Because learning changes everything.

Econ 122-Spring 21

CHAPTER 1

Economics and Economic Reasoning

 Chapter Goals

Understanding key concepts:

- Economics

- Microeconomics / macroeconomics

- Economic reasoning
- Opportunity cost

- Positive economics, normative economics

© McGraw Hill
 What Economics Is

Economics is the study of how human beings coordinate

their decisions about how they use their economic resources,
given the social customs, and political realities of the society.

The three central coordination problems any economy

must solve are:

1. What, and how much, to produce.

2. How to produce it.

3. For whom to produce it.

© McGraw Hill
 Scarcity

Economic problem (the coordination problem) arises because

of scarcity!

Scarcity means the goods and services available are not

enough to satisfy individuals’ or societies’ all needs and wants.

Scarcity means the resources are not enough to produce all

the desired and needed goods and services.

© McGraw Hill
 Microeconomics and Macroeconomics:

Economic theory is divided into two parts:

1. Microeconomics is the study of individual choice, and
how that choice is influenced by economic forces
When we talk about microeconomics, we usually talk about
specific markets/sectors (i.e. automobile market, wheat
market etc.)

2. Macroeconomics is the study of the economy as a whole.

When we talk about macroeconomics, we usually talk about

economy in a country (economic growth, inflation,
unemployment etc.) and relations between countries
(international trade etc.)

© McGraw Hill
 Economic reasoning or “thinking like an economist’ involves:
1) Analyzing any situation by comparing costs and
benefits of a decision.
2) Abstracting from the unimportant elements of a question
and focusing on the important ones.

Abstracting means making assumptions to simplify a

problem to focus on causal relationships. This would help us
models and then we can build complicated models to
analyze more complex situations.

© McGraw Hill
 3) Rational decision making means decisions are often made
by comparing marginal costs and marginal benefits.

Marginal cost is the additional cost over and above costs

already incurred. Marginal benefit is the additional benefit
above what has already derived.

If the marginal benefits of doing something exceed the marginal costs, do

it.

MB > MC> Do it!

If the marginal costs of doing something exceed the marginal benefits,

don't do it.

MC > MB > Don’t do it!

© McGraw Hill 7
 Opportunity cost is the benefit that you might have gained
from choosing the next-best alternative. In other words, it is
the alternative forgone.

Ex/ The opportunity cost of college includes: Items you could

have purchased with the money spent for tuition and books.
Loss of the income from a full-time job.

Note: For a decision to make sense (to be considered

rational), opportunity cost should always be less than the
benefit of what you have chosen.

© McGraw Hill
 Opportunity cost focuses on two aspects of the costs of a
choice that may be forgotten:

¢ Implicit costs are costs associated with a decision that

often are not included in normal accounting costs.

¢ (Illusionary) sunk costs are costs that show up in

financial accounts that are already spent.

Implicit costs should be included in opportunity costs but

sunk costs should not be included. Note that costs relevant
to decisions are often different from the measured
(accounting) costs.

© McGraw Hill
 Summary:
Economic Knowledge in One Sentence

This one sentence embodies the concept of opportunity cost:

There ain’t no such thing as a free lunch.

Abbreviated as TANSTAAEL.

© McGraw Hill
 What happens when there is scarcity?

scarcity means that there is a rationing problem: If

something is scarce, how we (the society) determine who
gets that scarce thing. Two types of forces operate in
response to a rationing problem:

Elaborate: Imagine | have only 1 ticket to the concert ofa

popular band. And there are 50 people in Econ 122 class
who like the band. How will | ration the ticket? How will |
decide who gets the ticket? (think about alternative rationing
mechanisms!)

© McGraw Hill 11
 Solutions to the rationing problem

1) Market forces

2) Social and Political Forces

A market force is an economic force that is given relatively

free rein by society to work through the market (demand and
supply--voluntary interactions that lead to price movements).

© McGraw Hill
 Social and Political Forces

Political forces usually refer to the actions of government

influencing the allocation of goods and services. Social
forces usually refers to culture (social norms and habits) that
influence the allocation of goods and services.

In most societies, there these forces (market forces and

social and political forces) interact. Sometimes, social and
political forces influence market forces. Sometimes, social
and political forces often work together against the invisible
hand.

© McGraw Hill 13
 The Invisible Hand Theorem

According to the invisible hand theorem, a market economy,

through the price mechanism, will allocate resources
efficiently.

¢ Price has a tendency to fa// when quantity supplied is

greater than quantity demanded.

¢ Price has a tendency to nse when the quantity demanded

is greater than the quantity supplied.

© McGraw Hill
 To distinguish between objective and subjective analysis,
economics is divided into two categories:

1. Positive economics is the study of what is and how the

economy works.

2. Normative economics is the study of what the goals of

the economy should be.

© McGraw Hill
 Examples of Categories of Economics

Examples of the two categories of economics:

1. Positive economics asks questions such as: How does

the foreign exchange market work?

2. Normative economics asks questions such as: What

should tax policy be designated to achieve?

© McGraw Hill
 Because learning changes everything.°

CHAPTER 24

Economic Growth, Business

Cycles, and Unemployment

Eleventh Edition
 Chapter Goals

Discuss the history of macroeconomics, distinguishing

Classical and Keynesian macroeconomists.

Define growth and discuss its recent history.

Distinguish a business cycle from structural stagnation.

Relate unemployment to business cycles and state how the

unemployment rate is measured.

© McGraw Hill
 What Is Macroeconomics?

Macroeconomics is the study of problems that affect the

economy as a whole (lack of economic growth, recessions,
unemployment, and inflation) and what to do about them.

Throughout the world, there are spirited debates about

appropriate the macroeconomic policy.

To understand the nature of current policy debate, it’s helpful

to review the historical development of macroeconomics

© McGraw Hill
 The Historical Development of Macro: Main stream:
Classical versus Keynesian

In 1930’s focus of macroeconomics moved to include short

run as well as long run issues.

There were two main strands of mainstream economics:

¢ Many variants such as New Keynesian, New Classical etc

1. Earlier economists who focused on long-run issues were

called Classical economists.

2. Economists who focused on the short run were called

Keynesian economists.

© McGraw Hill 4
 Main Tenants

In general, importance of structural forces

Highlighting disequilibrium rather than equilibrium
Importance of proceses rather than steady state
More emphasis on the role of uncertainity (fundamental uncertainity)
¢« Post Keynesian Economics
Bounded or reasonable rationality (rather than super rationality)
Paying attention to the realism of assumptions
Endogenous preferences
¢ Behavioral Economics/Evolutionary Economics
History and path dependence
Engaging with other social/natural sciences
¢ History, Physiology, Sociology, Biology
In general, doubt about the eficiency of markets
Importance of power structure/class structure
e Marxian Economics
© McGraw Hill
 Heterodox Economics

Very broad

* Post-Keynesian Economics

¢ Evolutionary Econonics

¢ Institutionalist Economics

¢ Austrian Economics

¢ Feminist Economics

¢ Marxian Economomics

¢ Behavioral Economics (Some variants)

© McGraw Hill
 The Historical Development of Macro

Classical economists believe that business cycles are

temporary glitches, and generally favor laissez-faire, or
nonactivist policies.

Keynesian economists believe that business cycles reflect

underlying problems that can be addressed with activist
government policies.

By the 1980s, Classical and Keynesian economics merged

into a new conventional macroeconomics.

