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Question 1

GDP is the standard measure of economic performance for countries: Governments target higher GDP growth rates and releases of GDP data have effects on financial markets. Session 1 is about the understanding of what is included (and not included) in GDP. The data assignment for this session allows to get a first picture of your economy: its GDP and how each of the two factors (population and GDP per capita) contribute to the size of its market. There has always been a debate about whether GDP captures everything that is relevant from a macroeconomic point of view and whether there are better alternatives. The readings below will help you understand the debate about alternative measures of economic performance. Think about those alternatives. What is missing in GDP?

Required reading
A nice summary from Finance and Development (IMF) on measuring GDP. In 2012 the United Nations commissioned its first World Happiness Report. You can read a summary of the report (with a link to the report if you are really interested in the subject) Does money buy happiness? Some recent evidence . How changing the definition of GDP increased US GDP by 3% last year.

Data Assignment (instructions can be found here: Instructions Assignment 2014)


Using the World Development Indicators database from the World Bank, find the following macroeconomic variables for the latest available year (2012) for the country allocated to your group (see instructions above for the list of countries and groups): 1. GDP per capita (current US$) 2. GDP per capita, PPP (current international $) 3. Population, total. And calculate the total size of the economy (GDP) both in current US$ and in PPP current international $ by multiplying GDP per capita by population.

Question 2
Session 2 is about the identity that links Saving and Investment. The required readings provide an interesting analysis of the world balance between these two variables and the effect that is has on interest rates. Use the data from your country to think about the trends described in the McKinsey article. How do you interpret the ratios of consumption (private and public) and investment to GDP for your country? Are they reasonable? In which direction will they move over the coming years?

Required readings

Read the executive summary of the MGI report (you have to download it from this page) This is a recent analysis of the McKinsey Global Institute on future trends in Saving and Investment in the world and how it might lead to an increase in interest rates. Read this article by FT's Martin Wolf, he explains the link between the "savings glut" and depressed interest rates (and susbsequent increase in housing prices). Read this FT article on the dynamics of debt in the US and in Europe.

Data Assignment
Using the World Development Indicators database from the World Bank, find the following macroeconomic variables for 2012 for the country allocated to your group. 1. General Government Final Consumption Expenditure (% of GDP) 2. Gross Capital Formation (% of GDP) 3. Household Final Consumption Expenditure, etc. (% of GDP) Add up the three numbers. Are they lower or higher than 100%? What do you learn about that country/year?

Questions 3
Session 3 is about the connection between Saving and Investment imbalances and the Current Account (or the trade balance). The data for your country will provide you with the connection between public savings the net private balance and the current account. How do you read the figures? Is your country in a sustainable path? Are deficits a sign of weaknesses? The required reading from the IMF provides an in-depth analysis of the role of Asia in global imbalances. The speech by Ben Bernanke provides a link between global imbalances and the current crisis. The FT article is about the more recent evolution of capital flows across the world.

Required reading
The role of Asia in addressing global imbalances. From the IMF Finance and Development publication. A recent speech by Ben Bernanke on the connections between global imbalances and the financial crisis of 2008-09. Post-crisis global capital flows.

Data Assignment
Using the World Development Indicators database from the World Bank, find the following macroeconomic variables for the latest available year (2012) for the country allocated to your group. Use the same year for the three variables: 1. Exports of Goods and Services (% of GDP) 2. Imports of Goods and Services (% of GDP). Using the IMF World Economic Outlook database from the IMF, find the following two macroeconomic variables

for the year 2012. 3. Current Account Balance (% of GDP) 4. General Government Net Lending/Borrowing (% of GDP) Subtract the General Government Net Lending/Borrowing number (this is the government balance) from the current account number (i.e. Variable #3 - Variable #4). This is the private sector balance or the difference between private saving and investment. What do you learn about this country/year?

Question 4
Session 4 is about understanding long-term growth rates. We want to understand what the world economy might look like in the coming decades. The reading from The Financial Times is a nice summary of how emerging markets are converging towards advanced economies (as measured in GDP per capita). But are all countries converging? The second reading by Dani Rodrik (more academic) is about the difficulties of convergence in some emerging markets. Finally, the third reading questions the prospects for future growth in developed countries. The data assignment will allow you to check if your country has indeed gotten close to the level of income per capita in the US during the period 1980-2011. What do you see? How can you explain it?

Required reading
A FT article on labor productivity convergence or absence thereof. An article written by a professor at the Kennedy School (Dani Rodrik) on the prospects for convergence of emerging markets. A recent article by Martin Wolf (Financial Times) on the prospects for future growth. [and if you want to know more about this check this debate between a pessimist (Robert Gordon) and an optimist (Erik Brynjolfsson) about the future of growth: http://www.youtube.com/watch?v=ofWK5WglgiI]

Data Assignment
Using the World Development Indicators database from the World Bank, find, for your country, the following macroeconomic variable for all the available years (1980-2012; shorter for Russia or Poland). Download the same variable for the United States as well. GDP per capita, PPP (constant 2005 International $). Assess whether your economy is today (2011) closer to the US economy than what it was in 1980, in terms of GDP per capita. Plot the ratio of GDP per capita in your economy, relative to that of the US. Is there any convergence?

Question 5 Required reading


We will be continuing our discussion regarding Session 4 (growth) so all materials for that session are relevant for this one. If we have time we might also go back to some of our discussion in Session 3 regarding the wealth and balance sheets of nations. Only two required readings: 1. Business prospects for clean innovations 2. Capital is back, what are the consequences for taxes. Also a very nice optional reading (because it is long), the executive summary of this MGI report disruptive on technologies.

Data Assignment
For this session you need to produce and assessment of the growth potential of your economy using the framework developed in Session 4 (you can use the slide labelled "the 4I's of economic growth" from Session 4). Here is an outline of the four steps that you might want to follow 1. Start with GDP per capita in the most recent year (you downloaded this variable in Session 1). This will give you a sense of "Initial Conditions". How much potential does the country have to grow? 2. Look at the investment in phyisical capital as % of GDP (you downloaded this variable in Session 2). This gives you a measure of (past) efforts to grow the productive capabilities of the economy. Given what we saw in Session 4, what type of growth rates would you expect if investment remained at this level? 3. Using the plot you did for Session 4, assess whether the country has been converging to the US economy in the period 1980-2012. 4. Using the Doing Business website of the World Bank see how your country is listed in their ranking in order to get a measure of the quaility of insitutions. Given all the information you have, what do you expect the growth rate of GDP per capita be over the next 2 or 3 decades.

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