Slide 1 - Bogazici - Economics

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					                  EC 102.01
Asst. Prof. Burçay ERUS and Dr. Burcu YAKUT-ÇAKAR,
Via phone: 359 7638 or 359 7652
Office Hours: Tuesdays 15:00-17:00 and by
2 midterms (2*30%) + 1 Final (40%); NO MAKE-UP!!
Ch 1 – Economic Activity in Context
Ch 3 – What Economies Do (Sections 1,3,4),
Ch 6 – Macroeconomic Measurement
  Section 3 – Measuring Household Production
  Section 4 – Measuring Economic Well-Being
National income accounting with “the outsiders”
Ch 5 – Macroeconomic Measurement
    Economic Activity in Context
What is economics? Study of the way people
 organize themselves to sustain life and
 enhance its quality
 resource maintenance, production,
 distribution and consumption of goods and
Micro vs. Macro
Macro vs. Global
 people = economic agents
 Microeconomic vs Macroeconomic
Microeconomic                                Macroeconomic
Should I go to summer school or take a       How many people are employed this
job?                                         summer?
What determines salary offered by            What determines overall salary level in
Garanti Bank to Huseyin Kum, a recent        the economy?
Bogazici grad?
What determines the price of chocolate       What determines the level of prices in the
produced by Eti and Ulker?                   overall economy?
What government policies are needed to       What government policies should be
make it easier for Roma students to enroll   adopted to promote employment and
in schools?                                  growth in overall economy?
What determines whether Akbank opens         What determines overall trade in goods,
a branch in Berlin?                          services, and financial assets between
                                             Turkey and the rest of the world?
    Economic Activity in Context
Macroeconomic Goals
   positive vs. normative questions
Concept of “well-being”
(i) Living standards – “keep living standards of the
    individuals high enough to maintain long,
    healthy and enjoyable lives”
    economic growth + political freedom + social
    - economic development
Growth but: What is produced? How ? For whom?
      Economic Activity in Context
(ii) Stability – temporal dimension
     fluctuations - boom vs. recession
     business/trade cycles – alternating periods of B/R
(iii) Sustainability
     financially? – “debt crises”
     socially? – “disparities in living standards”
     ecologically? – “catastrophic effects”

Need for a rethinking of economic growth
Economic Activity in Context

                                       Share in national income
                         1987   1994   2002        2003           2004    2005   2006
Total Household Income   100    100     100         100            100    100    100
Lowest 20 %               5,2    4,9    5,29           6           6,04    5,1    5,8
Second 20 %               9,6    8,6    9,81       10,28          10,69    9,9   10,6
Third 20 %               14,1   12,6   14,02       14,47          15,22   14,8   15,2
Fourth 20 %              21,2    19    20,83       20,93          21,88   21,9   21,5
Highest 20 %             49,9   54,9   50,05       48,32          46,17   48,4   46,9
Gini coefficient         0,43   0,49    0,44        0,42           0,40   0,43   0,41
         What Economies Do?
Goals (were): good stds of living, stability and
  sustainability – need to understand building
Need to combine micro and macro perpectives
  to understand the functionings
Four essential economic activities:
resource maintenance, production, distribution
  and consumption of goods and services.
     Essential Economic Activities
Resource maintenance: tending to preserving or
  improving the stocks of resources for
  preservation and quality of life
Capital stock – valuable for economic contribution!
Types: natural (physical assets provided by nature),
  manufactured (human productive activities
  added to natural), human (individual’s capacity
  fo labour – skills and knowledge), social (stock of
  trust, mutual understanding).
    Essential Economic Activities
Production: conversion of resources into useble
  products – tangible/intangible, manufactured
Inputs -> outputs + waste products
Need to consider capital stocks

