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FIN 30220: Macroeconomic Analysis

FIN 30220: Macroeconomic Analysis. Introduction to The US Economy. How do we measure a country’s size? Total production would be a good start…but. Choose the “American” Product. Where do BMWs come from?. Germany. China. USA. Canada. Egypt. South Africa. India. Japan. Mexico.

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FIN 30220: Macroeconomic Analysis

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  1. FIN 30220: Macroeconomic Analysis Introduction to The US Economy

  2. How do we measure a country’s size? Total production would be a good start…but Choose the “American” Product

  3. Where do BMWs come from? Germany China USA Canada Egypt South Africa India Japan Mexico

  4. Where does your IPhone come from? Imports of the iPhone in 2009 contributed $1.9 billion to the U.S. trade deficit with China.

  5. Two measures of a country’s production Gross Domestic Product represents the total currentmarket value of all goods and services produced within a country over the course of some time period Gross National Product represents the total currentmarket value of all goods and services produced by a country’s citizens over the course of some time period VS

  6. The Bureau of Economic Analysis (BEA) reports Gross Domestic Product (GDP) for the United States on a quarterly basis: For the third quarter of 2014, GDP in the United States was (on an annualized basis) was... $17,599,800,000,000.00 Gross National product $17,829,600,000,000.00 * Source: www.bea.gov

  7. Why East Timor’s GNP is almost six times as high as its GDP Gross Domestic Product: $1.3B Gross National Product: $7.54B (+580%) Foreign Aid

  8. Why is Ireland’s GNP so much lower than its GDP? Gross Domestic Product: $210.3B Gross National Product: $164.2B (-25%) “Double Irish with a Dutch Sandwich” (Do a google search on this)

  9. How does the US Economy compare in size to other countries around the world? (World Economy = $87T ; the countries listed below are 75% of the total) European Union $15.8T Russia $2.5T United States $16.7T China $13.4T England $2.4T Japan $4.7T California $2.0T India $4.9T Mexico $1.8T Brazil $2.4T Australia $998B PPP Method 2013 est. * Source: CIA Factbook

  10. 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 The average price of a Big Mac in China is* The average price of a Big Mac in the United States is* $4.62 16.60 Yuan Problem: How do we compare economies using different currencies? TheMarket Exchange rate method involves converting foreign prices to US dollars using the current market exchange rate. 1 Chinese Yuan = .16 U.S. dollars or 1 US Dollar = 6.24 Chinese Yuan Y16.60 x .16 = $2.65 *2014 Prices

  11. Problem: With the extreme variability in exchange rates, is the market exchange method accurate? Yuan Per US Dollar

  12. ThePurchasing Power Parity method values foreign production at prevailing US prices. The average price of a Big Mac in China is* The average price of a Big Mac in the United States is* $4.62 16.60 Yuan 1 Chinese Yuan = .16 U.S. dollars Market Exchange rate method Purchasing Power Parity Method VS. $4.62 16.60 x .16 = $2.65 No Calculation Necessary!

  13. ThePurchasing Power Parity method assumes that if markets are functioning properly, profitable trading opportunities will eventually be eliminated The average price of a Big Mac in China is* The average price of a Big Mac in the United States is* $4.62 16.60 Yuan 1 Chinese Yuan = .16 U.S. dollars $2.65 by current exchange rate In this example, you could make money by buying Big Macs in China and then resell them in The US. There is a unique exchange rate that eliminates this profit opportunity. 16.60 x exchange rate = 4.62 4.62 exchange rate = = .28 ($ per Yuan) (3.57 Yuan per $) 16.60 (This is known as the PPP exchange rate)

  14. The PPP exchange rate seems to eliminate the short term variation, but do markets really eliminate profit opportunities? Dollars Per Yuan .28 PPP 55% .16

  15. “Overvalued” Valuing currencies using the Big Mac Standard “Undervalued” China

  16. Note that the method by which countries are evaluated sometimes greatly change the results! *2013 Estimate ** CIA Factbook

  17. 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. $17T Per Capita GDP = 320M = $53,125 Per capita GDP is a better measure of the well being of an average American. * Source: www.bea.gov

  18. In Per Capita Terms,the US drops to #14 while China drops to #121 ($9,800)!! The European Union comes in at #41 ($34,500) Note: 2013 GDP estimates measured on a Purchasing Power Parity Basis * Source: CIA Factbook

  19. Side note: Calculating rates of growth: 100 125 140 160 175 t = 0 t = 1 t = 2 t = 3 t = 4 How would you calculate this rate of growth? 100 to 125 is a 25% increase… But, from 125 to 100 is a 20% decrease? Which is it??

  20. Using natural logs is the preferred method because the forward/backward problem is eliminated! 100 125 140 160 175 t = 0 t = 1 t = 2 t = 3 t = 4 100 to 125 is a 22.3% increase… And, from 125 to 100 is a 22.3% decrease

  21. A better measure of economic performance would be the rate of growth in output rather than the level of output Year on Year Growth Annualized Growth Year on Year growth (2013Q3-2014Q3) Annualized Growth (2014Q3) However, be careful here!

