1. What is economics and why should we study it?

2. Global Economics Immigration and Economic Development Technological Changes and Trade Outsourcing Foreign Investment and Currency Currency and Trade International Economic Shocks and Domestic Economics Stability »These are just some of the major venues through which world economy affects our economy Globalization is the process of integration of an economy into the world economy. This process involves output markets, labor markets, capital markets….

3. Trade (% of GDP) 2003 World47.84 Upper middle income68.53 Middle income61.98 High income45.29 Lower middle income57.10 Low income44.61 Sub-Saharan Africa64.28 South Asia33.33 Middle East & North Africa58.16 Latin America & Caribbean45.53 European Monetary Union68.25 East Asia & Pacific74.17 United States23.66 Definition: Trade is the sum of exports and imports of goods and services measured as a share of gross domestic product. For the US see BEA

4. The World Economy Source: WDI: 2006, World Bank

5. Lower income group: GNI per capita PPP< $1878 Lower middle income: GNI per capita PPP < $4244 Middle income group: GNI per capita PPP <7515 Upper middle income group: GNI per capita PPP < $18589 High income group: GNI per capita PPP > $18589 Income distribution in 2004

6. The planet Earth in the darkness of the night * * Image source: NASA (http://antwrp.gsfc.nasa.gov/apod/ap001127.html)

7. 2003: Health expendit ures per capita (current USD) 2004: cases of TB per 100,000 2004: Internet Users per 1000 Life expectan cy at birth Mobile phone subscrib ers per 1000 Infant mortality rate per 1000 PCs per 1000 people World587.79139.47139.9367.32279.3454.09129.77 Upper middle income279.96112.15159.3369.15484.1823.36121.75 Middle income116.29113.6391.8370.22293.6130.0260.86 High income3449.4017.11544.9378.74771.726.12574.14 Lower middle income77.49113.9775.9170.47248.8631.5846.20 Low income29.62223.9924.3458.6842.1579.4511.29 Sub-Saharan Africa36.42363.1419.4446.2274.08100.4715.05 South Asia23.78177.2126.1463.4141.3166.4112.14 Middle East & North Africa92.4153.9158.0069.35128.6144.0948.55 Latin America & Caribbean221.6863.51114.5372.19318.3626.5292.40 European Monetary Union2552.1013.00443.2279.38904.194.11420.84 East Asia & Pacific64.11137.7573.7970.28243.4729.1638.19 United States5711.004.70629.9977.43616.736.70749.18 Correlation between life expectancy and the standard of living as measured by the GDP per capita (PPP) is positive 0.63, see the stats table

10. Economic development = quality of life

11. Evaluating Economic Activity Output – production, the process of income creation GDP - the total market value of all final goods and services produced by factors of production located within a nation’s borders over a period of time GNP - the total market value of all final goods and services produced by factors of production owned by a nation over a period of time 1994 2000 2001 2002 2003 2004 Gross domestic product7,072.209,817.0010,128.0010,469.6010,971.2011,734.30 Plus: Income receipts from the rest of the world186.4382.7322.4305.7343.7415.4 Less: Income payments to the rest of the world160.2343.7278.8275275.6361.7 Equals: Gross national product7,098.409,855.9010,171.6010,500.2011,039.3011,788.00 Relation of Gross Domestic Product and Gross National Product [Billions of dollars] www.bea.gov

12. GDP is a measure of production, and production represents economic activity. Note that the sale of output is simply a transfer of ownership (or wealth), while the production of output is the process of generating wealth. The production generates incomes to the factors of production, which are then distributed to the inputs: -pay wages to employees -pay interest to lenders -pay profit to capital owners etc. Therefore total value of output is equal to total income. In what we can consume we are limited by what we produce. Therefore GDP per capita (GDP/population) is a measure of average income in a country. Output and Income GDP and GNI

13. Understanding GDP How should the following count? –Purchase of MSFT shares through e-trade broker –Purchase of a previously owned house –Purchase of a new house from a construction company –Purchase of a used car from a private individual –Purchase of a used car from a used car dealer –Purchase of a class at GSU –Build up of dealer inventories? –Cooking your own meal? –Going out to a restaurant?