Distribution: sharing of products and resources
  among people
Markets facilitate exchange relations
Transfers - payments given without return
  expectation (monetary/non-monetary – in kind)
      Essential Economic Activities
Consumption: final use of goods and services by
  individuals to satisfy needs.
May choose to save for consumption in the following
Flow of savings (either from individuals, business and
  government) add to the stock of available financial
Use of financial intermediaries help facilitate the
  savers to loan out to those who want to borrow
Some borrowed funds could be used for creation of
  new investment goods – aim to maintain resources
Distribution: Who gets what and how???
Distribution in form of exchange and in form of
    transfer – Main Q: who receive the incomes
    generated by production and the role of
    government, if any.
Exchange relations: two agree to trade on the basis of
    mutuall agreed terms.
Goods and labour markets – monetary flow (L/K
Wages, rents, profits – controversial debate over
    which is the productive one!
Distribution: Who gets what and how???
Taxes and transfers: funds flowing to and from gov.
From – dependency needs not met elsewhere (care,
    shelter, education, health services)
Two main types of transfer programs – social insurance
    and means-tested.
Insurance- pool insurance (contributions) to hedge for
Means-tested - non-contributory but
    income/assets/wealth being tested
TR: Social Insurance Institution, Unemployment Insurance
    Fund, Social Assistance and Solidarity Fund
Distribution: Who gets what and how???
Taxes and transfers: funds flowing to and from gov.
To – collection of income and consumption/sales taxes
    (e.g.VAT) – direct vs. indirect taxes
Proportional?? Progressive vs. regressive
Tax system in TR relies heavily on indirect taxes: in 2008,
    32.7 % of tax revenues come from income taxes while
    indirect taxes comprise of 63 % (OECD average 42 %).
Structure of taxation: share of tax revenues in TR
    constitutes only 24.5 % of GDP (OECD average: 35.8
    %, EU-15: 38.8%)
Share of income taxes in GDP (2007) in TR 5.6%
    (OECD: 13.2%; EU 15: 14%)
Distribution: Who gets what and how???
Distribution of Income - share of income received by the
Quintiles – equal sized groups
Distribution of income in TR
Distribution: Who gets what and how???
Measuring Inequality - need to describe the pattern
  of inequality - Lorenz Curve
 The more bended the curve,
    the greater the inequality
    of income
 Gini Coefficient: ratio of
    area between the Lorenz
    Curve and diagonal
 0 (perfect equality) < Gini <
    1 (complete inequality)
         Spheres of Economic Activity
Core Sphere – household, family, community that
    organize resource management, production and
work is rewarded directly by what it produces
eg. Childcare, elderly care, decisions on labour supply,
    decision on skills and education, allocation of
    consumption (and savings/investment)
Public-Purpose Sphere – governments, NGOs,
    international organizations
Exist for a specific purpose related to the “public good”,
    i.e. beyond individual and family interest.
eg. Regulation, direct provision
        Spheres of Economic Activity
Business Sphere – firms, looking for opportunities to buy
   and manage resources.
Responds to demands for goods and services (as opposed
   to core: direct needs; public-purpose: its
Propriatorships, partnerships, cooperatives, corporations
One clear goal : making profit! (most valuable outputs to
   produce, produce at the least possible cost,
Less Developed Country Context – Informal Sphere
Outside government oversight and regulation – could be
   illegal, illicit but not necessarily.
  Measuring Household Production
Significantly omitted in the calculation of national
  income – activities like housecleaning, laundry,
  childcare, meal preparation etc. (domestic female
  labour!! )
“households are unproductive”
“hard to distinguish household production from
   consumption” – third person criteria
“GDP measures market production” – non-market prod’n
 “Including household production would make too big of
   a change in the accounts” – countercyclicality!
  Measuring Household Production
Time-use surveys: might help to find out the time
  spent in unpaid productive activities.
Also: shows the different patterns of time-allocation
  associated with gender, thus serves to highlight
  roles and conditions of women and men in family
  and social life
TR – Time-use Surveys do have a short history and
  the results were yet not utilized for valuation or
  policy purposes.
Year 2006, survey with 5070 households, 11.815
  individuals over the age of 15
Measuring Household Production
Grafik 1. Cinsiyete göre ortalama faaliyet süresinin dağılımı (Saat)


             Çalışma ve iş arama

     Yemek ve diğer kişisel bakım

             Kitle iletişim araçları

         Sosyal yaşam ve eğlence

 Seyahat ve diğer zaman kullanımı

           Hanehalkı ve ev bakımı

       Gönüllü işler ve toplantılar

               Hobiler ve oyunlar



                                       10   9   8   7   6   5   4   3    2   1   0   1   2   3   4   5   6   7   8   9   10

                                                                        Erkek        Kadın
 Measuring Household Production
Tablo 1. Faaliyet türüne, cinsiyete ve çalışma durumuna göre ortalama faaliyet süresi (Saat)

