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Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani

Marietta College, Spring 2011. Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani. Week Two Lecture Slides Source: Chapter 1 (pp 15-). Teams. Have you divided the tasks? What tasks? Have you started reading? What should you be reading ?

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Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani

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  1. Marietta College, Spring 2011 Welcome to ECON 372: Comparative Economic SystemsBy: Dr. Jacqueline Khorassani Week TwoLecture Slides Source: Chapter 1 (pp 15-)

  2. Teams • Have you divided the tasks? • What tasks? • Have you started reading? • What should you be reading? • In you paper you must use the 6 criteria to classify your economies.

  3. Criteria For Evaluating Economies

  4. First Criterion • The level of output • GDP • Real/nominal? Why? • Per capita real GDP? • Better than that is real purchasing power parity per capita GDP

  5. PPP per capita RGDP • Suppose Ylandand Xland both have the same per capita RGDP = $10,000 • but a two-bedroom apartment is rented for $100/month in Ylandand for $200/month in Xland. • Citizens of which country is better off? • Yland • PPP per capita RGDP adjusts per capita RGDPs for the differences in the cost of living. • Example: PPP per capita RGDP = $10,000 in Yland and $5000 in Xland

  6. What about the role of the size of • Underground economy? • Shadow economy? • Informal economy?

  7. How are these economies different or similar? • Informal economy consist of a) Household production • No country includes this in GDP • But it can be estimated b) Small mostly home based enterprises that don’t pay taxes • They should be a part of GDP • But they are not, why?

  8. How are these economies different or similar? 2. Underground economy consist of a) Production of illegal goods/services • Is not a part of GDP anywhere • But it can be estimated b) Small- home based enterprises that don’t pay taxes • Should be a part of GDP • But they are not

  9. How are these economies different or similar? 3. Shadow economy consist of • Market based production of legal goods and services that is not included in the official measure of GDP. • Excludes illegal goods and services • Includes small-home based enterprises • In addition, includes big companies that hide a portion of their output form government; why? • Excluded from GDP everywhere • But, it can be estimated

  10. These definitions are not always mutually exclusive Underground Economy Informal Economy Household production Illegal goods/ser Shadow Economy

  11. Economic activity or inactivity? (Shadow? Informal? Underground?)

  12. Children at work ….(Shadow? Informal? Underground?)

  13. Excuse me, are you a registered worker?

  14. This guy says he makes R$100 per DAY. His wife who is a registered worker in the local spa made R$400 per MONTH.

  15. Oh yes, I was active in Brazilian shadow market too. The price was right and quality was great.

  16. Excuse me, do you pay taxes?

  17. Is this maid registered?

  18. And, there are big companies such as Illegal imports of Channel and Gucci bags by Daslu (importer of high end fashion in Sao Paulo) Tax evasion by Tatuzinho (Producer of hard liquor in Sao Paulo) Shadow, informal, underground?

  19. The Size of Brazil’s Shadow Economy (as a percentage of GDP in 1999-2000) Based on finding by Schneider, 2004

  20. Second Criterion • Growth in output • Percentage change in real GDP • In your paper, you need to report 10 years worth of data on this

  21. Third Criterion • Composition of output • Example • % of consumption in GDP • % of investment in GDP • % of government expenditures in GDP • Or % of government expenditures on education • Or % of government expenditures on Military goods and services • Why do these things matter?

  22. Fourth Criterion:The degree of static efficiency • Maximized output given what is available= efficiency in production • We have achieved efficiency in production if we can’t produce more of one thing without having to produce less of another thing. • Remember PPF • Production efficiency  operating on PPF • No unemployment or unemployment = natural rate • No underemployment • What should we look for in our paper? • Unemployment rate • Underemployment rate • What else?

  23. Maximized satisfaction given the distribution of output = efficiency in consumption • Pareto Optimality Efficiency in consumption exits when no one can be made better off without making someone else worse off. • Variables to look at for efficiency in consumption • Index of economic happiness • Economic Freedom Index • What else? • Poverty rates? • Income distribution figures?

  24. 5. The degree of dynamic efficiency • Is efficiency sustainable over time? • Are there policies in place to increase efficiency in the future? • Involves collection of efficiency related time-series data

  25. The 6th criterion • Macroeconomic stability • Stability in the following variables over time (10 years in your paper) • Output • Employment • Prices • Exchange rate volatility (value of currency) • What else?

  26. The 7th criterion • Economic security of individual • Income • Per capita • Distribution • Poverty rate • Employment • Unemployment rate/underemployment • Health care • % of population with health insurance • Infant mortality • Life expectancy • Others?

  27. 8th criterion • The degree of income or wealth equality? • What is the difference between income and wealth? • Which one is flow? • Which one is stock?

  28. One measure of income distribution Lorenz Curves % of national income 100 Perfect income equality Nation’s curve 20 45o 50 % of population 100

  29. Measure of income distribution • Gini coefficient= area between the Lorenz curve and the 45 degree line/total area under the 45 degree line • If =0  complete _______ • If =1  complete _______ Equality Inequality

  30. Quintile • Another measure of income inequality • What is it? • Here is how it is constructed • Obtain income data for every household in a given year. • Arrange the data in a list ranging from the household with the lowest income to the household with the highest • Divide the list into equal fifths (or "quintiles"). • Divide the income share going to the top quintile by the income share going to the bottom quintile. • The higher the quintile ratio, the _______ the inequality. Higher

  31. The 9th criterion • Degree of economic freedom • EFI = Economic Freedom Index • Takes a value between 1 (free) to 5 depending on 10 sub indexes having to do with • Corruption, trade barriers, tax rates, efficiency of law enforcement, regulatory burden on business, restrictions on banks, labor market regulations, informal market activities.

  32. Another way to measure the 9th criterion Source: World Bank, 2005

  33. HDI: Human Development Index • Takes a value between 0 (bad) to 1 depending on • Per capita income • Life expectancy • Adult literacy • Education enrollment • Which of the 9 criteria are reflected in this index?

  34. Let’s look at Tables 1.1 and 1.2, Pages 18 and 19. • Who is doing better than us (USA) in different area? • Why?

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