Following the crash of 2008, the U.S. economy experienced

structural stagnation — a period of protracted slow growth.

© McGraw Hill
 Two Frameworks: The Long Run and the Short Run:

The long-run growth framework focuses on incentives for

supply.

¢ Sometimes called supply-side economics.

¢ Issues of growth are considered in a long-run framework.

The short-run business cycle focuses on demand.

¢ Sometimes called demand-side economics.

¢ Business cycles are generally considered in a short-run

framework.

Inflation and unemployment fall within both frameworks.

© McGraw Hill
 Two Frameworks: The Long Run and the Short Run:

The stark division between the short-run and the long-run

frameworks is problematic.

The economy is simultaneously in the long run and short run.

Both frameworks have to be blended into a composite

framework in which both supply and demand influence long-
run and short-run forces.

The long run is just a combination of short runs that cannot

be separated.

© McGraw Hill
 Measuring the size of an economy: Aggregate
Output

Overall size of an economy

Economists guessed (at best used proxies)
National income and product accounts: At the end of WWII
National income and product accounts were developed at the end of
World War Il as measures of aggregate output.

Aggregate output= Gross Domestic Product

¢ Money value of all final goods and services produced in an
economy, sold in the market, in a certain time period (in a one year
period)
¢ Final goods: is one that will not be used to produce another good
that will be sold in the market

© McGraw Hill 10
 Aggregate Output: Nominal versus Real GDP

GDP
¢ Flow variable: in a specific period-output per year (GDP, savings, national account
variables)

* Stock variable: accumulated (wealth)

Nominal GDP is the sum of the quantities of final goods produced times
their current price.
* Representation in the book: $Yt (Price*Quantity)

¢ Nominal GDP increases for two reasons:

The production of most goods increases

The price of most goods increases

Real GDP is the sum of quantities of final goods times constant (not
current) prices.
* — Eliminating price impact

¢ Representation in the book: Yt

© McGraw Hill 11
 Main World Economies, Real GDP (in 2010
constant trillion $), 1971-2019

20 eC CHN ---USA -e-IND --JPN --DEU

18
16
14

11.53743 34
10
8
6 E 0698351

4 Q B456
2
5 -
HLS. SS Pr? SP of PAKS Sh © AS“S 1s.2S ‘se stg aseas se

© McGraw Hill
 13

6102
8102
ZL0¢
9102
GLO?
vlLOc
€L0%
LOS
Nominal versus Real GDP (TrillionTL Turkey

LO?
O10¢
6002
8002
L002
9002
GO00c

GDP
vo0d
£00¢

-eReal
COO?
LOO?
0002
6661
8661
2661
9661
S661
v661
661
C661
L661
O661
6861

Hill
© McGraw
1.8

1.6

1.4

1.2

0.8

0.6

0.4

0.2
13
 14

8102
9102
vLOc
CLO?
O02
8002
9002
vo0d
OOS
0002
8661
Current US Dollar

966|
ve6l
c661
0661
8861
9861
v86l
C861
Turkish GDP,

0861
8Z61L
9L61
vL6L
cLBL
OL6L
8961
996|
vI6L
C961
0961
1.2E+12

1E+12

8E+11

6E+11

4E+11

2E+11

Hill
© McGraw
14
 Growth:

Economists measure growth with changes in total output

over a long period of time.

GDP growtat time t = ((Y¥%;—Y;_1)/Y¥:_-1) ) * 100

Potential output is the highest amount of output an

economy can sustainably produce and sell using existing
production processes and resources.

© McGraw Hill 15
 Turkish GDP growth % (1961-2019)
14

12

10

© McGraw Hill 16
 GDP growtattimet= ((¥;—Y:_1)/Y:-1) ) * 100

(Real) GDP Growth Performance of Main

World Economies, 1971-2019

-10
-CHN -USA --IND --JPN -—DEU
Source: World Development Indica

© McGraw Hill 17
 GDP Growth ( %, 2002-2019)
6.00

5.00

4.00

3.00

2.00

1.00

0.00

High Income Low Income Upper Middle Middle Income Lower Middle
Income Income

© McGraw Hill
 Crisis and recession: 2009

Recession: Two consecutive quarters of negative GDP growth

Crisis: Deep recession

© McGraw Hill
 GDP Growth Performance of Main World Economiesse-Japan
1961-2017
15
=—eEuro

=—e United
—
oO

States
%

-10 Source: World Development Indica

© McGraw Hill 20
 Percent Change

| E
O.

{
1980 1985 1990 1995 2000 2005 2010 2015 2020

© McGraw Hill
 GDP based on purchasing power

Calculating GDP by considering the cost of living in different countries

¢ Same goods and services would be more expensive in advanced

countries

¢ Developing countries would have higher GDP (GDP based on

purchasing power-PPP)

* Asame cup of Starbucks coffee:1.41$ in Istanbul and 3.62$ in NY

¢ Purchasing power would not be very good indicator as well

© McGraw Hill 22
 Main World Economies, Real GDP (PPP, in 2011
$US), 1960-2017
25

21.22392194
20
17.66226774

15
A
on
Cc
2 .
|
= aeeChina
10 .
—e India

=e United
5 States
—eJapan

Source: World Development Indicators e-Euro area

0
SCH AMYTNORNDHDOKMANTNONDBDOMKNMNTNON
MPRMMDOMBMDAMDBDOMAODODROODDOCOCCOOCOTr
rr rrr
MPOMDADBDAADADMROODODOOSOSOCDDCDODOD00SO
TTT TTT TTT TNNNNN NNN NNN NNN N NNN

© McGraw Hill 23
 Real GDP (PPP, in 2011 trillion $), 1990-2019
25
=—e—CHN -—USA -eIND -eJPN -eDEU 30 50650093
20 204249 525

15

10

° = a ai
9oo —2=
eee

~ Source: World Development Indicators

0

© McGraw Hill 24
 Is the real GDP a good measure of the welfare of the
societies?

© McGraw Hill 25
 What about other possible problems related to the real GDP?

Remember: It does not tell much about the distribution of income

Besides:

¢ Does only measure the value of marketable goods and services

¢ Ignores household labour

¢ Does not measure the size of unofficial activities

¢ Unrecorded labour activities

¢ Black market activities

¢ Does not consider the negative externalities of the production process

¢ Environmental deterioration

© McGraw Hill 26
 Per capita output

is output divided by the total population.

Even if total output is increasing, the population may be

growing even faster, so per capita output would be falling.

When the population is growing, per capita growth is lower

than overall growth.

Example: If the population is growing at 1% and the economy

is growing at 3%, per capita growth is 2%.

© McGraw Hill 27
 Per capita (GDP/population)

Average income per person

What does it explain What is the weakness with it?

Per capita Income, 2017

China India United States Japan Euro area
1990 1526 1755 37062 30582 28116
2000 3701 2495 45986 33872 34082
2010 9526 4405 49374 35750 36787
2017 15309 6427 54225 39002 39175

Source: World Development Indicators

© McGraw Hill 28
 29

6L0Z
8L0Z
LL0Z
9L0Z
§l0z
BLOz
EL07
5107
@LOZ
6002
B00Z
#002
GDP Percapita,$

8002
8002
v00Z
-e IND -eJPN -e=DEU

€00Z
ZOOZ
L00z
0002
6661
8661
1661
-eCHN -e- USA

9661
G66l
y661
£661
Z661
L66L
0661

10000
70000

50000

30000
60000

40000

20000

Hill
© McGraw
 Business Cycles and Structural Stagnation

A business cycle is the upward or downward movement of

economic activity that occurs around the growth trend.

