Lecture 2_ Real sector_2014-1

Lecture 2_ Real sector_2014-1 - Macroeconomic Policy...

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Macroeconomic Policy Analysis in Low Income Countries Lecture 2: Real Sector: Ouput and Prices By Dr. Mark Ellyne
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2 REAL Output Prices EXTERNAL Foreign Inflows Trade Flows Foreign Reserves Foreign Prices FISCAL Tax Revenue &Grants Expenditure Foreign Financing Domestic Financing (T-Bills) MONETARY Credit to Government Credit to Economy NFA OUTPUT DEMAND EXCHANGE RATE PPP Critical Flows Interest Rates PRICE S ABSORBTIO N NFA NCG DEMAND -NCP IMPORTS + DONOR AID
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Goals of the Lecture Understand the National Accounts and its various measures Be able to project real and the GDP price deflator using alternative methodologies, including: Trends Filters Production function To estimate nominal GDP Dr. M Ellyne – Macro Policy Analysis 3
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Key Elements of the Real Sector? Output: GDP and national income accounts Prices: CPI and GDP deflator Important but needs to be examined separately: Income distribution Employment Market structure Dr. M J Ellyne 4
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1 - National Accounts by Activity Value added by: Primary sector (Agriculture) + Secondary sector (Industry) + Tertiary sector (Services) = GDP at basic prices (factor costs) + Taxes less subsidies on products = GDP at market prices (purchasers prices) Dr. M Ellyne – Macro Policy Analysis 5
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2 - National Accounts by Expenditure + Consumption expenditure government private + Investment expenditure government private + Exports of goods and nonfactor services + Imports of goods and nonfactor services +/- subsidies and taxes = Gross Domestic Product at market prices Dr. M Ellyne – Macro Policy Analysis 6
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National Income GDP = C + I + (X-IM) gnfs + Factor Income (FI) = Gross National Income + Transfers from ROW (Tr) = Gross National Disposable Income Y = C + I + CAB Dr. M Ellyne – Macro Policy Analysis 8
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Output vs Income Is it possible to spend more than the income your earn from production? Yes if CAB is negative GDP = C + I + (X-M) C+I > GDP 9
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Absorption Approach Absorption (A) = C + I Production = Y Y – A = CAB Can absorption be greater than production? Is this bad? How can you manage too large a current account deficit? Dr. M Ellyne – Macro Policy Analysis 10
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3 - National Accounts by Income GDP = + Compensation of employees (Wages) + Return on Capital, including: Operating Surplus of enterprises (Profits)+ Rents + Interest income + Taxes less Subsidies on Products = Gross Domestic Product at market prices = Labour income + Capital profit Dr. M J Ellyne 11
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National Output and Productivity National Income (P*Y) = labour income (W*L)+capital profits (R*K) P Y = W L + R K 1 = WL/PY + RK/PY If the wage share of total income rises, then the profit share must fall. Given: Prices, Y real output, Wage rate, Labour force, amount of Capital, and Rental rate of capital (interest rate) Dr. M Ellyne – Macro Policy Analysis 12
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Importance of Unit Labor Cost (ULC) WL/PY = Wage share total wages/Output = labour cost per unit = Unit Labour Costs = (W/P)/(Y/L) = Real Wage rate/Avg. productivity IF real wages rise faster than labour productivity, what happens to unit labour costs and profits?
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