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Economic Freedom V.S. Real GDP growth, or other indicators of economic outcome

Economic Freedom V.S. Real GDP growth, or other indicators of economic outcome. 04015304 Choi Kit Ying 04015290 Wong Kim On 04013786 Lam King Nin 04010140 Chan Hing Kwok. Introduction.

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Economic Freedom V.S. Real GDP growth, or other indicators of economic outcome

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  1. Economic Freedom V.S. Real GDP growth, or other indicators of economic outcome 04015304 Choi Kit Ying 04015290 Wong Kim On 04013786 Lam King Nin 04010140 Chan Hing Kwok

  2. Introduction

  3. To evaluate the economic performance among different countries, a lot of economic indicator are used • For example, level of output, static efficiency, dynamic efficiency……….etc

  4. One of them is the index of economic freedom announced by the Heritage Foundation (a unique institution public policy research organization, founded in 1973)

  5. Economic freedom index • The goal for this index is to develop a systematic, empirical measurement of economic freedom in countries throughout the world. • The Index is a careful theoretical analysis of the factors that most influence the institutional setting of economic growth.

  6. Methodology

  7. Total 157 countries are graded • Due to economic or political instability , a few countries were not ranked • Democratic Republic of the Congo • Iraq • Papua New Guinea • Samoa • Serbia and Montenegro • Somalia • Sudan

  8. 10 broad factors • Trade policy • Fiscal burden of government • Government intervention in the economy • Monetary policy • Capital flows and foreign investment • Banking and finance • Wages and prices • Property rights • Regulation • Informal market activity

  9. 1 5 The most conductive The least conductive Weighing • All factors are weighted equally • Each factor is graded according to a unique scale • The scales run from 1 to 5 • overall score based on the simple average of the 10 individual factor scores

  10. 4 broad categories of economic freedom Latest rating

  11. Trade policy • The degree government hinders access to and the free flow of foreign commerce affect the ability of individuals to pursue their economic goals • Components : • weighted average tariff rate • non-tariff barriers (e.g. import quotas, licensing requirements) • corruption within the customs service

  12. Fiscal burden of government • Government expenditures increases, the level of economic freedom in a society reduces, vice versa • Expenditure is financed-by taxation resources are diverted from the potentially more productive private sector expenditures reflect the total fiscal burden

  13. Components : • Top marginal income tax rate • Top marginal corporate tax rate • Year-to-year change in government expenditures as a share of GDP *double weight on the top corporate tax rate

  14. Government intervention in the economy • Measures government's direct use of scarce resources for its own purposes and government’s control over resources through ownership • Components : • Government consumption as a percentage of GDP • Size of the state-owned sector • the state of privatization programs

  15. Monetary policy • Stable monetary policy can rely on market prices for the foreseeable future longer-term plans are easier to make individuals enjoy greater economic freedom • There is no singularly accepted theory of the right monetary institutions for a free society now

  16. Most monetary theorists support for low or zero inflation • Components : • weighted average annual rate of inflation of the past 10 years

  17. Capital flows and foreign investment • Restrictions on foreign investment limit the inflow of capital and thus hamper economic freedom, vice versa • Components : • foreign investment code • restrictions on access to foreign exchange • restrictions on payments, transfers, and capital transactions • Equal treatment under the law for both foreign & domestic companies • Foreign ownership of land • Availability of local financing for foreign companies

  18. Banking and finance • Banks provide the essential financial services that facilitate economic growth heavy bank regulation, the less free they are to engage in these activities restricts economic freedom • Components : • Government regulations • Government ownership of financial Institutions • Restrictions on the ability of foreign banks to open branches & subsidiaries • Government influence over the allocation of credit

  19. Wages and prices • If prices are determined freely allocate resources to their highest use • Governments mandate wage and price controls inhibit information, restrict economic activity lower level of economic freedom

  20. Components : • Degree of freedom to set prices • Minimum wage laws • Government price controls • Government subsidies to business that affect prices

  21. Property rights • Examines … • the extent to which the government protects private property by enforcing the laws • how safe private property is from expropriation. • Secure property rights give citizens the confidence to undertake commercial activities freely • less protection private property receives, lower level of economic freedom

  22. Components : • Independence of the judiciary • Delays in receiving judicial decisions • Corruption within the judiciary • Government expropriation of property • Commercial code defining contracts

  23. Regulations • Measures how easy or difficult it is to open and operate a business • Most important Regulations are associated with licensing new companies and businesses • If regulations applies evenly and transparently regulatory burden lowers

  24. Components : • Degree of corruption in government • Licensing requirements to operate a business • Labor regulations • Environmental, consumer safety, & worker health regulations • Extent to which regulations impose a burden on business

  25. Informal market • A government regulation or restriction in one area may create an informal market • Captures the effects of government interventions that are not always fully measured elsewhere • Reflects restrictions, taxes, or imperfections in the private market • larger the informal market, the lower the country's level of economic freedom

  26. Components : • Mainly relies on Transparency International's Corruption Perceptions Index (CPI) • Smuggling • Piracy of intellectual property in the informal market

  27. Economic Freedom VS. Real GDP Growth

  28. Real GDP • Real GDP = Nominal GDP – Inflation rate • Real GDP measures the value of output in two or more different years by valuing the goods and services adjusted for inflation. • For year over year GDP growth, "real GDP" is usually used as it gives a more accurate view of the economy.

  29. Economic Freedom VS. Real GDP Growth • Generally, real GDP is positively related to the economic freedom • A free economy can allocate the resource more efficient • if prices are determined freely, • resources go to their most productive use

  30. Better protection of private property, Increase incentive of production • More free capital flows and foreign investment can boost the GDP

  31. China is a good example • Since the reform period, the market is more open and the GDP growth is increase

  32. The more Economic Freedom , the more Real GDP Growth?

  33. Improving economic freedom will raise real GDP growth rate, but not the only factor.

  34. Economic Freedom VS. Gini Coeffecient

  35. Gini coefficient • It is usually used to measure income inequality, but can be used to measure any form of uneven distribution. • Using the Gini can help quantify differences in welfare and compensation policies and philosophies. • The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income).

  36. Gini coefficient South Korea Iran China Hong Kong September 2005

  37. Hong Kong is the champion in economic freedom • However, its Gini coefficient is the highest compare with other developed countries • 0.525 in 2001

  38. The welfare is low in Hong Kong,so the fiscal burden of Hong Kong is low • Compare with Sweden ,its welfare is high(scored 3.6 at the category of Fiscal burden), so Sweden have low gini coefficient. Although Sweden will loss some degree of freedom due to higher welfare • More free, better living standard of people?

  39. Economic Freedom VS. Unemployment rate

  40. Unemployment Rate

  41. Economic freedom is negatively related to the unemployment rate • More foreign investment more labour demand lower unemployment rate

  42. In the category of Fiscal burden of government , more unemployment benefit and other welfare, the economic freedom is lower • Working incentive is lower and unemployment rate will be higher

  43. Overall, unemployment rate will be low if the score which in Index of Economic Freedom is low. • Exceptional case: Under the central planning system, there is no unemployment

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