To analyze an economy: some starting points

1
To analyze an economy some starting points

• Simple indicators
• Gross National Product
• Balance of Payments

2
How do you describe an economy?

• GDP
• Growth
• Unemployment
• Inflation
• Interest rates
• Exchange rate
• Balance of Payments
• Economic policy

• Development
• Welfare
• Quality of life
• Income distribution
• Rule of law
• Democracy
• Sustainability

3
Basics

• 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
• national produkt nationalvincome
• since value added is what the firm pays to
  employees and capital owners

4
How good a measure is GDP?

• Includes mainly market transactions (unpaid home
  work and black markets excluded)
• evaluation based on market (or based on cost, as
  in the case of public services)
• does not say anything about income distribution,
  environment, quality of life
• but no simple alternatives available

5
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)

6
Identities

• Can be further manipulated to state the relation
  between internal and external balance
• S - I X - M
• (internal balance current account)

7
Current account

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

8
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

9
Capital balance

• Capital balance foreign direct investment
  portfolio investment loans changes in
  foreign reserves errors and omissions
• Should always equal the current account but with
  the opposite sign

10
Example Sweden 1992 and 1995