International and

Domestic MacroComparisons

Basic Performance MeasuresWinter 2001 - Economics 102

Mr. Smitka

GDP levels

• Y = C + I + G + X - M is our basic measure– Represents final demand

• total production

• thus also total income

• How does the US fare?– Income per capita?– Income growth?

Comparing GDP Internationally

• Growth rates can be directly compared• Still, in the long run distortions arise

• Growth levels cannot be directly compared• Prices vary a lot across national borders

• Exchange rates don’t solve this problem• Forex rates aren’t set by trade

• Forex rates also can vary by 5% a week

• GDP clearly doesn’t rise and fall that rapidly!

PPP comparisons

• Instead of using nominal GDP data and exchange rates a common set of prices must be constructed

• Output quantities in each country can then be used with such common “international” prices

• PPP (purchasing power parity) is the jargon

GDP per capita

• The US leads (except for tiny Luxembourg)

• The EU is about 75% of the US level– Developed Asia is similar (Japan, Australia, NZ)

– Iberia & Greece are at a bit lower

• The developing world has far lower output– And according far lower incomes

– The citizens of Mexico, Turkey & Poland receive only 25% the average income of the US

– The rest of the world is poorer, often much poorer

GDP Growth Rates

-2

-1

0

1

2

3

4

5

98Q3 98Q4 99Q1 99Q2 99Q3 99Q4 00Q1 00Q2 00Q3

Canada

Mexico

United States

Japan

Korea

US Growth is strong, too

• US real growth - 4.1% pa - is well above average

• The EU grew slowly --Italy, Germany, France, the UK - except for Spain

• Japan in fact did worse in 1990-99 as a whole (and Korea did better)

• Ireland is the star -- a nice paper topic: why??

US Real GDP Growth

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

US cyclical performance

• Postwar real GDP grew 3.5% pa• Output thus doubled every 20 years

. . . but short run growth ...

• The post-WWII recession reflected an end to wartime I, not lower C

• The Great Depression remains anomalous– … thankfully!!

– but such crises afflicted many developing countries

US Consumer Price Inflation

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Inflation

• Mild since the Civil War

• Clear bouts associated with– WWI– WWII– Korean War– Vietnam War– 1st & 2nd Oil Crises

US Consumer Price Inflation

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

US Real GDP Growthand Inflation

-13.0%

-8.0%

-3.0%

2.0%

7.0%

12.0%

17.0%

Real Growth Inflation

Growth & Inflation?!

• Periods of sustained growth often are accompanied by rising inflation– 1954-57 – 1964-69– 1971-73 – 1976-79

• But not booms in the late 1980s and 1990s– other factors matter!– plus the time lag varies!

OECD Inflation Comparisons

• US inflation is not high, but not low

• Japan is very different - deflation!!

• Mexican inflation rates are high• if continued prices double in 6 years

• No country suffers hyperinflation• Linked to war or political breakdown

- Russia (USSR “transition”)- some LDCs- Weimar Germany

Inflation composition

• Prices move in different directions for

different goods

• Energy has been very volatile, up and down

• Food prices also bounce around a lot

– Still, focusing on “core” inflation (non-food,

non-energy) can be misleading...

Unemployment

• During the last 20-odd years:• European U is high

• Japanese U is low

• US is moderate

• Long-term unemployment also varies

• ∑ economic structure matters• As do details of definitions of U and data collection

Women & youth

• Women generally suffer more U

• Youth suffer much higher U

• In the US male youth U is high - not female

• Such male youth U is geographically based

• It also correlates closely with crime

US Unemployment

0

2

4

6

8

10

12

14

16

18

20

Unemployment variation

• It correlates with growth (surprise?!)

• Cyclical factors are not the only influence

• Hence we distinguish:– Cyclical U– Structural U– Frictional U

US Unemploymentversus Real GDP Growth

0

2

4

6

8

10

12

14

16

18

20

1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

U %

-20

-15

-10

-5

0

5

10

15

20

g in % pa

Causation• A sharp drop in investment

– “causes” higher U with a lag– “causes” lower Y growth with a lag

• Y growth and U are more simultaneous

• The relationship is clearly complex, and is

affected by other factors

Causation

• So what “causes” variability• “cause” is in parentheses for now -- it merely

indicates statistical correlation

• A starting point: how do the elements of GDP vary

• As share of GDP

• In terms of growth rates

Components of GDP

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1947Q11949Q11951Q11953Q11955Q11957Q11959Q11961Q11963Q11965Q11967Q11969Q11971Q11973Q11975Q11977Q11979Q11981Q11983Q11985Q11987Q11989Q11991Q11993Q11995Q11997Q11999Q1

Total I Consumption Imports Exports Government Purchases

Shares of GDP

• Consumption is large but steady– Some variation, and since large need to detail– In fact, the puzzle is stability, not variation!