14. Understanding the GDP II How should the following count? –Purchase by Ford Comp. of new tires from a tire supplier? –Purchase by me (private car owner) of new tires from a tire supplier –Purchase of oil by an American oil company from another American oil company (oil is domestically extracted) –Purchase of oil by an American oil company form a foreign supplier of oil –Receipt of dividends by a US resident from a Russian company –Production of new Nissan Altima cars by a US based Nissan Facility –Production of new VW Jetta cars by a Mexico-based VW facility

15. Comparing Incomes Across Countries Real PPP GDP per capita as a measure of the standard of living. Standard of living: Income/Prices Read GDP as a measure of income Adjustment for the cost of living: difference in prices Purchasing Price Parity – adjustment for the cost of living. Prices differ across countries creating differences in purchasing power of money. For instance, 1000 USD buys more (today, probably less) in Moscow than in Atlanta. Constructing a cost of living index Fixing a market basket Tracking that market basket through different locations

16. Less than 1710 1710-3560 3560-6250 6250-15110 Over 15110 No data available GNI per capita in 2001, PPP method (current international $) World Bank Development Indicators for 2003

17. Lower income group: GNI per capita PPP< $1878 Lower middle income: GNI per capita PPP < $4244 Middle income group: GNI per capita PPP <7515 Upper middle income group: GNI per capita PPP < $18589 High income group: GNI per capita PPP > $18589 Income distribution in 2004

18. Real GDP growth rate in 2000 World Bank Development Indicators 2003 Less than –0.6 -0.6 <. < 0.8 0.8 < / <2.1 2.1 <. < 4.2 Over 4.2 No data available

19. Real GDP growth rate in 2001 World Bank Development Indicators 2003 Less than –0.6 -0.6 <. < 0.8 0.8 < / <2.1 2.1 <. < 4.2 Over 4.2 No data available

20. Evaluating economic activity - Inflation Inflation – the rate of growth in the average of all prices Measuring inflation: –Price Index CPI PPI Core Index Real versus Nominal measures US statistics: www.bls.gov

21. Real versus Nominal Nominal GDP growth rate = output growth rate + price level growth rate USA

22. Characteristics of Recent US inflation Low level Non-uniform Impact of dollar exchange rate/weaknesses in foreign economies in the 1990’s; a characteristic of globalization in the output markets Recent impact of the price of Oil

23. Impact of Inflation Menu costs Redistribution of wealth Instability of relative prices Currency value – the law of one price for internationally traded goods Increased costs associated with forward looking financial arraignments Sources of Inflation Tight labor market –Overheated economy: US in the late 1990’s Strong Monetary Expansion –Germany in the 1920’s; Russia in the early 1990’s Rapid increases in input costs (other than labor) –US economy today and the price of Oil Currency depreciation –Recent dollar depreciation, particularly against the currency of China

24. Short international comparison

25. Evaluating economic activity - Unemployment Defining labor force, unemployment, labor force participation rate Measuring unemployment US unemployment statistics: www.bls.govwww.bls.gov Structural and cyclical unemployment

26. In 2001 EMU included Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, The Netherlands, Spain, Portugal

27. Supply - Demand Market –Product definition –Geographical boundaries Demand: Q = F (P, all other relevant factors) –Law of demand: as Price increases quantity demanded decreases –Relevant factors Income –Normal: Income increases  demand increases –Inferior: income increases  demand decreases Related in consumption goods –substitutes: Px increases  demand for Y increases »MARTA and GSU parking –Complements: Px increases  demand for Y decreases »GSU parking and gasoline use And many other factors… –Interesting demand functions: Vertical demand: no price sensitivity –Gasoline demand in the short-run –Your demand for this class if you are one class away from graduation

28. Supply: Q = F (P, all other relevant factors) –Law of supply: as Price increases quantity supplied increases –Relevant factors Cost of production –Cost of factors of production »Wages, interest rate –Production technology »Productivity and cost of production Related in production goods –Substitutes in production »Same resources can be used to produce either good »Condos versus single family homes –Complements in production Supply - Demand

29. Market equilibrium (private goods with no externalities) Quantity demanded = quantity supplied –Market clearing No excess supply or shortage Properties of the Market Equilibrium –Stability –Efficiency: Welfare to society –Consumer surplus –Producer surplus

30. Supply-Demand Example: The ForEx Market How Many Dollars Buy One Euro?

31. Source: FRB, NY

32. Should We Be Concerned With The Fluctuating Dollar? TRADE and Currency Fluctuations –Price Changes –Standard of Living –Commodity Prices DateUSD per EUROUSD Price of OILEuro Price of OIL March 1, 20020.865222.4025.89 March 3, 20031.083535.8833.11 March 1, 20041.243136.8629.65 March 1, 20051.318951.6839.18 % change over the period52.44130.7151.35