Classical economists argue that the government should

just accept that business cycles occur and take a laissez-
faire stance.

Keynesians economists argue that government can temper

these fluctuations with policy actions.

© McGraw Hill 30
 Turkish GDP growth

GDP Growth (annual %)

14

12
—
oO

== GDP Growth (annual %)

© McGraw Hill 31
 U.S. Business Cycles

Percentage fluctuations Business cycles have always been

inrealGDP around trends aq part of the U.S. economic scene.

20 World War Il
Recovery World War |
of 1895 Korean
10 Civil War War Vietnam
War Financial Crisis
f of 2007
O- ~--f4--Ay-H- ar e ~ 1 --f-td--b-g == -7-“\-/*- eo Ryeeccerse-

g Panic
10 Panic of 1907
of 1893
Great
-20 Depression
__ 1860 1880 1900 1920 1940 1960 1980 2000 2020

Access the text alternative for slide images.

© McGraw Hill 32
 FRED of — Unemployment Rate
15.0

12.5

10.0
=
g
g
January 2021,
“ 6.3 %
5.0

2.5

Cae
© McGraw Hill 33
 Describing the Business Cycle

Four phases of the business cycle: peak, downturn, trough,

and upturn.
1. The top of a business cycle is called the peak.
2. Eventually the economy enters a downturn and may
enter a recession.
¢ Arecession is a decline in real output that persists for
more than two consecutive quarters of a year.
3. The bottom of a recession or depression is called the
trough.
4. As total output begins to expand, the economy comes out
of the trough; economists say it’s in an upturn.

© McGraw Hill 34
 Business Cycle Phases

Total
Output

Secular
Growth
Trend

Expansion Recession Expansion

Quarters
123
4 41 2 3 4 141 2 3

Access the text alternative for slide images.

© McGraw Hill 35
 Structural Stagnation

Structural stagnation is a downturn that leads to slow

economic growth that prevents the economy from returning
to its past trend for a long time unless the structure of the
economy changes significantly.

¢ Unemployment is not due to temporary layoffs, as it is ina

business cycle; but to longer-term changes.

¢ Adepression is a deep and prolonged recession.

The distinction between a business cycle and structural

stagnation goes to the heart of the modern macro policy
debates.

© McGraw Hill 36
 Unemployment and Jobs

The unemployment rate is the percentage of people in the

economy who are willing and able to work but who cannot
find jobs.

Cyclical unemployment results from fluctuations in

economic activity.

Structural unemployment is that caused by the institutional

structure of an economy or by economic restructuring making
some skills obsolete.

Frictional Unemployment: caused by normal turn over in

labour market because of searching for a job or transferring from one job
to another

© McGraw Hill 37
 What is underemployment?

© McGraw Hill 38
 Underemployment

is the situation in which people are employed less than full time.
According to the bureau of labor statistics, there are two types of
underemployment. The ones in the first group work part-time for
economic reasons. These people are unable to find full-time jobs or their
hours have been reduced due to changes in economic conditions. Some
other people would choose to work part-time for non-economic reasons

© McGraw Hill 39
 Population

-Behind bars
Civilian Non-
-Above 65 and below
institutional
16
population
-Armed forces

(Civilian) Labour Out of the

force labour force

Discouraged Retired below Full time Housewives/ho

Employed Unemployed workers 65 students use husbands

Underemployed
Full employed .
Part-time

Part time for Part time for

economic non-economic
reasons reasons

© McGraw Hill 40
41
The civilian _non-institutional population
includes people between 16 and 65 years old,
excluding those people under the arm and in
prisons. Sometimes working population is used
to refer to the civilian non-institutional
population. “In other words, it is the
percentage of the population that is either
working or actively seeking work.”
Population —
Numer of people under 16 over 65 —
Armed forces —
Number of poople behind the bar
Labour force: the sum of employed and
unemployed people will give us the number of
people in the labor force. Those people who are
not working and looking for a job are not
included in the labor force.
Labour force: Employed +
Unemployed

© McGraw Hill My
42

Out of the labor force: those people who are

not working and not looking for a job are
outside the labor force. This group of people is
within the civilian non-institutional labor force.
According to the bureau fo labor statistics:
Discouraged workers: those people within the
civilian non-institutional population who are
willing to work but not actively looking for a
job. Most of these people have been
unemployed for a long time and lost their hopes
for finding a job (discouraged),
They are not considered among unemployed
people and within the labor force.

© McGraw Hill 42
43

Unemployment rate: is the ratio of the number of people who are unemployed to
the number of people in the labor force.
Unemployed people
Unemployment rate = U = Labour force

Participation rate: is the ratio of the labor force to the number of people in the
non-institutional civilian population (working population)
Labor force
PR= ————, —
Non — institutinal civilan population

High discouraged workers------------ Lower participation rate and low unemployment

hs
© McGraw Hill 43
 Unemployment Rate since 1900

In the mid-1940s, the U.S. government

started focusing on the unemployment rate
as a goal, and initially chose 2%, but it was
Percentage of labor force
gradually increased to around 3 to 5%. In
unemployed
2018 the rate was about 4%.
30

20

. |
Target rate

WN Ln_ a
WV Vv Ww™ \

0
1900 1920 1940 1960 1980 2000 2020

Access the text alternative for slide images.

© McGraw Hill 44
 16 Turkish Unemployment Rate, %

14

aot

10

0
A <Q \
So
% © yy DO A OD A & © dA CO
PPS
BD D>
”
er OD
QO
SPP QD
PS
QD QD DC’ QL”
SF og of
QD VL’ CO

=—=@— Series2

© McGraw Hill
46 Temel iggiicitt gdéstergeleri
Main labour force indicators

[15+ yas
- age] Thousand person)

isgiiciine
15 ve daha katilma
yukarl isgiiciine orani
yastaki dahil Labour _istihdam issizlik
nifus olmayan force orani oranl
Population isgiici istindam issiz niifus participatio Employmen Unemploym
15 years Labour edilenler Unemploye Not in n rate t rate ent rate
Yillar - Years and over force Employed d labour force (%) (%) (%)
Ocak -
2020 January 62,015 31,373 26,953 4,420 30,642 50.6 43.5 14.1
Subat-
February 62,119 31,320 27,081 4,239 30,798 50.4 43.6 13.5

Mart - March 62,216 29,967 26,062 3,905 32,249 48.2 41.9 13.0

Nisan - April 62,320 28,794 25,096 3,698 33,526 46.2 40.3 12.8

Mayis - May 62,421 29,287 25,595 3,692 33,134 46.9 41.0 12.6
Haziran -
June 62,525 30,896 26,869 4,028 31,629 49.4 43.0 13.0
Temmuz -
July 62,626 31,528 26,940 4,588 31,098 50.3 43.0 14.6
Agustos -
August 62,730 31,600 27,506 4,094 31,130 50.4 43.8 13.0
Eylul -
September 62,834 31,546 27,645 3,901 31,289 50.2 44.0 12.4
Ekim -
October 62,935 31,422 27,415 4,007 31,513 49.9 43.6 12.8
Kasim -
November 63,039 30,688 26,728 3,960 32,351 48.7 42.4 12.9
Aralik -
December 63,140 30,271 26,327 3,944 32,869 47.9 41.7 13.0
Ocak -
2021 January 63,236 31,309 27,115 4,194 31,927 49.5 42.9 13.4

