Economics
(a Non-Economist’s views)
Rahul Tongia
CMU
A Stylized Skim through
Economics
ƒ Things to look out for
o Learn the jargon
ƒ Formal frameworks
o Microeconomics, macroeconomics, finance,
etc.
ƒ Techno-economic (project) valuation
2
Global Population
Population 2007·09·19
1. China
1,323,607,597
2. India
1,133,843,283
3. USA
301,730,016
4. Indonesia
235,317,962
5. Brazil
190,430,440
World
6,619,111,398
Sources: UN Data; GeoHive
3
Economics – Global
Statistics
ƒ
ƒ
ƒ
ƒ
ƒ
GDP (PPP)
GDP (Currency)
GDP/capita (PPP)
GDP/capita (Currency)
Annual growth
per capita GDP (PPP)
2002]
Distribution (2004 Est.)
GDP:
Agriculture:
Industry:
Services:
4 Web
sources
US$65.95 trillion (2006 est.)
$46.76 trillion (2006 est.)
$10,200 (2006 est.)
$7,178 (2006 est.)
4.0% (tty*); 2.1% (1950-2003)
[tty – trailing 10 years till
4%
32%
64%
Labor 40.7%
20.5%
38.8%
Relative value of money
ƒ Market exchange rate
o What you buy and sell currency at
ƒ Purchasing Power Parity (PPP)
o Factors in differences in cost of living for a
“basket of goods”
– The $1/day for absolute poverty is using a PPP
number!
ƒ What’s the Big Mac Index?
5
Economics is about
tradeoffs – Consider Food
ƒ Diets in the US have changed – for the worse
ƒ But we’re spending less money for the food
ƒ In other countries, calories might be
available but not nutrients
ƒ UN states there are more overweight than
underweight people now
6
o Poverty in the US is associated with obesity,
not under-nutrition
US Food Changes
450
60
50
Pounds Fruits/Vegetables
350
300
40
250
30
200
150
20
100
10
Pounds (or Gallons) / % expenditures
400
Red meat
Poultry
Fish & Shellfish
Fruits
Vegetables
Milk
Carbonated Soft Drinks
Alcoholic
% of disposal personal income
% spent away from home
50
19
30
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
0
7
0
Compiled from USG data
40.0
Food & Tobacco
35.0
Clothing & Accessories
30.0
Personal care
25.0
Housing
20.0
Household Operation
15.0
Medical care
10.0
Personal business
8
2000
1995
1990
1985
1980
1975
1970
1965
1960
Compiled from USG data
1955
Recreation
1950
0.0
1945
Transportation
1940
5.0
1935
% Personal Income
US Personal Expenditures
Other
Economics and Development
ƒ People just need more money (?)
o Need to remember inflation – can’t “print money”
o Real money is “deflated” to match inflation (compared
to nominal)
ƒ Need to spend money better (?)
o Not limitless
o How to optimize and prioritize
– Utilitarian
• Greatest good for greatest numbers
– Libertarian
• No Interventions – do as you wish as long as it doesn’t hurt
others
– Egalitarian
• Equality
9
o What are markets?
New Models of
Developing Countries
ƒ Economist Robert Wade talks of a 1:3:2 world
o 1st group – Developed
o 2nd group – Developing
o 3rd group – Failing to develop
2nd group has higher growth rate than 1st; 3rd has lower
ƒ Political Scientist Atul Kohli characterizes countries as
o “Neopatrimonial state,"
– Ruler treats state resources as his own
o Cohesive-capitalist state (E. Asia)
o Fragmented-multiclass state
– (In-between (parts of L. America))
10
Role of the State
ƒ Much of the world had (and has) State
Owned Enterprises (SOEs)
o Some activities are not even companies, but
Govt. Departments (e.g., Dept. of Telecom)
ƒ Markets (and the belief they are better) are
growing
o Privatization
– Not the same as competition!
– Type I and Type II (selling off to highest bidder or
letting new entrants emerge)
11
What’s the Role of Government
In a Market World?
ƒ NOT AS
o Producer (left to private enterprise)
o Allocator / controller (“command and control”)
ƒ Consumer
o Worked in Andhra Pradesh, India, for Fiber to
the Village
ƒ Regulator
12
o
o
o
o
Create level playing field
Set up transparent rules of the game
Standards
Is a regulator required in a “free market”?
Role of Innovation
ƒ Source of much of economic growth
o Services in the economy
o Source of more of the JOBS
o Small companies matter
US 2003 figures (Census Bureau)
Size of Firm
Fraction of total US employees
1-19
25.0%
20-99
29.8%
100-499
25.2%
500-999
6.7%
1000+
13.3%
13
– It’s also the growth of jobs that’s higher for small
firms
Economics and Analysis
ƒ Macroeconomics
o Money supply, interest rates, inflation,
exchange rates, deficits, etc.
ƒ Microeconomics
o Supply and Demand, market clearing prices
ƒ Development Economics
o Transfers, comparative advantage
ƒ Financial Economics
o Returns
14
ƒ Etc.
“Utils” – Measure of
Utility
ƒ Artificial measure of tradeoffs amongst
producers and consumers
o Money is used as for intermediation (“common
currency”)
ƒ Challenges
o Rationality
o Time periods (discounting)
o Risk tolerance
15
Wealth, Development and
“Happiness”
ƒ (Reportedly) Wealth doesn’t relate to
happiness AFTER a minimum level of wealth
ƒ Subjective measures
o Is “happiness” relative?
o Locally, “in-peer,” or globally?
16
Money and Value
ƒ (Discuss) - Larry Summer’s statement on
shipping wastes to developing countries
ƒ Thought experiment: smoking in the US
o Viscusi has calculated that smoking leads to a
net positive financial gain for states
– Litigation Settlement
– Excise taxes
– Earlier death reduction of pension obligations
ƒ Are traditional economic measures accurate
or sufficient?