                                                    Toplam                     Çalışan                     Çalışmayan
Faaliyet adı
                                           Toplam   Erkek    Kadın    Toplam   Erkek     Kadın    Toplam    Erkek    Kadın

Yemek ve diğer kişisel bakım                02:42    02:45    02:38    02:40    02:42     02:34    02:43     02:52      02:40

Çalışma ve iş arama                         02:47    04:27    01:08    05:39    06:08     04:19    00:02     00:07      00:00

Eğitim                                      00:22    00:24    00:20    00:05    00:05     00:06    00:38     01:14      00:25

Hanehalkı ve ev bakımı                      03:05    00:51    05:17    01:37    00:43     04:03    04:29     01:12      05:43

Gönüllü işler ve toplantılar                00:46    00:37    00:54    00:30    00:29     00:31    01:00     00:57      01:02

Sosyal yaşam ve eğlence                     01:54    01:50    01:57    01:32    01:33     01:30    02:14     02:35      02:07

Spor                                        00:07    00:10    00:04    00:05    00:06     00:02    00:08     00:19      00:04

Hobiler ve oyunlar                          00:15    00:25    00:05    00:15    00:19     00:04    00:14     00:38      00:06

Kitle iletişim araçları                     02:14    02:20    02:07    01:53    02:00     01:34    02:33     03:12      02:18

Seyahat ve belirlenmemiş zaman kullanımı    01:18    01:43    00:55    01:35    01:45     01:09    01:02     01:36      00:49

Uyku                                        08:32    08:27    08:36    08:08    08:08     08:07    08:55     09:18      08:46

Toplam                                      24:00    24:00    24:00    24:00    24:00     24:00    24:00     24:00      24:00
   Measuring Household Production
Methods of valuing household production – need to
Need to assign the monetary value to the time use
 - Replacement cost method: hours spent are valued
 at what level would it cost to pay someone else to
 do the same job.
 - Opportunity cost method: wage rate the person
 would have earned in the market at a paid job is
Neither method is perfect BUT better than nothing!
    Measuring Economic Well-Being
Remember the goal! – well-being of the individuals
Output cannot be the measure for human well-being
- Well-being reducing products: drugs, unhealthy
- Well-being reducing production methods:
  unpleasant working conditions
- Defensive expenditures: armaments
- Loss of leisure: overwork makes you tired :D
- Unequal distribution: prevalence of poverty
    Measuring Economic Well-Being
Genuine Progress Indicator (GPI)
Personal Consumption Expenditure (corrected for
+ benefits (estimates of unpaid work and services of
  durables and public roads!)
– social costs+ environment costs
+ net capital investment – foreign borrowing
- cost of durables
    Measuring Economic Well-Being
Human Development Index (HDI) – used by UNDP
Capability Approach – Amartya Sen
Life expectancy at birth, adult literacy and secondary
   education enrolment rates, GDP per capita
Annually published in Human Development Report
Human welfare on the basis of not only how much is
   produced but also what is produced and how it is
Country rankings wrt GDP and HDI may differ!
    Measuring Economic Well-Being
Human Development Index (HDI) – used by UNDP
2010 report entitled “Real Wealth of Nations:
  Pathways to Human Development”
Grouping of countries (very high,high,medium,low)
TR used to be in medium, now in high HD group
HDI rank 83 (out of 169), GDP rank – HDI rank = -26
Interesting examples: Serbia HDI:60, GDP-HDI=+11
UAE HDI:32, GDP-HDI=-28; Brazil HDI: 73, GDP-HDI=-3
   Macroeconomic Measurement
Accounting for “outsiders” : household production
  and economic well-being
Need aggregate measures for making economic
  policy choices at the national level.
Use of “sectors” – households/institutions
  (personal), business, government and foreign
Remember: different types of capital (human,
  social, natural, manufactured) – only
  manufactured is included in national accounting
  – fixed assets, inventories, durables
          Gross Domestic Product
Total value of final goods and services newly
  produced in the country over a specified period of
  time (1 year)
Final goods – avoid double counting
“Domestic” – within the borders of the country
Value of production = value of spending = value of
Production – sum up value of all final goods and services
  produced in each sector
Spending – sum up value of spending by all sectors
Income – sum up compensation received by all involved
  in production and services.
Calculating its Value – Three Approaches
Product Approach – Rather than looking at the
  final sale, utilize a “value-added” approach
Q: how much each industry contributes the the
  value of the final good or service?
Start from the raw material and see how much
  market value is added at each stage
Value of sold – value of intermediate inputs used
Value added at each stage must sum up to the
  final value of the final product
Input-Output tables
Calculating its Value – Three Approaches
Use of imputation to estimate the value of some
Esp. Government production is imputed by
  summing up the payments to workers, payments
  for intermediate goods and services, allowance
  for depreciation of assets
What about household production for own use?
  Not counted at all!
GDP = Business production + household and
  institutions production + government production
Calculating its Value – Three Approaches
Spending Approach – adding up the value of
  newly produced goods and services bought by
  the sectors
Personal consumption expenditures – spending by
  households and institutions
Gross private domestic investment – spending by
  businesses on e.g. fixed assets
Net Spending by foreign sector – net exports of
  goods and services (NX = X – M)
Government consumption expenditures and gross
  investment – include e.g. defense expenditures
Calculating its Value – Three Approaches
Income Approach – adding up production-related
  domestic incomes (wages, rents, profits) earned
  by all individuals and organizations
Closed vs. open economy
Need to taken into account
- Net income from RoW : to be deducted
- Depreciation: consumption of fixed capital – to
  be added
GDP = NI – Net income from RoW + Depreciation
Growth, Price Changes and Real GDP
GDP Growth – changes in GDP over time,
 percentage change in the value of GDP from
 one year to another.
Percentage change = [(Value2-Value1)/Value1]*100
Annual growth and quarterly growth
Growth, Price Changes and Real GDP
Nominal vs. Real GDP
Nominal GDP – total production valued at current
   prices (current meaning the year in
!! Not only the level of output but also the price
   levels change from one year to another.
Real GDP – Actual value of goods and services
   produced which is net of price changes
GDP = Σ (P x Q)
Growth, Price Changes and Real GDP
Calculate Real GDP using constant prices from a
  base year/reference year
For the base year Nominal and Real GDP are same!
Use of price indices – to measure the changes in
  prices as compared to another period.
CPI – consumer price index: measuring changes in
  prices of goods and services bought by
Weighted average of a bundle of goods and services
Growth, Price Changes and Real GDP
 Use changes in CPI to calculate for inflation!
 Inflation – growth rate of prices
 When weights are constant, tend to overstate
   inflation – because people may look for
   cheaper substitutes!
 Updating the market basket periodically using
   information from household
   budget/expenditure surveys
Growth, Price Changes and Real GDP
Other indices are used: e.g. PPI – using prices
  facing domestic producers
Baskets are different, inflation rates differ!
GDP Deflator – implicit price deflator
GDP Deflator = (Nominal GDP / Real GDP) *100
Reflects changes in all the prices of goods and
  services included in GDP.
Growth, Price Changes and Real GDP