• Government is even steadier– A one-time change with Korea & Cold War– Secular shift from Federal to State & Local

– See next slide….

Major Components Share in GDP - excluding consumption -

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1946Q11948Q11950Q11952Q11954Q11956Q11958Q11960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q1

Total I Imports Exports Government Purchases State & Local G Federal G

Trade• One major shift: trade

– 4% of Y in 1950s– 8% in 1973 with oil crisis– 12%-14% today

• Net trade– Remains smallish– Shift from small surplus to 3+% deficit– Some variability, too

Trade as % of GDP

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

1946Q11948Q11950Q11952Q11954Q11956Q11958Q11960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q1

Net Trade Exports Imports

Investment

• Far more volatile than C or G– C & G are larger, but I is still 1/6th of GDP

• I is the proximate cause of business cycles– See charts following…

– We’ll also see that shifts in I are amplified

• What parts of I vary?– Business fixed investment– Residential (housing)

Why the business cycle?

• Why does C not vary?• Life cycle models

• Why does housing investment vary?• Interest rates shift mortgage costs

• Why does business investment vary?• “Animal spirits” (Keynes)

• Net trade? -- some impact of interest rates

• Government -- fiscal policy (taxing & spending) not central

Investment as % of GDP

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

1947Q11949Q11951Q11953Q11955Q11957Q11959Q11961Q11963Q11965Q11967Q11969Q11971Q11973Q11975Q11977Q11979Q11981Q11983Q11985Q11987Q11989Q11991Q11993Q11995Q11997Q11999Q1

Total I Residential Business Fixed I Durable Goods Business Structures Information Technology

Growth Rates, GDP Components

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1948Q11950Q11952Q11954Q11956Q11958Q11960Q11962Q11964Q11966Q11968Q11970Q11972Q11974Q11976Q11978Q11980Q11982Q11984Q11986Q11988Q11990Q11992Q11994Q11996Q11998Q1

Consumption Investment Government Purchases

Investment (Growth, % per annum)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1947Q41949Q41951Q41953Q41955Q41957Q41959Q41961Q41963Q41965Q41967Q41969Q41971Q41973Q41975Q41977Q41979Q41981Q41983Q41985Q41987Q41989Q41991Q41993Q41995Q41997Q41999Q4

% over same quarter previous year

Residential (households) Equipment and software (corporate)

Factors Driving Business Cycles

• All components of GDP shift over time

• C is the largest component– It however tracks GDP (= national income)– Indeed, the puzzle is why is it so stable?

• G varies primarily with war– Also long-run shift from Federal to State/local– Not a source of the business cycle

Investment

• Investment is by far the most volatile item– At 1/6th of GDP, big enough to matter– Residential investment volative

• Interest rates affect it

– Business plant & equipment investment• Keynes’ “animal spirits” affect it

• Net trade now sometimes matters• Interest rates shift forex, shifting levels

Impact on Real GDP GrowthContribution (left scale), GDP Growth (right)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

194719491951195319551957195919611963196519671969197119731975197719791981198319851987198919911993199519971999

-4

-2

0

2

4

6

8

10

Personal consumption expenditures Gross private domestic investment Govt consumption expenditures & gross investment Net exports of goods and services Gross domestic product

Contribution Graph

• In the previous graph, dark blue line is GDP

• Bar graphs reflect contribution to change in GDP growth– Portions below 0 are slowing growth– Portions above 0 add to growth

• Drops in investment drive recessions– Net trade declines contribute, too

Conclusions

• We are left with questions / hypotheses– Why does investment vary?– Why doesn’t consumption vary?– How strong / constant is the link between

declines in growth and unemployment?– What is the link between growth and inflation?

• Why do long-run growth / U etc vary across countries?