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Unformatted text preview: The Global Economy and World Politics
Professor Edward Weisband Lecture 4: Sectoral Diversification, Economic Productivity, and Social Prosperity First Cut Gross Domestic Product: A Measure of Output and Consumption Gross Domestic Product (GDP): The standard measure of economic output on a comparative basis across national economies GDP measures economic output Relative to all FINAL goods and services Produced in a national economy For a particular period according the prices of that period And reflects the value of all inputs in the production process relative to the output of enduse products GDP, Final Uses, and End Users GDP measures final economic values Total "final" value of produced goods and services Bought and consumed Within a national economy During any year by endusers For a good or service to be counted in GDP it must be Purchased or consumed by buyers For their immediate use or satisfaction GROSS DOMESTIC PRODUCT PRODUCTION ENDUSE CONSUMPTION Second Cut Four Economic Sectors Specialized capital inputs are converted into GDP outputs across different economic sectors: Agricultural/Extractive and Mining (Primary) Manufacturing (Secondary) Services (Tertiary) Research and Development (Quaternary) Sectoral Diversification and Economic Prosperity A wealthy economy specializes in many specializations We call this sectoral diversification It is the key to national economic competitiveness Measured or benchmarked by what is called Gross Domestic Product (GDP) National economies that produce GDP on the basis of one or a few concentrated sectoral specializations tend to be either very wealthy (oil) or very poor (cotton) In such cases the distribution of income is highly skewed or unequal As in the diverse cases of Saudi Arabia and Mali Thus sectoral diversification tends to predict for greater levels of prosperity and income equality Sectoral Diversification and Prosperity Diverse specialization across sectors represents the key predictor of economic productivity AND social prosperity--WHY? An economy that enjoys diverse specializations across economic sectors Opens a wider range of opportunities for capital inputs to be employed for future gain Example: labor mobility and human capital Diversification across sectors permits greater degrees of specialization to be used in generating economic outcomes measured by GDP The more diverse sectoral specialization within an economy the more diverse its outputs Because of multiple specializations economies can sacrifice some in terms of capital and emphasize others in terms of output The Key Logic Stream: Sectoral Diversification and Specialization The dynamics of specialization, interdependence, and risk come together in terms of sectoral diversification National Economic Growth in GDP requires Growth in production Of specialized outputs for end users Across increasingly diversified sectors Of products and services Third Cut Sectoral Diversification as Specialization on a National Scape As the logic stream of specialization indicates Specialization in one economic area Requires specialization across many other economic areas No form of economic specialization should stand alone Each should progress in relation to all others To produce wealth and prosperity Specialization across economic areas within a national economy is referred to as sectoral diversification Herein lies the economic significance of interdependence within a national scape Specialization and Diversification For specialization to generate wealth and prosperity it must become diversified across economic sectors, industries, and services WHY?? For specialization to advance toward prosperity it must occur across sectors, industries, and services rather than remain limited to or concentrated within specific areas of economic activity--WHY? Economic concentration in specific sectors, industries, or services Limits the capacity of an economy to produce economic outputs and to grow Sectoral Concentration and Poverty Sectoral concentration EVEN WHEN SPECIALIZED is the "kiss of death" that condemns an economy to poverty and inefficiency Because it prevents sectoral diversification And specialization across sectors Thus promoting inefficiency--WHY? Sectoral concentration eliminates production possibilities Thereby limiting ways to make sacrifices In the name of reducing opportunity costs Fourth Cut Sectoral Concentration and Opportunity Costs To think about sectoral concentration is to focus on the relationship between sectoral diversification and reduced opportunity costs Question: what would it mean to Saudi Arabia for petroleum reservoirs to be depleted? Question: what would it mean for Russia for natural gas reserves to be depleted (Gazprom)? Question: what would it mean for Rwanda to have a bad coffee crop? Economies that specialize in concentrated primary commodity industries tend to be poor, inefficient, and dysfunctional no matter how specialized or valuable their economic output Imagine the opportunity costs of sacrificing petroleum production in Saudi Arabia versus sacrificing petroleum production in the United States Sectoral concentration versus sectoral diversification between Saudi Arabia and the United States widely differs Opportunity Costs in Diversified v. Concentrated Economies The US enjoys a complex range of economic activities across many specialized sectors, industries, and services Although important, the petroleum producing sector is hardly essential to overall US economic prosperity Thus, in analytical terms, its potential sacrifice represents an opportunity cost that the US can "afford" to pay in the pursuit of other production possibilities (such as alternative energy technologies) The Consequences of Concentration On the other hand Saudi Arabia remains inefficient and unable to grow GDP in efficient ways--WHY??? Because they do not diversify As a consequence, they do not lower the opportunity costs of economic concentration BUT what happens when the oil runs out? The UAE has embarked on a specific strategy of using its vast resources generated from petroleum As specialized capital inputs towards sectoral diversification By investing in its future that will include tourism, banking, and hospitality services Diversification in the United Arab Emirates
"The UAE has an open economy with a high per capita income and a sizable annual trade surplus. Despite largely successful efforts at economic diversification, nearly 40% of GDP is still directly based on oil and gas output. Since the discovery of oil in the UAE more than 30 years ago, the UAE has undergone a profound transformation from an impoverished region of small desert principalities to a modern state with a high standard of living. The government has increased spending on job creation and infrastructure expansion and is opening up utilities to greater private sector involvement... Dependence on oil and a large expatriate workforce are significant longterm challenges. The UAE's strategic plan for the next few years focuses on diversification and creating more opportunities for nationals through improved education and increased private sector employment." From the CIA World Factbook (1.23.08) Economic Growth and Sectoral Diversification Thus in a diversified economy The opportunity costs of sacrifice Are not prohibitive of innovation In new production possibilities And thus of increasing specialization and wealth This is the essential value of economic interdependence across sectors within a national economy Interdependence reduces opportunity costs In ways that promote advancing forms of specialization Across many services, sectors, and industries As in the cases of Luxembourg, Bermuda, Switzerland, Norway, and Iceland --the world's richest countries in terms of Per Capita GDP ...
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- Spring '08