                                                                                 OECD - Total
                                                                                 European Union (27
    0.00                                                                         countries)
           2000   2001   2002   2003   2004   2005   2006   2007   2008   2009
                                                                                 Euro area (16
  -10.00                                                                         Turkey


Growth, Price Changes and Real GDP
 CPI inflation Turkey (yearly basis) – Historical Trajectory

  Current CPI inflation Turkey (yearly basis) – last 12 months
Growth, Price Changes and Real GDP
   Savings, Investment and Trade
National accounts – also show the savings-asset
  situation within an economy
GDP = Personal C + Priv. I + Gov. C + Gov. I + NX
GDP – Personal C – Gov. C = Priv. I + Gov. I + NX
Saving – excess of consumption
Savings = Investment + NX
Excess of goods and services produced in the
  economy not consumed can be investment
  goods or can be sold to foreign countries
          Financing Spending
Closed economy – no trade; all resources not
   spent for consumption are used for spending
   on investment goods
   Savings = Investment
Open economy – not straightforward
    Savings = Investment + NX
If domestically have extra savings, can loan to
   foreigners to purchase domestic goods
   Savings = Investment + Net Foreign Lending
   Savings = Investment – Net Foreign Borrowing
            Financing Spending
If net foreign borrowing is positive, saving is less
   than investment
Q: Is it problematic to be the “borrower”?
Depends on the use of borrowed funds
   if used for financing purchase of new investment
       goods, not so bad.
   if go to unproductive investments or finances
       high levels of consumption, problematic!
Debt crises facing the developing/less developed
   countries – e.g. HIPC: 40 countries (29 sub-
   Saharan African)

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