW X5 is an American car, but the IPhone is an Chinese phone (actually, a global phone)
By the Standard of GDP, a BMW X5 is an German car, (The IPhone is still a global phone)
Gross Domestic Product: $1.3BGross National Product: $7.54B (+580%)
Why East Timor’s GNP is almost six times as high as its GDP
Foreign Aid
Gross Domestic Product: $210.3BGross National Product: $164.2B (-25%)
Why is Ireland’s GNP so much lower than its GDP?
(Do a google search on this)
“Double Irish with a Dutch Sandwich”
The Bureau of Economic Analysis (BEA) reports Gross Domestic Product (GDP) for the United States on a quarterly basis:
For the first quarter of 2015, GDP in the United States was (on an annualized basis) was...
$17,665,000,000,000.00
* Source: www.bea.gov
Gross National product
$17,827,100,000,000.00
Let’s stick with GDP for now. How does the US Economy compare in size to other countries around the world? (World Economy = $108T ; the countries listed below are 75% of the total)
Japan
$4.807T
United States
$17.46T
European Union
$17.61T
Australia
$1.1TBrazil
$3.07T
PPP Method 2014 est. * Source: CIA Factbook
China$17.63T
India
$7.277T
Russia$2.5T
California
$2.0T
Mexico
$2.14T
England
$2.4T
The average price of a Big Mac in the United States is*
$4.62
The average price of a Big Mac in China is*
16.60 Yuan
Problem: How do we compare economies with different currencies?
The Market Exchange rate method involves converting foreign prices to US dollars using the current market exchange rate.
Y16.60 x .16 = $2.65
The Purchasing Power Parity method uses prevailing US prices $4.62
1 Chinese Yuan = .16 U.S. dollars
Which if these is more accurate?
In this case, you could make money by buying Big Macs in China and then resell them in The US. There is a unique exchange rate that eliminates this profit opportunity.
16.60 x exchange rate = 4.62
exchange rate =4.62
16.60= .28 ($ per Yuan) (3.57 Yuan per $)
(This is known as the PPP exchange rate)
The average price of a Big Mac in the United States is*
$4.62
The average price of a Big Mac in China is*
16.60 Yuan = $2.651 Chinese Yuan = .16 U.S. dollars
In principle, it shouldn’t matter…arbitrage would eliminate any price differentials
Do markets really eliminate profit opportunities?
.28
.16
55%Yua
n P
er U
S D
olla
r
PPP Based off of Big Macs, the Yuan is “undervalued” by 55%
Valuing currencies using the Big Mac Standard
“Overvalued”
“Undervalued”
China
The method by which countries are evaluated sometimes greatly change the results!
PPP Approach Market Exchange Rate
Country GDP Rank GDP Rank
China $17.63T #1 $10.36T #3
European Union $17.61T #2 $18.14T #1
USA $17.46T #3 $17.46T #2
India $7.277T #4 $2.048T #7
Japan $4.807 #5 $4.77T #4
Germany $3.621 #6 $3.82T #5
Russia $3.568 #7 $2.06T #6
*2014 Estimate
** Source: CIA Factbook
Nominal GDP around the world (PPP Method)
*Source: CIA Factbook
Note how concentrated GDP is among a few countries….
* Source: www.bea.gov
Lets use the PPP method as a reasonable method for comparing countries. Per Capita GDP is calculated by dividing total GDP by the current population. This gives a better sense of average well being.
Per Capita GDP = $17T320M
= $53,125
Qatar
Luxem
bourg
Liech
tenst
ein
Mac
au
Berm
uda
Isle
of M
an
Singap
ore
Monac
o
Brunei
Kuwait
25,000
45,000
65,000
85,000
105,000
125,000
145,000
165,000
* Source: CIA FactbookNote: 2014 GDP estimates measured on a Purchasing Power Parity Basis
In Per Capita Terms, the United States ranks #18 while China sits at #113 ($12,900)!! The European Union comes in at #42 ($38,300)
*Source: CIA World FactbookGDP Per Capita around the World
Again, per capita GDP is highly concentrated is a few countries
* Source: Census Bureau
Median Household Income by County (2012)
Recall, GDP per capita is around $53,000
Even within the US, income is heavily concentrated!
* Source: World Bank
Did you know that if you earn $20,000 or more per year, you are in the top 4% of the global income distribution
$20,000 is in the bottom 20% of the US income distribution
Side note: Calculating rates of growth
t = 0 t = 1 t = 2 t = 3 t = 4
100150
220
340
540
Suppose that we have the following data. How would you calculate the rate of growth between time 0 and time 4.
