Meeting 3 23 Jan 2013 Handout The Global Economy We have looked at the global economy its size and

structure - who produces and income and population distribution. The figures we will be using are not the most up to date. But they will do for the purposes of this analysis. Dollar output in 2010 (at current purchasing power parity prices) was around $80tr, of which around $41.77tr (about 52.1%) was generated by G30 countries (the OECDs 30 odd member states sometimes referred to as the Richmans Club). G7 (the US, Japan, Germany, Britain France, Italy and Canada) account for the bulk of OECD output - around 40% of the total. The US accounts for 19.5%. Total trade accounts for around $15tr having fallen sharply as the global financial crisis impacted upon economic growth. According to the WTO, trade in 2009 in current dollars declined by around 25%. The IMFs assessments of economic growth points to growth being sustained by the largest developing economies (China, India and Brazil) though less strong. Recovery elsewhere but notably in the US and the Euro zone remains muted. This has important implications for per capita income growth. Look at the data taken from the OECD and the IMF. Have a look also at the WTO website. Population and per capita incomes Some further key statistics. The OECD which accounts for around 52% of global GDP has a population of around 943 million souls. It has an average per capita, income based on its $41.77tr of collective GDP, of around $44,000. Some of course enjoy higher per capita incomes than others. The US has one of the highest. Portuguese and Greek per capita income, for example, will be markedly lower. Some 440m live in the EU, which is the largest single market. Elsewhere around 5bn live in NICs (newly industrialising countries) and other developing and transitional economies. Their collective GDP is $38.3tr or some 47.9% of the total. They enjoy per capita incomes of around $7,600. Some are above the average. Russia with a population of 145m has a GDP of around $1.7tr and an average per capita income of $12,000. China has a population of 1.4bn with GDP of around $8tr with per capita income of around $5,700. In Africa income per head is as little as $300 per annum - less than the proverbial $ a day! Looking to the future and the role of China But there are fast and radical changes taking place beneath these statistics. Perhaps the most important is that GDP could well more than treble for China over the next decade and a half, which could put Chinese GDP at around $25tr and ahead of US total GDP though not in terms of per capita income.1 If annualised growth is maintained at around current levels (c 8%pa) it will take China around 9 years to double its growth. If low economic growth of around 2% continues for the US it will take 35 years for the US economy to double. Look also the attached article from a recent Economist article How to get a Date.

A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the rate of growth.

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More broadly the total share in world GDP will rise significantly for non-OECD countries and the per capita differential between rich and poor will decline further. The rich are going to get poorer: the poorer will get richer! The wealth gap as it stands will narrow. . In any event the implications are very clear. China's total dollar spend will equal or exceed that of the US in the next decade (even though its GDP per head will still lag the US). China will be the largest single market in the global economy. It certainly explains why everyone wanting to do anything in the global economy wants some part of the Chinese 'action'. See if you can work your way around these figures. See if you can weaknesses in the assumptions that have been made. Check the latest population projections. There are of course other implications. One of the most challenging is that as real incomes in Asia continue to rise - real incomes in other more prosperous regions today could very well face declines in real wealth. European citizens may very well be poorer - along with US citizens. OECD economies are likely to grow more slowly that's for sure. Capital will be drawn to markets that are expanding. It will be withdrawn from markets that are contracting or growing more slowly to more dynamic ones. The GDP outturns suggested above may not be realised. OECD might very well experience declining real wealth compared to China, India and other Asian economies. It may be instructive to look historically how GDP and per capita incomes have moved since the industrial revolution. Look carefully at Maddison a copy of which is in the library. Read the Introduction and Summary (pages 17 25). Look carefully at Table 1-2 (page 28). Look in particular at movements in the period 1820 1998 for Group A countries when compared with Group B. What conclusion do you draw? Finally -consider the position in respect of trade. Total net imports and exports total around $14tr - or 20% of global GDP. Of this the advanced economies account for 70% of the total with developing countries accounting for around 30%, China with exports in excess of $1tr2 is already the new workshop of the world. But what about its past? The trading of financial assets With the globalisation and deregulation of capital markets these far exceed the value of trade in goods and services. Trade accounts for around $20tr in 2008, though declining, whereas total global assets/liabilities (debt, equity and other securities) are something in the region of $100tr. Recent figures such suggest that global equity markets alone have a capitalisation of around $50r. To that we need to add debt, say a further $25tr (assuming average gearing at around 50%) and a further $25tr which consists of government bonds. A grand total of around $100tr. And the story is not finished. There are derivatives with a nominal value of at least 10 times the underlying valuation of debt and equity. A figure in the region of $1,000tr would not exaggerate the volumes that one way or another are transacted through global money markets. Not all of this is currently tradeable. Remember the example of Zimbabwe. There are, or course, many other countries where these assets/liabilities are not yet acceptable trades.

Chinas exports account for 8.5% of some $15tr = $1.275tr.

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This figure will of course increase as capital markets expand and deepen internationally to cover non-OECD countries provided the current crisis is resolved. You can see why the international financial market is very important. You can also see why trade in goods and services is the small change when compared with the trade in financial portfolios all of which passes through the international money markets. Questions for Review 1. Explain why we talk about an approaching tipping point in the growth of the OECD group of countries the Developing countries group? 2. What is the current ratio of per capita incomes between OECD anbd non OECD countries? What does this signify? 3. 4. Why has growth slowed in the OECD group of countries? Why does it remain robust in the non OECD group of countries?

5. Why is the trade in merchandise so tiny when compared with the trade in financial assets? 6. 7. How do financial assets arise? What do we learn from Getting a Date?

8. How long will it take China to double its GDP if its likely future growth is around 8% per annum? How long will it take the US to double with a growth rate of 2% per annum? Make use of the Rule of 70.

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