Source: TURKSTAT, Labour Force Statistics

© McGraw Hill 46
 Temel igsgiicti gostergeleri
Main labour force indicators
(Bin kisi -
[15+ yas - age] Thousand
person)

15 ve daha isgiiciine isgiiciine

yukarl dahil katilma orant istindam
yastaki niifus olmayan Labour force orant issizlik orani
Population isgiicti istindam issiz nifus participation Employment Unemployme
15 years and Labour edilenler Unemploy Not in labour rate rate nt rate
Yillar - Years over force Employed ed force (%) (%) (%)
Kadin - Female

2020 Ocak - January 31,374 10,075 8,421 1,654 21,299 32.1 26.8 16.4

Subat- February 31,420 10,120 8,590 1,530 21,300 32.2 27.3 15.1
Mart - March 31,463 9,286 7,943 1,343 22,177 29.5 25.2 14.5
Nisan - April 31,509 9,076 7,940 1,136 22,433 28.8 25.2 12.5
Mayis - May 31,554 9,321 8,151 1,171 22,232 29.5 25.8 12.6

Haziran - June 31,600 9,801 8,377 1,424 21,799 31.0 26.5 14.5

Temmuz - July 31,644 10,041 8,410 1,632 21,603 31.7 26.6 16.2

Agustos - August 31,690 10,153 8,558 1,595 21,537 32.0 27.0 15.7
Eylul -
September 31,736 10,079 8,511 1,568 21,657 31.8 26.8 15.6

Ekim - October 31,781 9,880 8,367 1,513 21,900 31.1 26.3 15.3
Kasim -
November 31,827 9,554 8,155 1,399 22,273 30.0 25.6 14.6
Aralik -
December 31,871 9,438 8,100 1,339 22,433 29.6 25.4 14.2

2021 Ocak
- January 31,917 9,758 8,319 1,438 22,160 30.6 26.1 14.7
Nee
© McGraw Hill Source: TURKSTAT, Labour Force Statistics 47
48 Temel iggiicitt géstergeleri
Main labour force indicators

[15+ yas
- age] Thousand person)

isgiiciine
15 ve daha katilma
yukari isgiiciine orani
yastaki dahil Labour _istihdam issizlik
nifus olmayan force oranl orani
Population isgiici istindam issiz nifus participatio Employmen Unemploym
15 years Labour ~— edilenler Unemploye Not in n rate t rate ent rate
Yillar - Years and over force Employed dlabour force (%) (%) (%)
Erkek - Male
Ocak -
2020 January 30,641 21,298 18,533 2,765 9,343 69.5 60.5 13.0
Subat-
February 30,699 21,200 18,491 2,709 9,499 69.1 60.2 12.8
Mart - March 30,753 20,681 18,120 2,562 10,072 67.2 58.9 12.4
Nisan - April 30,811 19,718 17,156 2,562 11,093 64.0 55.7 13.0
Mayis - May 30,867 19,966 17,444 2,521 10,902 64.7 56.5 12.6
Haziran -
June 30,926 21,095 18,491 2,604 9,830 68.2 59.8 12.3
Temmuz -
July 30,982 21,487 18,531 2,956 9,495 69.4 59.8 13.8
Agustos -
August 31,040 21,447 18,948 2,498 9,593 69.1 61.0 11.6
Eylul -
September 31,098 21,467 19,133 2,333 9,631 69.0 61.5 10.9
Ekim -
October 31,154 21,542 19,048 2,495 9,612 69.1 61.1 11.6
Kasim -
November 31,212 21,134 18,573 2,561 10,078 67.7 59.5 12.1
Aralik -
December 31,269 20,832 18,227 2,605 10,436 66.6 58.3 12.5
Ocak -
2021 January 31,318 21,551 18,796 2,755 9,767 68.8 60.0 12.8
gure TURKSTAT, Labour Force Statistics
© McGraw Hill Note 1) Total figures may not be exact due to the rounding of the numbers.
48
 30

Comparison: Unemployment ( %, 2002-2019)

* WP oe a *, » Ne we a ¢ se Sv e 3 £ 3 S Se oe

= & = & x og & o SF sf & we ws “s “ o& OS

s & ry x Se & ~ ee
Ss

© McGraw Hill
50

55 Labour Force Participation Rate, %

60

55

50

45

rT TTT TTT TH THNNNNN NNN NNN NNN NON ON ON ON ON

hs
© McGraw Hill 50
 The Unemployment Rate

Why Do Economists Care about Unemployment?

© McGraw Hill 51
 The Unemployment Rate

Why Do Economists Care about Unemployment?

1. Direct effect on the welfare of the unemployed
Income losses and psychological problems

2. Asignal that the economy is not using its human resources efficiently.

3. Social problems: high crime rates etc

Very low unemployment can also be a problem as the economy runs into
labor shortages.

hs
© McGraw Hill 52
 Unemployment as Government’s Problem

As capitalism evolved, the fear of hunger was no longer an

acceptable answer to unemployment.

In the Employment Act of 1946, the U.S. government took

responsibility for unemployment.

Full employment is an economic climate where nearly

everyone who wants a job has one.

Frictional unemployment is unemployment caused by

people entering the job market and people quitting a job just
long enough to look for and find another job.

© McGraw Hill 53
 Target Rate of Unemployment

The target rate of unemployment is the lowest sustainable

rate of unemployment that policy makers believe is
achievable given existing conditions.

The appropriate target rate of unemployment has been a

matter of debate.

© McGraw Hill 54
 What is inflation:

© McGraw Hill 55
 The Inflation Rate

Inflation is a sustained rise in the general level of prices—the price level.

The inflation rate is the rate at which the price level increases.

Deflation is a sustained decline in the general level of prices (negative

inflation rate).

How can we measure it?

hs
© McGraw Hill 56
 The Inflation Rate:

Different ways to measure:

GDP Deflator

Consumer Price Index (CPI)

The GDP deflator in year f (P,) : Benefiting from the difference between nominal and real GDP

ary ,
GDPDeflator = p, = Nominal GDP, _ $Y;
Real GDP, Y,
It is called an index number (1 in 2009), which has no economic interpretation.
The rate of change has a clear interpretation: the rate of inflation.

7, =( (GDPDeflator, — GDPDeflator, ,)/GDPDeflator,, )*100

© McGraw Hill 57
 The Inflation Rate

The Consumer Price Index (CPI) is a measure of the cost of living of an

average household

* Tracks the prices of a certain basket of goods and services relevant for an average urban
household

* Basket is updated from time to time

¢ Bureau of Labor Statistics (BLS)

© McGraw Hill 58
 Is GDP deflator similar to CPI?

© McGraw Hill 59
 Is GDP deflator similar to CPI

Largely similar

The set of goods produced in the economy is not the same as the set of goods
purchased by consumers because:
* Some of the goods in GDP are sold not to consumers

but to the firms, to the government, or to foreigners.

* Some of the goods bought by consumers are not produced domestically

but are imported from abroad.

