İktisada Giriş II Measuring a Nation’s Income Chapter 23: Measuring a Nation ’ s Income Economics is divided into two parts: Microeconomics and Macroeconomics. In microeconomics, we discuss issues such as firm behavior and costs of the firm, (i) consumer ’ s budget constraint and his optimal choice. (ii) In mac roeconomics that we will learn this semester, we will focus on issues like Gross Domestic Product (GDP) (Gayrisafi Yurtici Hasila) : total income (i) (expenditure) of everyone in the economy . Show GDP data across countries. I nflation: the rate at which averag e prices are rising . Show inflation data (ii) across countries. Unemployment: the percentage of labor force that is out of work. Show (iii) unemployment data across countries. Trade Deficit (Ticaret Acigi) : the excess of imports (ithalat) over exports (iv) (ihracat) for a n economy . “ Deficit ” means Trade Account = Exports – Imports is a negative number . Some people also call Trade Account “ Net Exports ” . (Current Account = Trade Account + Transfer Payments) Current Account Deficit (Cari Acik) happens when CA is a negative number . This is caused mainly by Trade Deficit, because trans fer payments are usually a small amount . Why is there a Trade Deficit? Ask class. Show Current Account Data from file. Show slide 1 : defn. of micro economics and macro economics . Slide 2 : questio ns of macro economics . Slide 3 : total income. Slide 4 : Income and expenditure must equal each other , GIVE example: Let ’ s say I bought a new car from Toyota dealer for 32,000 YTL, then this is expenditure for me. It is income for the Toyota dealer. GDP incre ases by 132,000 YTL. (Note: GDP does not rise when I buy a used car because there is no good or service produced when I buy a used car . My income decreased, but the seller ’ s income increased at the same amount. So total income = GDP did not change. ) Slide 5 : Expenditure = Income can be illustrated on Circular Flow Diagram : Slide 6. Slide 7: defn. of GDP, Slide 8 : defn. of GDP in detail, Slide 9 : Defn. of GDP in detail, Turk ey ’ s GDP does not include income earned by Turkish citizens working in Germany or in R ussia. But if a Bulgarian citizen works in Turkey, his income is included in Turkey ’ s GDP. There is another measure called Gross National Product (GSMH) that includes earnings of Turkish citizens out of Turkey in Turkish GDP . Of course, Bulgarian citizens ’ income is counted in Bulgarian GNP. Slide 1 0 : GDP includes only legal markets: GDP does not measure : illegal or underground economy (kayitdisi) , or home production. Slide 1 1 : Components of GDP formally, write the formula on the board, Slide 1 2 : Consumptio n & Investment, Slide 1 3: Govt. spending and Net Exports. Another concept more popular in media than Net Exports is “ Balance of Trade ” . T his is the same as Net Exports = Balance of Trade. If Exports is less than Imports, Balance of Trade is negative. Then there is a T rade D eficit. Show disticaret.xls file taken from Turkish Statistics Office . Turkey ’ s exports in 2006 were 85 billion dollars, imports were 137 billion $, and net exports or “ trade balance ” w as - 52 billion $. Turkey has a large “ trade deficit ” with the rest of the world. This means Turkey is buying more from the rest of the world (r . o . w . ) than she is s elling to the r.o.w. Many economists in Turkey see this trade deficit as a big risk for the economy. We will talk about why trade deficit is a pr oblem later in detail. 2Slide 1 4 : U.S. GDP components in 200 4 . Slide 15 : U.S. 200 4 GDP components in graphics, In 200 4 , US trade deficit was 609 billion $. In 2006, the US trade deficit increased to $76 4 billion. This is 14.6 times the Turkish trade defic it. Is this much trade deficit a big risk for US? Yes it is. But let us look at ratios of trade deficit/GDP . The US GDP in 2006 is $12.98 trillion ( p.p.p. est.). The Turkish GDP in 2006 is $627.2 billion (p.p.p. est.) . Then, trade deficit/GDP for US is 5.9 percent while for Turkey this ratio is 8.3 percent. So there is a bigger trade deficit problem for Turkey compared to US in 2006 . Another measure of how dangerous is the trade deficit problem is to look