  22. GDP measures current dollar value of all goods and services produced. When GDP rises, its impossible to distinguish between an increase in production and an increase in prices!! Economy A: Zero growth, high inflation. Both have (approximately) 25% annual growth in GDP!!! Economy B: Rapid growth, no inflation.

  23. We can approximate real growth by subtracting the inflation rate Year on Year growth (2013Q3-2014Q3) Annualized Growth (2014Q3) Annualized Inflation (2014Q3) Year on Year Inflation (2013Q3 - 2014Q3) Real Growth = 4.7% Real Growth = 2.6% * Source: www.bea.gov

  24. In terms of real GDP Growth the US drops to #157 Note: 2013 GDP estimates measured on a Purchasing Power Parity Basis * Source: CIA Factbook

  25. How would you calculate the average per period growth? 100 175 t = 0 t = 1 t = 2 t = 3 t = 4 or We have the same forward/backward problem here No forward/backward problem here!!

  26. Perhaps to get a better sense of the US, we should look at average performance over a long time period. Price Growth (Inflation) Total Growth Real Growth = 6.3% - 3.2% = 3.1%

  27. Note that the US seems to be slowing down…we’ll talk about this later Average Real Growth = 3.2% Current Real Growth

  28. Let’s compare the US with countries that are in our “peer group” in terms of development: • United States • GDP: $17.0T • GDP Per Capita: $50,000 • Real GDP Growth: 2.0% • Inflation Rate: 1.6% • European Union • GDP: $15.8T • GDP Per Capita: $34,500 • Real GDP Growth: 1.6% • Inflation Rate: 1.5% ~70% of US *Source: CIA Factbook (2013 estimates)

  29. Let’s look at historical data for the US and Europe. Europe fell behind the US in the mid 1800s and has been struggling to catch up ever since! Real Per Capita GDP, Europe and the United States: 1820 - 2000

  30. To understand this, let’s look at the sources of economic growth….where does GDP come from? “is a function of” Real GDP Employment Productivity Capital Therefore, we should be able to break down economic growth into its individual components Capital Growth Real GDP Growth Productivity Growth Employment Growth

  31. So, what jumps out at you? Real GDP Growth = 2.35% Real GDP Growth = 1.42% Real GDP Growth = 2.15% Real GDP Growth = 2.57% Real GDP Growth = 2.94% Real GDP Growth = 1.72%

  32. It seems that the biggest difference between the US and Europe involves employment and productivity. With that in mind, let’s decompose GDP per capita differently… GDP per hour (productivity) Employment (% of Population) GDP per capita Hrs. per employee

  33. Lets measure output per hour in the US (a reasonable measure of productivity)… Employed 139 Million Recall, GDP = $17 Trillion 139 Million X 1,794 (hours/yr.) = 250 Billion hours per year $17T = $68 Per hour 250B Hrs.

  34. Here’s American productivity relative to European productivity. * USA = 100 ** Source: OECD

  35. As with GDP per capita, productivity in Europe has lagged behind that of the US until recent years. Real GDP per Hour, Europe and the United States: 1870 - 2000

  36. Europe had been falling behind the US in both productivity and output per capita until recent years. However, while productivity has caught up with the US, output per capita still lags. Ratio of Europe to the United States: 1820 - 2000

  37. Productivity in Europe is comparable to the US, but output per capita is much lower. How can that be? Equal to the US Lower in Europe This must be lower in Europe!

  38. The US has maintained a lower average unemployment rate that Europe as well as a higher employment rate ** Source: OECD

  39. Lately, we have seen wages diverge from productivity …especially in the US! * USA = 100 ** Source: OECD

  40. The “wage gap” is the difference between productivity and wages Index: 1947 = 100

  41. Historically, labor’s share of income has been constant at around 65%, but has decreased since the 1980s. Percent 65% ? So, where is the extra income going?

  42. Note that the distribution of household income is skewed to the left. That is, there is a large segment of the population that is below average income Median Household Income = $50,000 Mean Household Income = $68,000 Total Households = 121M Source: US Census Bureau (www.census.gov)

  43. One indicator of growing inequality is a separation of the mean and the median Source: US Census Bureau (www.census.gov)

  44. Average Income by Quintiles (2012) $119,000+ $76,000 - $119,000 $50,000 - $76,000 $27,000 - $50,000 $0 - $27,000 Source: US Census Bureau (www.census.gov)

  45. The Lorenz Curve The Lorenz curve plots the cumulative distribution of US income

  46. The Gini Coefficient The US currently has a Gini coefficient of .45 0 = Perfect Equality 1 = Perfect inequality

  47. The Gini coefficient allows us to “quantify” the differences in income inequality across countries. *Source: Luxembourg Income Study

  48. The fact that income inequality in the US is rising is reflected in a rising Gini coefficient This suggests that while the US market based economy is a real engine of growth, not everyone benefits equally from our economic success…the poor are getting poorer relative to the wealthy! Start of the “wage gap”

  49. Note that income inequality in the US was worse back in the 1920’s

  50. The Good Old Days: Economic Growth from 1947-1973

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