Besides, “Again, neither is clearly superior. CPI fixes its basket and so
overstates inflation since most people can change their consumption
choices. GDP deflator changes the basket each year and so understates
inflation since changing baskets imply loss of utility for people”

© McGraw Hill 60
 35
Inflation in Main Economies, % (1960-2017)

30
=eChina
=e|India
=e United States
—eJapan
=—eEuro area

Source: World Development Indicators

© McGraw Hill 61
 FRED af — Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average

15.0

12.5
Percent Change from Year Ago

10.0

fa

5.0

2.5

0.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

96 laa ntti 20 2010 ii

hs
© McGraw Hill 62
 Deflation: Japanese case % (1960-2017)

20
= on

13 5 7 9 11131517
19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49%51 53 55 57
Source: World Development Indicate

hs
© McGraw Hill 63
 64

0z-09q
oz-Aew
6L-0
6L-EW
gL-Bny
gL-uer
Z\-unr
QL-AON
Inflation (Annual rate of change %)

Q|-idy
GL-des
GL-qe4
vL-ine
€1L-098q
€L-Aew
ZL-O
ZL eW
| L-Bnvy
| p-uer
OL-unr
60-AON
60-Jdy
go-des
g0-qe4
Zo-In¢
90-08q
go-Aew
go-90
GO-JEWN
vo-iny
vo-uer

Hill
© McGraw
5.00

0.00
15.00

10.00
30.00

25.00

20.00
65
20
Comparison: Inflation ( %, 2002-2019)
18

16

14

12

10

0
:
Bs © So © oo x
& oe

© McGraw Hill 65
 Why do economists care about inflation?

© McGraw Hill 66
 The Inflation Rate

Pure inflation is proportional increase in all prices and wages.

¢ May not be a big problem: relative prices are unaffected.

« Real wage (wage measured by goods rather than dollars) would be

unaffected.

¢ However, no such thing as pure inflation.

hs
© McGraw Hill 67
 The Inflation Rate

Why Do Economists Care about Inflation?

¢ Inflation affects income distribution when not all prices and wages rise proportionally.
Borrowers gain lenders lose

Fixed income earners lose... Wages indexed to inflation: not affected

¢ Higher uncertainty

¢ Different income groups would have different inflation

Most economists :

* the “best” rate of inflation to be a low and stable rate of inflation between 1 and 4%.

hs
© McGraw Hill 68
69
What is the relationship between output and unemployment
rate?

© McGraw Hill 69
 Output, Unemployment, and the Inflation Rate: Okun’s Law
and the Phillips Curve

Determine each other

Okun’s Law: relationship between unemployment and output
Arthur Okun, 1960s

Empirical relationship Higher Y “===> LowerU

LLL
© McGraw Hill 70
 Okun’s Law

Figure 2-5 Changes in the Unemployment Rate versus Growth in the

United States, 1960-2014

Change in the unemployment rate

Output growth that is

(percentage points)
higher than usual is
associated with a
reduction in the
unemployment rate.

Output growth that is lower

than usual is associated
with an increase in the
unemployment rate.

—4 -2 0 2 4 6 8
Source: See Figures 2-2 and 2-3. Output growth (percent)

hs
© McGraw Hill 71
 Output, Unemployment, and the Inflation Rate: Okun’s Law and the Phillips
Curve

Okun’s law is a relation first examined by U.S. economist Arthur Okun.

In Figure 2-5, the line that best fits the points is downward sloping.

The slope of the line is —0.4, which implies that, on average, an increase
in the growth rate of 1% decreases the unemployment rate by —0.4%.

The line crosses the horizontal axis where output growth is 3%, meaning
that it takes a growth rate of 3% to keep unemployment constant.

hs
© McGraw Hill 72
73
Jobless Growt??

© McGraw Hill 73
74
Jobless Growt??

Output increases would not generate more employment

Why?

© McGraw Hill 74
75
Jobless Growt??

¢ Output increases would not generate more employment

¢ Why?

¢ Especially, after the crisis, the same amount of goods and services
are forced to be produced by less labour (given technology)

¢ Productivity increase due to technological advances or more capital

investment—less need more labour

© McGraw Hill 75
76
The Phillips Curve (The relationship between unemployment
and inflation?

© McGraw Hill 76
 Phillips Curve

Phillips Curve: relation between unemployment and inflation

A. W.H. Phillips, 1957-8
Empirical relationship Higher U Lower Inf

A low unemployment rate leads to an increase in the inflation rate.

A high unemployment rate leads to a decrease in the inflation rate.

LLL
© McGraw Hill 77
 Philips Curve

Many different version

¢ The inflation rate versus unemployment

¢ Change in the inflation rate versus unemployment

© McGraw Hill 78
 Phillips Curve

Figure 2-6 Changes in the Inflation Rate versus the Unemployment

Rate in the United States, 1960-2014

A low unemployment rate 6

leads to an increase in the © =
inflation rate. s 4 /—

A high unemployment rate

52
= = 2—
leads to a decrease in the 2°
inflation rate. oD o-
Yc
$$
£2
$5 2
cf a
2 B
Oo 4 — obo

Source: See Figures 2-3 and 2-4. -6 | I I I I I I I |

3 4 5 6 7 8 g 10 11
Unemployment (percent)

hs
© McGraw Hill 79
 Because learning changes everything.°

CHAPTER 25

Measuring and Describing the

Aggregate Economy

Eleventh Edition

© 2020 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Aggregate Accounting

Aggregate accounting (or national income accounting) is a

set of rules and definitions for measuring economic activity in
the economy as a whole.

Aggregate accounting is a way of measuring total, or

aggregate production, expenditures, and income.

Gross domestic product (GDP) is the total market value of

all final goods and services produced in an economy in a
one-year period.

© McGraw Hill
 Calculating GDP

Calculating GDP requires adding together millions of different

services and products.

All of the quantities of goods and services produced are

multiplied by their market price per unit to determine a value
measure of the good or service.

This is weighting the importance of each good by its price.

The sum of all of these values is GDP.

© McGraw Hill
 The Components of GDP:

GD P is divided into four expenditure categories:

1. Consumption (C) is soending by households on goods

an services.

. Investment (I) is soending for the purpose of additional

production.

. Government spending (G) is goods and services that

government buys. Transfer payments are not included
(Social Security, etc.)

Net exports is spending on exports (X) minus spending

on imports (M).

© McGraw Hill
 The Components of GDP:

Since all production is categorized into one of these four

divisions, by adding up these four categories, we get total
production of Turkish (US) goods and services
GDP = Consumption

+ Investment
+ Government spending
+ Net exports

GDP =C+1+G+(X-M)

© McGraw Hill
 Expenditure Breakdown of GDP

Country eee $) =C(%) + 1 (%) +G(%) +X(%) -1(%)

U.S. 19,485 69 17 17 12 15
China 25,240 39 44 15 20 18
Germany 4,370 53 20 17 47 40

Japan 5,620 56 24 20 16 15
Mexico 2,070 65 24 12 37 39
Nigeria 1,170 79 15 7 13 14
Poland 1,190 59 20 18 54 50

© McGraw Hill 6
 Expenditure Breakdown of GDP

Gross domestic product at current prices by expenditure approach (value, share,

percentage change), 1998-2019
Gross fixed Exports of (Less) Imports
Government capital Change inGoods and of Goods and
Consumption Expenditures formation stocks Services Services

Share Share Share Share Share Share Share

(%) (%) (%) (%) (%) (%) (%)
1999 100 66.04 12.67 19.88 1.46 18.81 18.85

2008 100 61.08 13.60 26.65 2.09 23.57 26.98

2009 100 61.57 15.66 22.23 0.59 23.37 23.42

2018 100 56.17 14.69 29.66 -0.38 31.20 31.34

2019 100 56.87 15.53 25.87 -1.07 32.74 29.94

© McGraw Hill 7
 GDP is a Flow Concept

GDP is a flow concept, the market value of total final output a

country produces per year.