17
Human vs. Economic
Development
* Rank means lower number is better
180
Sierra Leone
Nigeria
Yemen
Tajikistan
160
Kenya
GDP (PPP) Rank
Sri Lanka
120
Cape Verde
80
Namibia
Turkey
Mexico
60
Barbados
Korea, Rep. of
40
Sw eden
Japan
Norw ay
0
0
Iran, Islamic Rep. of
Thailand
Brazil
Czech Republic
Botsw ana
OECD (Hi Income)
Russian Federation
Mauritius
South Africa
Saudi Arabia
CIS/E. & Central Europe
Arab States
United Arab Emirates
E. Asian and Pacific
Equatorial Guinea
Luxembourg
United States
40
Latin America & Caribbean
S. Asia
Seychelles
Singapore
Hong Kong, China (SAR)
Germany
20
Angola
China
Ukraine
Cuba
Pakistan
India
Lebanon
Poland
18
Ghana
Turkmenistan
100
20
Burkina Faso
Haiti
140
60
Created from HDR 2004 Report Data
80
100
HDI Rank
120
Sub-Saharan Africa
140
160
180
Economic Theories of
Development
ƒ Capital Fundamentalism
o Need to invest (savings rate) for growth
o If domestic funds are lacking, aid is the solution
ƒ Solow (1957) studied all the inputs (labor,
capital, etc.) and outputs and found there was
unexplained growth
o This residual was due to TECHNOLOGY
19
Growth Models
ƒ Entire global system is predicated on growth
o Real growth, ideally per capita
o Demands increased productivity
o Are there limits?
– Malthusian view (population growth is exponential)
– Innovation view (e.g., Julian Simon) – Materials substitution
ƒ Developing countries often have centralized planning
o
o
5 year plans
Socialistic history
ƒ Subsidies, cross-subsidies and interventions are not
merely socialist
20
o Real estate insurance pricing in Florida – regulated
to make it artificially affordable (think hurricanes)
Growth and Sustainability
ƒ Environmental sustainability is already in question
ƒ Economic Sustainability
o BOTH sides are key
– Supplier
– Consumer
o Diminishing returns often seen after some point
o Continued growth requirements – more
resources and more transfers
o Aid based economics is problematic
21
Technology and
Productivity
o Role within economy
– Increasing share of services (~2/3)
Adoption Rate
o Adoption of new technologies
– Bell Curve
o Schumpeterian destruction?
– Disruptive technologies
o New business models and market
structures
– Where is the market power?
22
•
•
•
•
•
•
Fundamental Technologies
New market creation
Manufacturing
Implementation
Retailing
Servicing
•Issues of barriers to
entry, commoditization,
etc.
Time
“Smiley-Faced Curve” of Value
Idea/
Design/
Ownership
Value
Retail/
Service
Manufacturing
/ Production
Product Stage
(A generalization if not simplification)
23
Kuznet’s Curve
Inequality
ƒ Using cross-country data,
Kuznet postulated
inequality grows and
then decreases over time
ƒ Has been applied to
environmental
degradation as well
ƒ Criticisms
o Used cross-sectional data
across countries, instead
of time-series
ƒ
24
More equitable
trajectories possible?
GDP per capita
Gini Coefficient
Measure of attribute distribution
vs. population = A/(A+B)
„
Criticisms
„
A
B
Data issues (not unique to Gini)
Granularity (sample
size/geography; data steps)
„
„
Households vs. individuals differ
E.g., poorer families may have 2
earners
„
25
Gini Coefficients over Time
26
Rest of the world
ƒ Why is such data limited in value for many
developing countries?
o Non-monetary expenditures
o Wide variance between very poor and super rich
ƒ What expenditures are public vs. private?
o Education
o Infrastructure (water, electricity, etc.)
– Exit strategies … can lead to vicious cycles
27
ƒ Can we assume developing countries will
follow similar trajectories as developed?
Jobs and Developing
Countries
ƒ Job creation
o Sharing vs. growing the pie
o Changes in jobs
– Fraction in agriculture
– Globalization
o
Changes in demographics
ƒ How do you grow jobs?
o
o
Small enterprises
Entrepreneurship
ƒ Role of Competition is important
28
o Globalization means competition is not just domestic,
e.g., WTO obligations
Developing Country Issues
ƒ Higher risk perceived in developing countries
ƒ Lack of insurance schemes
o Social Security, farmers, etc.
ƒ Credit is expensive
o Cell phones example – innovation beyond technology
– Prepaid
• Reduces distances
» Scratch cards for bribes!
– Low-cost banking
o Kiosks are inevitable for interfacing
o Q: What is the biggest bank in India?
29
Measures of Wealth
ƒ GDP = consumption + (capital) investment + exports − imports
[final goods and services only]
ƒ GNP = includes net income from abroad
ƒ NNP = GNP - Depreciation of Capital
ƒ Green NNP = GNP - Depreciation of Produced Assets - Depletion
of Natural Resources
ƒ Genuine Savings = Production - Consumption - Depreciation of
Produced Assets - Depletion of Natural Assets
o (Also takes out net borrowings)
Issues of sustainability are outside typical economic metrics
ƒ But, what is expenditure on education?
o Consumption, or
o Investment into the future
30
Macroeconomics
ƒ Study of the overall economy, including
overall production, supply, prices,
employment, etc.
o Includes currency, taxes, monetary policy, etc.
o Domain including policy interventions
ƒ (Beyond the scope of this course to discuss
these issues in depth)
ƒ Development linkages
31
o Trade
o Tariffs
o Exchange rates