EC 102.01

1. EC 102.01 Instructors: Asst. Prof. Burçay ERUS and Dr. Burcu YAKUT-ÇAKAR burcay.erus@boun.edu.tr, burcu.yakut@boun.edu.tr Via phone: 359 7638 or 359 7652 Office Hours: Tuesdays 15:00-17:00 and by appointment 2 midterms (2*30%) + 1 Final (40%); NO MAKE-UP!!

2. Outline Ch 1 – Economic Activity in Context Ch 3 – What Economies Do (Sections 1,3,4), Ch 6 – Macroeconomic Measurement Section 3 – Measuring Household Production Section 4 – Measuring Economic Well-Being National income accounting with “the outsiders” Then Ch 5 – Macroeconomic Measurement

3. 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

4. Microeconomic vs Macroeconomic Questions

5. Economic Activity in Context Macroeconomic Goals positive vs. normative questions Concept of “well-being” • 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?

6. Economic Activity in Context (ii) Stability – temporal dimension fluctuations - boom vs. recession business/trade cycles – alternating periods of B/R (iii) Sustainability financially? – “debt crises” socially? – “disparities in living standards” ecologically? – “catastrophic effects” Need for a rethinking of economic growth

7. Economic Activity in Context

8. 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.

9. Essential Economic Activities Resource 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).

10. Essential Economic Activities Production: conversion of resources into useble products – tangible/intangible, manufactured Inputs -> outputs + waste products Need to consider capital stocks Distribution: sharing of products and resources among people Markets facilitate exchange relations Transfers - payments given without return expectation (monetary/non-monetary – in kind)

11. Essential Economic Activities Consumption: 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

12. 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!

13. 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 risks Means-tested - non-contributory but income/assets/wealth being tested TR: Social Insurance Institution, Unemployment Insurance Fund, Social Assistance and Solidarity Fund

14. 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 taxes Proportional?? Progressive vs. regressive Tax 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%)

15. Distribution: Who gets what and how??? Distribution of Income - share of income received by the population/households Quintiles – equal sized groups Distribution of income in TR

16. 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)

17. Spheres of Economic Activity Core Sphere – household, family, community that organize resource management, production and consumption. work is rewarded directly by what it produces eg. 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

18. Spheres of Economic Activity Business 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, corporations One clear goal : making profit! (most valuable outputs to produce, produce at the least possible cost, innovation) Less Developed Country Context – Informal Sphere Outside government oversight and regulation – could be illegal, illicit but not necessarily.

19. 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!

20. 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

21. Measuring Household Production

22. Measuring Household Production

23. 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!

24. Measuring Economic Well-Being Remember the goal! – well-being of the individuals Output 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

25. Measuring Economic Well-Being Genuine 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

26. Measuring Economic Well-Being Human Development Index (HDI) – used by UNDP Capability Approach – Amartya Sen Life expectancy at birth, adult literacy and secondary education enrolment rates, GDP per capita Annually published in Human Development Report Human 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!

27. Measuring Economic Well-Being Human Development Index (HDI) – used by UNDP 2010 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 group HDI rank 83 (out of 169), GDP rank – HDI rank = -26 Interesting examples: Serbia HDI:60, GDP-HDI=+11 UAE HDI:32, GDP-HDI=-28; Brazil HDI: 73, GDP-HDI=-3

28. Macroeconomic Measurement Accounting for “outsiders” : household production and economic well-being Need aggregate measures for making economic policy choices at the national level. Use of “sectors” – households/institutions (personal), business, government and foreign Remember: different types of capital (human, social, natural, manufactured) – only manufactured is included in national accounting – fixed assets, inventories, durables

29. Gross Domestic Product Total 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 sectors Income – sum up compensation received by all involved in production and services.

30. Calculating its Value – Three Approaches Product Approach – Rather than looking at the final sale, utilize a “value-added” approach Q: 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 stage Value of sold – value of intermediate inputs used Value added at each stage must sum up to the final value of the final product Input-Output tables

31. Calculating its Value – Three Approaches Use of imputation to estimate the value of some components Esp. 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

32. Calculating its Value – Three Approaches Spending 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

33. Calculating its Value – Three Approaches Income Approach – adding up production-related domestic incomes (wages, rents, profits) earned by all individuals and organizations Closed vs. open economy Need to taken into account • Net income from RoW : to be deducted • Depreciation: consumption of fixed capital – to be added GDP = NI – Net income from RoW + Depreciation

34. Growth, Price Changes and Real GDP GDP 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

35. Growth, Price Changes and Real GDP Nominal vs. Real GDP Nominal 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)

36. Growth, Price Changes and Real GDP Calculate Real GDP using constant prices from a base year/reference year For 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

37. Growth, Price Changes and Real GDP Use changes in CPI to calculate for inflation! Inflation – growth rate of prices When 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

38. Growth, Price Changes and Real GDP Other indices are used: e.g. PPI – using prices facing domestic producers Baskets are different, inflation rates differ! GDP Deflator – implicit price deflator GDP Deflator = (Nominal GDP / Real GDP) *100 Reflects changes in all the prices of goods and services included in GDP.

39. Growth, Price Changes and Real GDP

40. Chart – historic CPI inflation Turkey (yearly basis) – full term Growth, Price Changes and Real GDP CPI inflation Turkey (yearly basis) – Historical Trajectory Current CPI inflation Turkey (yearly basis) – last 12 months

41. Chart – historic CPI inflation Turkey (yearly basis) – full term Growth, Price Changes and Real GDP

42. Savings, Investment and Trade National accounts – also show the savings-asset situation within an economy GDP = Personal C + Priv. I + Gov. C + Gov. I + NX GDP – Personal C – Gov. C = Priv. I + Gov. I + NX Saving – excess of consumption Savings = Investment + NX Excess of goods and services produced in the economy not consumed can be investment goods or can be sold to foreign countries

43. Financing Spending Closed 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 goods Savings = Investment + Net Foreign Lending Savings = Investment – Net Foreign Borrowing

44. Financing Spending If net foreign borrowing is positive, saving is less than investment Q: 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)