Wealth accounts are a balance sheet of an economy’s

assets and liabilities and it is a stock concept.

© McGraw Hill
 GDP Measures Final Output

GDP does not measure total transactions in the economy.

It counts final output, but not intermediate goods.

¢ Final output is goods and services purchased for final

use.

¢ Intermediate products are used as an input in the

production of some other product.

Counting the sale of both final and intermediate goods would

result in double counting.

© McGraw Hill
 Two Ways of Eliminating Intermediate Goods

Calculate only final output.

¢ A firm would report how much it sold to consumers and

how much it sold to producers (intermediate goods).

Follow the value added approach.

¢ Value added is the increase in value that a firm

contributes to a product or service.

¢ Itis calculated by subtracting intermediate goods (the cost

of materials that a firm uses to produce a good or service)
from the value of its sales.

© McGraw Hill 10
 Value Added Approach Example: Ice Cream Production

Farmer 0 100 100

Cone factory and 400 250 450
ice cream maker
Middleperson (final 250 400 450
sales)

Vendor 400 500 100

Totals 750 1,250 500

© McGraw Hill
 What Is Counted in GDP?

¢ Secondhand sales ¢ Value added by a used car dealer

¢ Commissions paid to stock

¢ Sales of stocks or bonds
brokers

¢ Government transfer payments

¢ Work of house-spouses

© McGraw Hill
 Gross and Net Concepts

Net domestic product (NDP) is GDP adjusted for

depreciation.

Depreciation is the amount of capital used up in producing

that year’s GDP.

NDP measures output available for purchase.

NDP = C +1+ G+ (X-—M) - depreciation

Net Investment is gross investment minus depreciation.

© McGraw Hill 13
 National and Domestic Concepts

GDP is the total value of all final goods and services

produced in an economy in a one-year period.

¢ GDP is output produced within a country’s borders.

Gross National Product (GNP) is the aggregate final output

of citizens and businesses of an economy in one year.

¢ GNP is output produced by a country’s citizens.

¢ GNP = GDP + Net foreign factor income.

Net foreign factor income is the income from foreign

domestic factor sources minus foreign factor income earned
domestically.

© McGraw Hill 14
 Calculating Aggregate Income

Aggregate income is the total income earned by citizens and

businesses in a country in a year.

Aggregate income consists of:

¢ Employee compensation.

¢ Rent.

¢ Interest.

¢ Profits.

Aggregate income = Employee compensation + Rents +

Interest + Profits

© McGraw Hill
 Equality of Aggregate Income and Aggregate Production

Whenever a good or service is produced (output), somebody

receives an income for producing it.
Aggregate Income = Aggregate Production

Profit is what remains after all the firm’s other income

(employee compensation, rent and interest) is paid out.

This aggregate accounting identity allows us to calculate

GDP either by adding up all values of final outputs (C, I, G,
net exports) or by adding up the values of all earnings or
income.

As globalization has expanded, net exports have become

increasingly important.

© McGraw Hill 16
 National Income Equality

Output Income
Consumption Employee Compensation
Investment Rent
Government Spending Interest
Net Exports Profit

Remember: We can also calculate GDP from the

production side:
i) Value added approach
ii) Final goods approach

© McGraw Hill
 Inflation: Distinguishing Real from Nominal

Inflation is a continual rise in the overall price level.

Price Index is a measure of the composite price of a

specified group of goods.

Nominal GDP is the amount of goods and services produced

measured at current prices.

Real GDP is the total amount of goods and services

produced, adjusted for price-level changes.

© McGraw Hill 18
 Real versus Nominal GDP

GDP deflator is the price index that includes all goods and
services in the economy expressed relative to a base year of
100.

Example: GDP rises 10%, from $16 trillion to $17.6 trillion.

How much of that 10% is real?

If prices have risen 5%, that means the GDP deflator has
increased from 100 to 105 (100 + 5).

Real GDP = $17.6 + 105 x 100 = $16.76 trillion.

© McGraw Hill 19
 Other Real-World Price Indexes

Consumer Price Index (CPI) measures the prices of a fixed

basket of goods, weighted according to each component's
share of an average consumer's expenditures.

Producer Price Index (PPI) is an index of prices that

measures the average change in the selling prices received
by domestic producers of goods and services over time.

GDP Deflator

© McGraw Hill 20
 Other Real and Nominal Distinctions (self study)

Nominal interest rate is the rate you pay or receive to

borrow or lend money.
Real interest rate is the nominal interest rate adjusted for
inflation.

¢ Nominal Interest rate

Real wealth is the value of the productive capacity of the

assets of an economy measured by the goods and services it
can produce now and in the future.

Nominal wealth is the value of those assets measured at

their current market prices.

Asset price inflation is a rise in the price of assets

unrelated to increases in their productive capacity.
© McGraw Hill 21
 Some Limitations of Aggregate Accounting:

Per capita GDP can be misused in comparing various

countries’ living standards.

Because of differences in nonmarket activities and difference

in product prices, per capita GDP may be a misleading
measure of living standards.

As discussed before, purchasing power parity is a

method of comparing income that takes into account the
different relative prices among countries.

© McGraw Hill 22
 Some Limitations of Aggregate Accounting:

¢ GDP measures neither happiness nor economic welfare.

¢ Measurements inflation can involve significant

measurement errors.

¢ As discussed before, does no tell anything about

distribution

¢ Many activities such as unpaid housework are not

included

¢ Negative externalities such as pollution are not considered

© McGraw Hill 23
 Some Limitations of Aggregate Accounting ;

Measurement is necessary, and the GDP measurements and

categories have made it possible to think and talk about the
aggregate economy.

Search for better indicators:

¢ Human Development Indicators

Human Development : -—
Index (HDI) DIMENSIONS Long and healthy life Knowledge A decent standard of living

INDICATORS Life expectancy at birth Expected years Mean years GNI per capita (PPP $}
of schooling , of schooling

DIMENSION Life expectancy index Education index GNI index

INDEX

Human Development Index (HDI)

hs
© McGraw Hill 24
 Some Limitations of Aggregate Accounting ;
¢ The genuine progress indicator (GPI) makes a variety of
adjustments to GDP to better measure the progress of
society rather than just economic activity.

¢ The GPI includes social goals such as pollution reduction,

education, and health.

¢ The GPI is a version of the Index of Sustainable EconomicWelfare

(ISEW) first proposed in 1989 (Daly and Cobb, 1989).

¢ GPI starts with Personal Consumption Expenditures (a major

component of GDP)

* adjusts them using 24 different components,

* including income distribution, environmental costs, and negative

activities like crime and pollution, among others.

¢ adds positive components left out of GDP, including the benefits of

volunteering and household work (Talberth et al., 2007)
© McGraw Hill 25
 https://gnhusa.org/genuine-progress-indicator/

Genuine
Progress
verts
Indicator

' - <u
at .

