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International and
Domestic MacroComparisons
Basic Performance MeasuresWinter 2001 - Economics 102
Mr. Smitka
GDP levels
• Y = C + I + G + X - M is our basic measure– Represents final demand
• total production
• thus also total income
• How does the US fare?– Income per capita?– Income growth?
Comparing GDP Internationally
• Growth rates can be directly compared• Still, in the long run distortions arise
• Growth levels cannot be directly compared• Prices vary a lot across national borders
• Exchange rates don’t solve this problem• Forex rates aren’t set by trade
• Forex rates also can vary by 5% a week
• GDP clearly doesn’t rise and fall that rapidly!
PPP comparisons
• Instead of using nominal GDP data and exchange rates a common set of prices must be constructed
• Output quantities in each country can then be used with such common “international” prices
• PPP (purchasing power parity) is the jargon
GDP per capita
• The US leads (except for tiny Luxembourg)
• The EU is about 75% of the US level– Developed Asia is similar (Japan, Australia, NZ)
– Iberia & Greece are at a bit lower
• The developing world has far lower output– And according far lower incomes
– The citizens of Mexico, Turkey & Poland receive only 25% the average income of the US
– The rest of the world is poorer, often much poorer
GDP Growth Rates
-2
-1
0
1
2
3
4
5
98Q3 98Q4 99Q1 99Q2 99Q3 99Q4 00Q1 00Q2 00Q3
Canada
Mexico
United States
Japan
Korea
US Growth is strong, too
• US real growth - 4.1% pa - is well above average
• The EU grew slowly --Italy, Germany, France, the UK - except for Spain
• Japan in fact did worse in 1990-99 as a whole (and Korea did better)
• Ireland is the star -- a nice paper topic: why??
US Real GDP Growth
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
US cyclical performance
• Postwar real GDP grew 3.5% pa• Output thus doubled every 20 years
. . . but short run growth ...
• The post-WWII recession reflected an end to wartime I, not lower C
• The Great Depression remains anomalous– … thankfully!!
– but such crises afflicted many developing countries
US Consumer Price Inflation
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Inflation
• Mild since the Civil War
• Clear bouts associated with– WWI– WWII– Korean War– Vietnam War– 1st & 2nd Oil Crises
US Consumer Price Inflation
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
US Real GDP Growthand Inflation
-13.0%
-8.0%
-3.0%
2.0%
7.0%
12.0%
17.0%
Real Growth Inflation
Growth & Inflation?!
• Periods of sustained growth often are accompanied by rising inflation– 1954-57 – 1964-69– 1971-73 – 1976-79
• But not booms in the late 1980s and 1990s– other factors matter!– plus the time lag varies!
OECD Inflation Comparisons
• US inflation is not high, but not low
• Japan is very different - deflation!!
• Mexican inflation rates are high• if continued prices double in 6 years
• No country suffers hyperinflation• Linked to war or political breakdown
- Russia (USSR “transition”)- some LDCs- Weimar Germany
Inflation composition
• Prices move in different directions for
different goods
• Energy has been very volatile, up and down
• Food prices also bounce around a lot
– Still, focusing on “core” inflation (non-food,
non-energy) can be misleading...
Unemployment
• During the last 20-odd years:• European U is high
• Japanese U is low
• US is moderate
• Long-term unemployment also varies
• ∑ economic structure matters• As do details of definitions of U and data collection
Women & youth
• Women generally suffer more U
• Youth suffer much higher U
• In the US male youth U is high - not female
• Such male youth U is geographically based
• It also correlates closely with crime
US Unemployment
0
2
4
6
8
10
12
14
16
18
20
Unemployment variation
• It correlates with growth (surprise?!)