Side note: Calculating rates of growth
t = 0 t = 1 t = 2 t = 3 t = 4
100150
220
340
540
540 100*100 440%
100Growth
440% (Of 100)
Calculating a percentage change like this assumes that the growth takes place all at once
Side note: Calculating rates of growth
t = 0 t = 1 t = 2 t = 3 t = 4
100150
220
340
540
ln 540 ln 100 *100 168%Growth
168%
Using natural logs allows the growth process to be a smooth, continual process
Side note: Calculating rates of growth
t = 0 t = 1 t = 2 t = 3 t = 4
100150
220
340
540
1
4540 1 *100 52.5%
100Average Annual Growth
52%
52%
52%
52%
Again, this assumes a discrete process (happening at regular intervals)
Side note: Calculating average annual rates of growth
t = 0 t = 1 t = 2 t = 3 t = 4
100150
220
340
540
ln 540 ln 100*100 42%
4Growth
42%
42%
42%
42%
Using natural logs allows the growth process to be a smooth, continual process
Period GDP (Billions)
2014Q1 17,044
2014Q2 17,328
2014Q3 17,599
2014Q4 17,703
2015Q1 17,655
Another measure of economic performance would be the rate of growth in output rather than the level of output
Year on Year growth (2015Q1-2014Q1)
ln 17,655 ln 17,044 *100 3.5%
Year on Year Growth
Annualized Growth
Annualized Growth (2015Q1)
ln 17,655 ln 17,703 *4*100 1.08%
Period GDP (Billions) Price Level
2014Q1 17,044 107.66
2014Q2 17,328 108.23
2014Q3 17,599 107.60
2014Q4 17,703 108.64
2015Q1 17,655 108.61
We can approximate real growth by subtracting the inflation rate
* Source: www.bea.gov
Year on Year Inflation (2013Q3- 2014Q3)
ln 108.61 ln 108.64 *4*100 .11%
Year on Year growth (2013Q3-2014Q3)
Real Growth = 2.63%
Annualized Growth (2014Q3)
Annualized Inflation (2014Q3)
ln 108.61 ln 107.66 *100 .87% Real Growth = -.97%
- -
ln 17,655 ln 17,044 *100 3.5% ln 17,655 ln 17,703 *4*100 1.08%
Mac
au
Turk
men
ista
nCha
d
Mon
aco
Mon
golio
Dem. R
epub
lic C
ongo
Burm
a
Moz
ambi
que
Ethio
pia
Sierr
a Le
one
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
* Source: CIA FactbookNote: 2014 GDP estimates measured on a Purchasing Power Parity Basis
In terms of real GDP Growth the US drops to #131
Real GDP Growth by State: 2013
*Source: Bureau of Economic Analysis
Economic growth in the US is also pretty concentrated
Growth Rates of Real GDP around the world*Source: IMF's October 2012 World Economic Outlook
Note that this picture of economic growth is almost a mirror image of the picture for GDP per capita (the fastest growing regions are the lower income regions…we will come back to this)
Year GDP Price
1947Q1 $237B 12.6
2015Q1 17,655 108.6
Let’s look at longer term averages for the US…
ln 17,655 ln 237*100 6.3%
68
Total Growth Price Growth (Inflation)
ln 108.6 ln 12.6*100 3.2%
68
Real Growth = 6.4% - 3.2% = 3.1%
Average Real Growth = 3.2%
Note that the US seems to be slowing…this began in the 1970s
???
Something definitely happened in the 1970s and 1980s…
1947 1957 1967 1977 1987 1997 20070
50
100
150
200
250
300
350
400
450
Real GDP Per Hour Real Compensation Per Hour
From the late 1970’s on, we have developed a “wage gap”
Index: 1947 = 100
Since the late 1970’s we have seen the emergence of a “wage gap”. That is, we see a difference between productivity and wages
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 201256
58
60
62
64
66
68
70Percent
65%
Historically, labor’s share of income has been constant at around 65%, but has decreased since the 1980s.
So, where is the extra income going?
This “wage gap” translates into a lower labor share of income
*Source: Thomas Piketty and Emmanuel Saez
As labor’s share of total income declines, a larger share of income is going to capital owners (i.e. to rich people)
Real GDP Per Capita (1993 = 100)
Real Median Household Income (1993 = 100)
Note the divergence of median with mean in the late 1990’s
* Source: US Census Bureau
US Income Distribution in 2012 (Real Mean Household income = $60,000)
# of Households = 121M
Source: US Census Bureau (www.census.gov)
$105,910+
$65,501 - $105,910
$40,187 - $65,501
$20,900 - $40,187
$0 - $20,900
Average Income by Quintiles (2013)
The Lorenz curve plots the cumulative distribution of US income
The Lorenz Curve
The Gini Coefficient
0 = Perfect Equality
1 = Perfect inequality
BA
AGini
The US currently has a Gini coefficient of .45
Gini Coefficient in the US by County
* Source: Census Bureau
* Source: CIA Fact book
Gini Coefficients around the world
Note that income inequality in the US was worse back in the 1920’s, but has grown dramatically since the 1970s
Income inequality really accelerated in the 1990’s!
The Good Old Days: Economic Growth from 1947-1973
The Times, They are a Changin’: Economic growth from 1977-1989
Here we can see both the declining growth as well as the rising inequality.