Ecological Economics Lecture 06 05th May 2011 Rui Mota and Tiago Domingos Environment and Energy Section Department of Mechanical Engineering

What is Sustainable Development? Brundtland report (1987) – “Development that meets the needs of the present without compromising the ability of future generations to meet their own need.” –Intra- and inter-generational equity –Anthropocentric Sustainability of what? –non-declining aggregate output or consumption, –non-declining utility, –non-declining aggregate resources (productive base), –non-increasing pollution, … Weak vs. Strong Sustainability We choose non-declining utility as the criterion for sustainable development –some call this Weak Sustainability, but we don’t agree –this still misses the intra-generational component

National Accounting: Keywords Flow of income in the economy GDP Savings Net vs Gross Domestic vs National CPI Inflation Real vs Nominal Aggregates

National Accounts The System of National Accounts is a comprehensive accounting framework within which economic data can be compiled and presented in a format that is designed for purposes of economic analysis, decision- taking and policy-making. Integrates a set of macroeconomic accounts, balance sheets and tables based on a set of internationally agreed concepts, definitions, classifications and accounting rules. Accounts compiled for a succession of time periods, thus providing a continuing flow of information, indispensable for the monitoring, analysis and evaluation of the performance of an economy over time.

Aggregation 5 Sectors: –Households –Firms –Financial Intermediaries (banks, …) –Governments (national and local) –Rest Of the World (ROW) 4 Markets (Supply and Demand): –Goods and services –Resources (labor, land and capital) –Money (loanable funds) –Foreign exchange

Circular flow of income Factors: Labor, Land, Capital Factor payments: Wage, Rents, Interests, Profits – become income. Expenditures: on goods and services (output) 1 – Income approach: Y = Wage + Rent + interest + operating surplus 2 – Output approach: Y = market value of all produced output (Σ VA) 3 – Expenditure approach: Y = C Households Firms Output Factors Factor payments: Y Expenditures: C € €

Circular flow of income Balance to: –Households: Y - T net = C + S, T net = T- Tr –Firms: Y = C + I + G + X - M –Government: ΔGov = T net - G –FI: S + ΔGov + B - L = I –ROW: X - M = L - B Households Firms C FI S I Gov. Y T Tr G ROW X M ΔGov Borrow Lend - Market for outputs

National Accounts Identity C I X M

Main Aggregates National (Residence) - Primary income flows to ROW Product / Income + Primary income flows from ROW Domestic (Territory) Net + Consumption Fixed Capital (CFC) Aggregate X - Consumption of Fixed Capital (CFC) Gross X – Domestic produc, Income, Saving, Disposable income,...

GNI = GDP + Y’ RM. Where Y’ RM = Net income payable to non-resident units for production factors. Domestic Product vs. National Income Source: AMECO database

The value added of a firm owned by Portuguese residents and functioning on our economic territory is part of the Portuguese GDP and GNI. The wage (or other factor payments) of a resident that during 6 months worked to a firm in Spain is a part of Spanish GDP and Portuguese GNI. The operating surplus (profits) – capital remuneration of a firm located in Portugal but owned by Germans – sent to Germany, is part of the Portuguese GDP and the German GNI. The income earned by Portuguese emigrants working abroad as residents is not part of the Portuguese GDP and GNI. Domestic Product vs. National Income

Main Aggregates Gross Domestic Product Gross Domestic Product (GDP) + Net primary income flows to ROW = Gross National Income (GNI) + Current net transfers from ROW = Gross National Disposable Income - Final consumption (Private and Government) = Gross Saving (S) Net Domestic Product (NDP) = Net National Income (NNI) = Net National Disposable Income = Net Saving (NS) Subtract CFC

Gross Product vs. Net Product [Million euros 2000] Source: AMECO database

Gross Product per person employed [euros 2000] Source: AMECO database

Gross Product per hours worked [euros 2000] Source: AMECO database

Net Saving in Portugal [Mrd euros 2000] Source: AMECO database Net savings are negative when consumption is higher than net disposable income

National Disposable Income [Mrd euros 2000] Source: AMECO database

Net resources that the total economy makes available to the rest of the world (if it is positive) or receives from the rest of the world (if it is negative). Net Lending/Borrowing [% of GDP] Source: AMECO database