at the ratio of exports/imports (ihracatin ithalati karsilama orani). Let us look at this ratio for Turkey in disticaret.xls file. If this ratio is small, then there is a bigger deficit problem. One interesting point is that in 1993, the year before the 1994 crisis, this ratio was 52.1 percent. In 2000, be fore the 2001 crisis, this ratio was 51.0 percent. We can say that if this ratio is smaller, than the probability of a crisis is higher. In 2006, this ratio was 62.1 percent. We hope that it will not go down to 50 percent in 2007. SHOW gsyh-sabit .xls file. This file shows GDP components for Turkey. Show the calculation of GDP from its components in the file. Show this for both current prices and for 1987 constant prices. I will explain what current prices and 1987 constant prices mean in a few moments. Noti ce that increase in inventories is included in investment. Compare percentages of C, G, I across Turkey and US. 3Slide 16 : Real versus Nominal GDP defn. Nominal GDP is current output valued at current prices. Real GDP is current output valued at base-yea r prices. Current prices versus constant prices . Show in gsyh-sabit .xls. 2005 GDP in current prices is 481 billion YTL. 2005 GDP in 1987 prices is only 147 million YTL. Slide 17 : We use GDP Deflator to convert nominal GDP numbers to real GDP. Slide 18 : Table 2 shows the prices and quantities produced of hot dogs and hamburgers across years . 2005 Nominal GDP = 2005 Price of a Hot Dog * 2005 Qty of Hot Dogs Produced + 2005 Price of a Hamburger * 2005 Qty of Hamburgers Produced Slide 19 : shows how to calc ulate nominal GDP in each year. Notice that nominal GDP increased from $ 200 to $ 600 btw 2005 and 2006. There are two effects in this increase: The effect of inflation: prices of both goods increased, 1- The effect of increase in quantity of both goods. 2- In or der to compare years, we are more interested in quantity increase. So we want to subtract the effect of inflation. That is why we calculate real GDP. Slide 2 0 : shows how to calculate real GDP by taking 2005 as base year . We are keeping prices constant at 2005 prices. So that we can isolate the incr e ase in quantities of hot dogs and hamburgers produced . 200 7 Real GDP = 2005 Price of a Hot Dog * 200 7 Qty of Hot Dogs Produced + 2005 Price of a Hamburger * 200 7 Qty of Hamburgers Produced Slide 21: GDP Deflator definition. GDP Deflator measures the current price level relative to the base-year price level. Slide 22: GDP Deflator formula. 4 GDP deflat or = Nominal GD P Real GDP ? 100Calculate the GDP Deflator for 2005 from the gsyh- sabit .xls file. GDP deflator for 2005 is equal to ( 480 923 / 147)*100 = 326 714 % . This means that t he price level has increased 3267 times between 1987 and 2005. But there is another measure of inflatio n that is called Consumer Price Index (TUFE). We will talk about CPI in the next chapter. Slide 23: From the previous formul a, we can also write So if you know the GDP deflator but you don ’ t know real GDP, then you can use this formula to find real GDP. Slide 24: Let us calculate GDP Deflator for our hot dogs example. Slide 25: Shows real GDP in the US across years. SHOW Tu rkey ’ s real GDP from gsyh- sabit file. Slide 26: GDP per person (they also say “ per capita ” ) is the most widely used measure of economic well-being. It is the average income of a person in a country. But of course one cannot measure happiness or quality of life with GDP. Slide 27: For example, GDP does not tell anything about the DISTRIBUTION of income within the country. For example, if 5 % of the population in a country earns 95 % of total income, then this is not a very good thing for the citizens of that country. Slide 28: shows some other measures of quality of life. Life expectancy and internet use. If we used life expectancy instead of GDP per capita, then Japan would be first country in the world and US would be third. Life expectancy in Turkey is 70 years. So it is right below China. Show link: http://devdata.worldbank.org/wdi2006/contents/Section2.htm “ mortality ” for some other development indicators like infant mortality r ate . 5 Real GDP Nominal GD P GDP deflat or 20XX 20XX 20XX ? ? 100