ENvironMENTAY

© McGraw Hill 26
 Components of GPI
Personal Consumption Expenditures HB Built Capital
Income Distribution
Personal Consumption Adjusted Human Capital
= for Income Inequality
Services of Household Capital BB Social Capital
Additions Services Highways and Street 1) Natural Capital
Value of Household Labor
| Value of Volunteer Work

( Cost of Consumer Durables

Loss of Leisure Time
Cost of Commuting
Cost of Automobile Accidents
Cost of Crime
Cost of Family Breakdown
Subtractions

Cost of Underemployment
Cost of Household Pollution Abatement
pe SE

Cost of Water Pollution

Cost of Air Pollution
Cost of Noise Pollution
Loss of Wetlands
Lost of Farmland
Depletion of Nonrenewable Resources
Long-Term Environmental Damage
Cost of Ozone Depletion
\ Loss of Forest Cover
Net Capital Investment
ae.
Net Foreign Lending and Borrowing
© McGraw Hill 27
 Global GPI/capita & GDP/capita
12,000

10,000 re'GP/ capita

wmrrrGP/capita

8,000
2005 $USD

6,000

4,000

2,000

1945 1955 1965 1975 1985 1995 2005

http://www. bioline.org.br/pdf?nd13075

© McGraw Hill 28
 What is your take on?

© McGraw Hill 29
 What is your take on

For some:

“If we hope to achieve a sustainable and desirable future, we need to

rapidly shift our policy focus away from maximizing production and
consumption (GDP) and toward improving genuine human wellbeing (a
version of GPI or something similar). This is a shiftthat will require far
more attention to be paid to environmental protection, full employment,
social equity, better product quality and durability, and greater resource
use efficiency.”

© McGraw Hill 30
 What is your take on

¢ Too complex

¢ Asimplified version

¢ Apositive correlation between GDP per capita and welfare up until a

certain point

¢ However: “Studies suggest there exists a threshold for economic

development beyond which well-being in fact declines”.

¢ For developing countries????

© McGraw Hill 31
 Reading

https://gnhusa.org/gpi/the-case-against-gdp-made-by-its-own-creator/

© McGraw Hill 32
ECON 122-Balance of Payment
Statistics-Current Account
 Different ways of Calculating GDP

¢ Production side:

— Value added

— Final goods

¢ Income side:

— Wages+profittinterest+rent

¢ Expenditure side

— C+I1+G+(X-M)
 The Components of GDP
Expenditure side
GDP is divided into four expenditure categories:
Consumption (C): goods and services purchased by
consumers
— Durable
— Non-durable
— Services
Investment (/) or fixed investment:
— nonresidential investment (machinery, tools, factories)
— residential investment-new houses
 The Components of GDP
Expenditure side

¢ Government spending (G) is goods and services that government

buys.
— Transfer payments are not included (Social Security, etc.)

¢ Net exports is soending on exports (X) minus spending on

imports (M).
¢ Inventory Investment (negligible): the change in
the stocks of firms
— Production-Sales
— Planned
— Unplanned: the sign of either underproduction or
overproduction
— Some books: part of investment.
 The Components of GDP

Since all production is categorized into one of these four

divisions, by adding up these four categories, we get total
production of Turkish (US) goods and services
GDP = Consumption
+ Investment
+ Government spending
+ Net exports
¢ GDP=C+I+G+(X-M)
 What will we discuss?

¢ A short introduction of BOP (Balance of

Payment),
¢ And its sub components
— The Turkish Case
 Recent Growth of Trade and Capital
Movements

¢ The integration among countries in terms of trade and

financial transactions have increased significantly.
¢ The value of trade in goods and services has
increased from $582 billion in 1973 to USS18.8
trillion in 2019 trillion
¢ International financial flows increased dramticly as
well
 How do we measure the trade and financial
transactions among countries?

2???
 Balance-of-Payments

Balance of payments accounts are a way of keeping track

of all economic transactions between the home country
and the rest of the world over a specific time period
(usually one year).
A country’s balance of payments accounts for its
payments to and its receipts from foreigners.
An international transaction involves two parties, and
each transaction enters the accounts twice: once as a
credit (+) and once as a debit (—).
Very high quality and reliable data
 Balance of Payments Accounts
(cont.)
— current account: accounts for flows of goods and services
(imports and exports etc).
— financial account: accounts for flows of financial assets
(financial capital).
— capital account: flows of special categories of assets (capital):
typically nonmarket, non-produced, or intangible assets like
debt forgiveness, copyrights and trademarks.This is a relatively
negligible item
— Change in Official Reserve: An increase or decrease the amount
of official foreign exchange reserves held by central banks
— Net Errors and Omissions

— **In the past, financial account and capital account was called
capital account.
 Balance of payment
¢ Current Account+Capital
Account*+Financial Account+Net Error
and Omissions+Change in Official
Reserves =0
¢ *In the past, Financial Account and Capital Account
were under the heading of Capital Account.
¢ Recently, these two headings were seperated and
current capital account heading is negligible for most
of the countries.
 Export and Import of goods and services, net
income
CURRENT ACCOUNT
+

Debt reduction etc

+ CAPITAL ACOUNT

FDI, Portfolio, Others

+ FINANCIAL ACCOUNT

The current account balance may not

exactly equal the financial account

NET ERRORS AND im vote data llowal actities. and

OMMISSIONS eee ee e e ea
mismatches on the timing of data
collection.
+

change in foreign assets held by

central banks to
CHANGE IN RESERVES

+
 wee
Foreign NI \ S
debt
repayment

0) ae
ACCOUNT
bora
This part will be explained

CURRENT ACCOUNT (C+D)

1. Exports Exporting cars etc

2. Imports Importing computers etc

A Balance on Goods

3. Services: Credit
Payments OR receipts for legal services,
4. Services: Debit shipping services, tourist meals, etc
B
(A+3+4) Balance on Goods and Services

interest and dividends from investments

S. Income: Credit abroad, wages earned abroad

interest and dividends paid to investors

6. Income: Debit abroad, wages paid to foreigners

C
(B+5+6) [Balance on Goods, Services and Income
Government aids (transfers) workers
D Current Transfers remitances
¢ The secondary income (Current
Transfers) »account represents the provision
(or receipt) of an economic value by one party
without directly receiving (or providing) a
counterpart item of economic value. In plain
terms this is a transaction representing
“something for nothing”
https://www.ons.gov. uk/economy/nationalaccounts/balanceofpayments/compendium/unitedkingdombalanceofpaymentsthepinkbook/2015-10-
30/chapter5secondaryincome#:~:text=The%20secondary%20income%20account%20represents,representing%20%E2%80%9Csom ething%20for%20
nothing%E2%80%9D.
Any idea about the size of the Turkish
imports and exports
 Balance of Payments (BPM6) - Monthly Analytic
Presentation (2020 - 2021 February)
2020 Jan.- 2021 January 2021) 2021 Jan.-
Feb. February) Feb.

