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To analyze an economy: some starting points

To analyze an economy: some starting points. Simple indicators Gross National Product Balance of Payments. GDP Growth Unemployment Inflation Interest rates Exchange rate Balance of Payments Economic policy. Development Welfare Quality of life Income distribution Rule of law

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To analyze an economy: some starting points

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  1. To analyze an economy: some starting points Simple indicators Gross National Product Balance of Payments

  2. GDP Growth Unemployment Inflation Interest rates Exchange rate Balance of Payments Economic policy Development Welfare Quality of life Income distribution Rule of law Democracy Sustainability How do you describe an economy?

  3. Basics • Gross national product (GDP) • the value of all goods and services produced in an economy during a year (aggregated value added) • rought proxy for ”development” or ”welfare” • national produkt = nationalvincome • since value added is what the firm pays to employees and capital owners

  4. How good a measure is GDP? • Includes mainly market transactions (unpaid home work and ”black markets” excluded) • evaluation based on market (or based on cost, as in the case of public services) • does not say anything about income distribution, environment, quality of life …but no simple alternatives available

  5. Some identities GDP = Consumption (C) + Investment (I) + [Exports (X) - Imports (M)] Sometimes simpler to reshuffle and state as GDP + M = C + I + X (supply = alternative uses)

  6. Identities • Can be further manipulated to state the relation between internal and external balance S - I = X - M (internal balance = current account)

  7. Current account • Not only a measure of external balance, but also reflection of internal balance • Deficits may or may not be serious depending on • why a deficit has been generated • how the deficit is financed

  8. Balance of payments Trade balance (X - M for goods) + Service balance (X - M for services) + In and outflows of capital incomes + In and outflows of transfers and gifts = Current account = Capital balance (with opposite sign) that shows how a deficit is financed or how a surplus is invested

  9. Capital balance • Capital balance = foreign direct investment + portfolio investment + loans + changes in foreign reserves + errors and omissions • Should always equal the current account but with the opposite sign

  10. Example: Sweden 1992 and 1995

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