33. Supply of the USD –Imports to the US Goods (trade) Services (tourism) –US investment abroad Foreign Financial Markets Direct investment abroad –Central Banks –Speculation Demand for the USD –US Exports Goods Services (tourism) –Foreign Investment into US US Financial markets Direct investment –Central Banks –Speculation The ForEx Market

34. The Interesting 90’s 1991-92: Collapse of the USSR Block, beginning of the Transitional Recession in Eastern Europe 1994 Mexican Currency Crisis 1991(2)-95 The Balkan Wars 1998 Recession in Japan 1997 (July) Beginning of the Asian Financial Crisis 1998 major Rouble Crisis US ECONOMY average % rates 1992- 2000 2001- 2004 Real GDP3.72.5 Gross Domestic Private Investment8.71.8 Non-Residential Investment9.10.2

35. The market for USD in the 90’s DS Influx of investment stimulated Demand Increase in imports stimulated Supply Demand Effect Dominated (thus positively effecting consumers’ standard of living) P of USD

36. The post 90’s era United Europe –10 New Countries Entered the Union on May 1 st of 2004, bringing the total number of member states to 25, with combined population of over 430 million (US population is 293 million). Growth in Russia and China nearing double digits Emerging Economies of Brazil and India Threat of Terrorism to the US Continuous Growth in US Trade Deficit

37. The market for USD in the post 90’s era DS Supply effect appears to be dominating The demand effect P of USD

38. The BIG picture Rise in Imports  Increase in Supply  Depreciation Rise in Exports  Increase in Demand  Appreciation Influx of Investment  Increase in Demand  Appreciation Outflow of Investment  Increase in Supply  Depreciation

39. Modern Economic Systems A modern Mixed Economy: Capitalism with elements of Socialism An economic system –Capitalism –Socialism –Communism An economic system and economic efficiency –What? How? For Whom? –Market Economy versus Command Economy

40. Data for 2001, source: World Bank

41. Market Economy Prices play two roles: signaling mechanism and distribution mechanism Consumer and producer surpluses: Welfare economics Income effect on the demand Consumer sovereignty (voting with dollars) Price controls and lack of adjustment on the part of the market Market efficiency

42. Presence of government in the production process Competition Versus Monopoly Mixed industry: GSU versus Emory Can GSU be viewed as a competitive firm? Large presence of the government in an industry: Primary education Government Monopoly: Provision of some public utilities in certain areas, such as water services in Fulton county Soft Budget Constraint Command Economy

43. Command Economies of Eastern Europe and USSR History: 1917, 1945, 1985, 1989-1991 Structure of command economy: –Central planning versus price mechanism –State ownership versus private entities –State monopoly versus competition –Quality versus quantity –Pricing of raw materials (USSR and the Eastern Block) –Emphasis on industrialization (USSR) –Principal-Agent problem 50’s60’s70-7575-8080-85 GNP growth5.75.23.72.62.0 Productivity Growth 1.6 (1.4)1.5 (0.9)0 (1.5)-0.4 (-0.8)-0.5 (-1.2)

45. Source: World Bank

46. Economies in Transition: Real GDP growth rates

47. Reforms in Transitional Economies planning is great if you have the opportunity to do it Privatization What’s the value of state enterprises? How should the shares of those enterprises be allocated? –Poland (intermediate funds), Czech Republic (vouchers), Yugoslavia (worker-control), Russia (combination of vouchers, management control…) –Effect of the scheme on the scope of restructuring - income distribution - government budget - differences between the economies of the USSR and those of Eastern Europe Price liberalization Shock therapy versus gradual approach - Poland (January 1, 1990) versus Hungary and the experience of Russia Sequence of reforms (political and economic) and income inequality Financial Stability and exchange rate

48. Principles of Trade Absolute Advantage: total cost Comparative Advantage: relative (opportunity) cost Consider two economies (A, B), each endowed with 200 worker-hours. Consider that there are only two goods being produced (X, Y). Consider that in country A the hourly wage is $A10, while in country B it is $B20, for simplicity assume that $A=$B. Table below shows costs in each country: AB X1 ($A10)1 ($B20) Y3 ($A30)2 ($B40) What can be said about the absolute and comparative advantage principles in this case? Productivity and trade (education, physical capital…) Currency and Trade