A- CURRENT ACCOUNT -3,409 -1,815 -2,610 -4,425

1. Exports 29,544 14,810 15,934 30,744
2. Imports 34,804 16,740 17,999 34,739
Balance on Goods -5,260 -1,930 -2,065 -3,995

3. Services: Credit 7,713 2,428 2,367 4,795

4. Services: Debit 4,662 1,916 1,873 3,789
Balance on Goods and Services -2,209 -1,418 -1,571 -2,989

5. Primary Income: Credit 1,142 749 445 1,194

6. Primary Income: Debit 2,306 1,221 1,616 2,837

Balance on sooo rimary income -3,373 -1,890 -2,742 -4,632

7 oem Income (current- 36 75 132 07
 Turkish Current Account Balance (Million S$)

-30,000

-40,000

-50,000

-60,000

-70,000

-80,000
 easly
elasiN
eisAejel
ejanzaudA,
be]
(% GDP, 2002-2014)

eissny
euUly)
euljuasuy
saulddl|itd
Paloy
aselaay
2.38

pueleyl
(|9x8) a8esdAy
Account

0.93

elsouopu|
4dA33
allyd
e1sy ezey| 'Z
Vv
IZe1q 3
DKA 5
Current

N
bu =
Cc
Id ad
|OD
o|O
S
se
oS —
oO
x<
Vv
N a eal
° w
T T
w q
ao co

14 +

+
N s+ wo
5

10
12
>
<x
 Current Account (% GDP)

CA 2002-07 2008-09 2010-13 2002-13

1 Algeria 22.58 Malaysia 16.29 Iraq 9.63 Algeria 12.3
2 Nigeria 16.84 Nigeria 11.28 Malaysia 8.09 Nigeria 12.27
3| Malaysia 12.79 lraq 10.3 Algeria 5.71 Malaysia 11.81
4| Venezuela 12.45 Algeria 10.09 Venezuela 4.28 Venezuela 8.94
5 Russia 8.77 China 7.09 Nigeria 3.79 Iraq 7.82
6 China 5.54 Venezuela 5.44 Russia 3.65 Russia 6.45
7 Iraq 4.97 Russia 5.11 Korea 3.62 China 4.83
8] Argentina 4.38 Thailand 4.56 Philippines 3.18 Argentina 2.79
9 Egypt 2.67 Philippines 2.55 China 2.62 Philippines 2.72
10| Philippines 2.47 Argentina 2.37 Kazakhstan 2.39 Korea 2.46
11] Indonesia 2.26 Korea 2.02 Thailand 1.15 Thailand 2.13
12| Thailand 1.97 Indonesia 1 Argentina -0.13 Indonesia 0.86
13 Korea 1.84 Kazakhstan 0.46 Pakistan -1.21 Egypt 0.56
14 Chile 1.73 Chile 0.1 Mexico -1.21 Chile 0.35
15 Brazil 0.66 Egypt -1,32 Indonesia -1.3 Brazil -0.8
16 India 0.02 Mexico -1.38 Chile -1.6 Kazakhstan -0.8
17|__ Pakistan -0.98 Brazil -1.6 Egypt -2.4 Mexico -1.23
18 Mexico -1,19 India -2.18 Brazil -2.58 India -1.51
19| Colombia -1,52 Colombia -2,32 Colombia -3.05 Pakistan -2
20| Kazakhstan -2.82 Turkey -3.75 India -3.46 Colombia -2.16
21| South Africa -3.18 Poland -5.29 Poland -3.8 | South Africa -3.81
22| Turkey -3./8 | South Africa | -5.66 | South Africa | -3.83 Poland -4.07
23| Poland -3.84 Pakistan | -6.62 | Turkey |-7.49| Turkey | -5.02
Average 3.68 Average 2.11 Average 0.70 Average 2.386522
Average (excl) 1.05 Average (excl)| 0.03 |Average(excl)} 0.70 |Average (excl)} 0.93
 i

e eo? & a OSTeg SE A SeST BV’ RS SILA

So <A SL
PB? > ©se&
%
 will s

Ecuacorm™
Indonesia
Argentina
Bangladesh
Philippines
Korea, Rep.
China
Thailand
Russian Federation
Malaysia

8 6 4 2 0 2 4 6 8 10
 68,423
206,272

(+) 0ZOZ
6102
8102
Trends in Turkish Exports and Imports

L102
9102
STOz
vLo7
€10@
7102
TLOz
oroz
Turkish Exports and Imports (Goods-Million $)

6002
8002
£002
9002
§00z
p00z
£002
7002
To0z

Imports
0002
6661
866T
L661
966T

Exports
G66T
p66
€66T
766T
T66T
O66T
6861
8861
L861
986T
G86T
pR6T
€86T
786T
TS6T
O86T
6L6L
BL61
LLEL
OLE
GL6T

150,000

100,000
350,000

300,000

250,000

200,000
450,000

400,000

50,000
 Balance on Goods (Million $)

1975197719 0032005 2007200920112013201520172019

-10,000

-20,000
-30,000
-40,000 -37/849

-50,000
-60,000
-70,000

-80,000

-90,000

-100,000
 Turkish Services Exports and Imports (Million S)

What is the reason behind the drastic decline in service exports in 2016 and 2020?
60,000

50,000

40,000

30,000

20,000

10,000

0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

— Services-Exports — Services-Imports
 Balance on Services (Million $)
40,000

35,000 ,528

30,000

25,000

20,000 2016, 20,523

15,000

10,000 9,505

5,000

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

-5,000
 Travel Income and Expenses (Million S)
35,000

30,000 AK 2014, 29,552 2019, 29,829

2013, 27,997
DZ 2015, 26,616
25,000 2011, 25,08 2012, 25,345 2018, 25,220

J 2008, 23,3 2009, 22,35 j 5910, 22,585

JL. 2017, 22,478

20,000 2007, 19,430

2016, 18,743
4 2006, 17,457

15,000

10,000 2020 (*), 10,221

oN
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (*)

—_— Travel-lncome =— Travel-Expenses

 Balance on Travel (Million $)
30,000

2019, 25,719
25,000

20,000

15,000

10,000
2020 (*), 9,180

5,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(*)
 Transport Income and Expenses (Million S$)
30,000

25,000
24,195

20,000

15,000
,268

10,000 08
998

5,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
(*)
_ Transport-Income Transport-Epenses
 Balance on Transport (Million S$)
18,000

16,000

2019, 14,
14,000

2016, 12,681
12,000

10,000

8,000

6,000
2020 (*), 5,1

4,000

2,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(

-2,000
5,000
Primary Income (Million $)

0,000

15,48:
5,000

0,000

98

5,000

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Primary Income: Credit Primary Income: Debit

 Balance on Primary Income (Million S)

-4,000

-6,000

-8,000
2020 (*), -8,685

-10,000

-12,000

2019, -12,843

-14,000
 Balance on Primary Income (Million S)

-4,000

-6,000

-8,000
2020 (*), -8,685

-10,000

-12,000

2019, -12,843

-14,000
What are the detarminants of Current
Account
The main determinants of Exports and
Imports
The main determinants of Exports and Imports: The
general form
- 4 _
IM= F(Y,Pa, Pr, e, Tarif
fs)
+ — + -
TN ON Oo a
X = F(Y;,Pq, Py, e, Tarif
fs)
Y: Domestic income—higher domestic income--- higher expenditures for
foreign goods
Y¥-: Foreign income—higher foreign income—higher expenditures for domestic
goods
Pq: Domestic prices--higher domestic prices—expensive domestic goods—
imports will increase and exports will decrease
Pr: Foreign prices—higher foreign prices—expensive foreign goods—imports
will decrease and exports will increase
e: Nominal exchange rate
— The price of the domestic currency relative to a foreign currency.
— Higher e means a stronger domestic currency (higher value of the domestic currency)
— Higher e means more imports and less exports
In next slides, we will learn how to write a shorter version of the determinants
We can represent Pq, Pr, e with the real exchange rate
— This will be explained in next slides