• Cyclical factors are not the only influence
• Hence we distinguish:– Cyclical U– Structural U– Frictional U
US Unemploymentversus Real GDP Growth
0
2
4
6
8
10
12
14
16
18
20
1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
U %
-20
-15
-10
-5
0
5
10
15
20
g in % pa
Causation• A sharp drop in investment
– “causes” higher U with a lag– “causes” lower Y growth with a lag
• Y growth and U are more simultaneous
• The relationship is clearly complex, and is
affected by other factors
Causation
• So what “causes” variability• “cause” is in parentheses for now -- it merely
indicates statistical correlation
• A starting point: how do the elements of GDP vary
• As share of GDP
• In terms of growth rates
Components of GDP
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1947Q11949Q11951Q11953Q11955Q11957Q11959Q11961Q11963Q11965Q11967Q11969Q11971Q11973Q11975Q11977Q11979Q11981Q11983Q11985Q11987Q11989Q11991Q11993Q11995Q11997Q11999Q1
Total I Consumption Imports Exports Government Purchases
Shares of GDP
• Consumption is large but steady– Some variation, and since large need to detail– In fact, the puzzle is stability, not variation!
• Government is even steadier– A one-time change with Korea & Cold War– Secular shift from Federal to State & Local
– See next slide….
Major Components Share in GDP - excluding consumption -
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1946Q11948Q11950Q11952Q11954Q11956Q11958Q11960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q1
Total I Imports Exports Government Purchases State & Local G Federal G
Trade• One major shift: trade
– 4% of Y in 1950s– 8% in 1973 with oil crisis– 12%-14% today
• Net trade– Remains smallish– Shift from small surplus to 3+% deficit– Some variability, too
Trade as % of GDP
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
1946Q11948Q11950Q11952Q11954Q11956Q11958Q11960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q1
Net Trade Exports Imports
Investment
• Far more volatile than C or G– C & G are larger, but I is still 1/6th of GDP
• I is the proximate cause of business cycles– See charts following…
– We’ll also see that shifts in I are amplified
• What parts of I vary?– Business fixed investment– Residential (housing)
Why the business cycle?
• Why does C not vary?• Life cycle models
• Why does housing investment vary?• Interest rates shift mortgage costs
• Why does business investment vary?• “Animal spirits” (Keynes)
• Net trade? -- some impact of interest rates
• Government -- fiscal policy (taxing & spending) not central
Investment as % of GDP
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
1947Q11949Q11951Q11953Q11955Q11957Q11959Q11961Q11963Q11965Q11967Q11969Q11971Q11973Q11975Q11977Q11979Q11981Q11983Q11985Q11987Q11989Q11991Q11993Q11995Q11997Q11999Q1
Total I Residential Business Fixed I Durable Goods Business Structures Information Technology
Growth Rates, GDP Components
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
1948Q11950Q11952Q11954Q11956Q11958Q11960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q1
Consumption Investment Government Purchases
Investment (Growth, % per annum)
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1947Q41949Q41951Q41953Q41955Q41957Q41959Q41961Q41963Q41965Q41967Q41969Q41971Q41973Q41975Q41977Q41979Q41981Q41983Q41985Q41987Q41989Q41991Q41993Q41995Q41997Q41999Q4
% over same quarter previous year
Residential (households) Equipment and software (corporate)
Factors Driving Business Cycles
• All components of GDP shift over time
• C is the largest component– It however tracks GDP (= national income)– Indeed, the puzzle is why is it so stable?
• G varies primarily with war– Also long-run shift from Federal to State/local– Not a source of the business cycle
Investment
• Investment is by far the most volatile item– At 1/6th of GDP, big enough to matter– Residential investment volative
• Interest rates affect it
– Business plant & equipment investment• Keynes’ “animal spirits” affect it
• Net trade now sometimes matters• Interest rates shift forex, shifting levels
Impact on Real GDP GrowthContribution (left scale), GDP Growth (right)
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
194719491951195319551957195919611963196519671969197119731975197719791981198319851987198919911993199519971999
-4
-2
0
2
4
6
8
10
Personal consumption expenditures Gross private domestic investment Govt consumption expenditures & gross investment Net exports of goods and services Gross domestic product
Contribution Graph
• In the previous graph, dark blue line is GDP
• Bar graphs reflect contribution to change in GDP growth– Portions below 0 are slowing growth– Portions above 0 add to growth
• Drops in investment drive recessions– Net trade declines contribute, too
Conclusions
• We are left with questions / hypotheses– Why does investment vary?– Why doesn’t consumption vary?– How strong / constant is the link between
declines in growth and unemployment?– What is the link between growth and inflation?
• Why do long-run growth / U etc vary across countries?