1. Ecological Economics Lecture 06 3rd May 2010 Tiago Domingos Assistant Professor Environment and Energy Section Department of Mechanical Engineering Collaboration: Rui Mota

2. Growth accounting: Short-run sources of growth Break down observed growth in GDP, into components associated to changes in factors of production. Output growth only happens due to growth in productive inputs, including technology. Tehcnological progress is measured indirectly, i.e., as growth not attributed to changes in observable inputs. Solow refered to the residual as Total Factor Productivity (TFP)

3. Growth accounting: Short-run sources of growth Solow model explains more than ½ of output growth. An important part of growth is attributed to exogenous “inputs”. What is technological progress? (the residual) – Knowledge, institutions (property rights), education, culture,...

4. Total Factor Productivity Growth in Portugal Source: AMECO database

5. 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.

6. 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

7. 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 1 2 3 € €

8. 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

9. National Accounts Identity C I X M

10. 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,...

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

12. 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

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

14. Domestic Product vs. National Income Source: AMECO database

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

16. Gross/Net Saving in Portugal [euros 2000] Source: AMECO database