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

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

Ari Kokko Basics n 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” n national produkt = nationalvincome –since value added is what the firm pays to employees and capital owners

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

Ari Kokko 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)

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

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

Ari Kokko 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

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

Ari Kokko Example: Sweden 1992 and 1995