International Political Economy

(IPE)
Dr. Islam Abdelbary
Assistant Professor - Arab Academy for Science and Technology
Senior economic researcher – Plymouth University

Understand Economics Data

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 Subjects

• Circular Flows Through Markets ( Come from)

• Measuring GDP
• Nominal GDP and Real GDP
• Real GDP per person & The Standard of Living Over
Time
• Potential and actual GDP
• Limitations of Real GDP

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Circular Flows Through Markets

Households and Firms

Households sell and firms buy the services of labor,
capital, and land in factor markets.
Firms pay wages for labor services, interest for the use of
capital, and rent for the use of land.
A fourth factor of production, entrepreneurship, receives
profit.
In the figure, the blue flow, Y, shows total income paid by
firms to households.

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 Circular Flows Through Markets
The circular flow diagram
shows the transactions
among households,
firms, governments, and
the rest of the world.
Factors of production,
and …
goods and services flow
in one direction.
Money flows in the
opposite direction.

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 Gross Domestic Product

GDP and the Circular Flow of Expenditure and Income

GDP measures the value of production, which also equals
total expenditure on final goods and total income.
The equality of income and value of production shows the
link between productivity and living standards.
The circular flow diagram in Figure 21.1 illustrates the
equality of income and expenditure.

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Simple economy

Households Firms

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 Economy with the financial sector

Financial Monetary Policy

Sector

Households Firms

Leakages = Injections
S = I
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Economy with government

Financial
Sector

Households Firms

Fiscal
Policy
Leakages = Injections
S+T =I+G Government
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 Open economy (economy with foreign sector)
Trade Foreign
Financial Policy Sector
Sector

Households Firms

The blue and green flows are the circular

flow of expenditure and income.
Y=C+I+G+X–M
Leakages = Injections
S+T+M =I+G+X Government
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Leakages Injections
Saving Investment
Tax Government spending
Imports © 2019 Pearson Education Ltd. Exports
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 Gross Domestic Product

The circular flow shows two ways of measuring GDP.

GDP Equals Expenditure Equals Income
Total expenditure on final goods and services equals
GDP.
GDP = C + I + G + X – M.
Aggregate income equals the total amount paid for the use
of factors of production: wages, interest, rent, and profit.
Firms pay out all their receipts from the sale of final goods,
so income equals expenditure,
Y = C + I + G + (X – M).

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Three measures of national output

Expenditure
the sum of expenditures in the economy
Y=C+I+G+X-Z
Income
the sum of incomes paid for factor services
wages, profits, etc.
Output ( GDP)
the sum of output (value added) produced in the
economy

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 Gross Domestic Product

GDP Defined
GDP or gross domestic product is the market value of
all final goods and services produced in a country in a
given time period.
This definition has four parts:
▪ Market value
▪ Final goods and services
▪ Produced within a country
▪ In a given time period

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World GDP 2018

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 World GDP 1980

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World GDP 2000

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 World GDP 2005

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World GDP 2010

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 World GDP 2019

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Measuring U.S. GDP

The Bureau of Economic Analysis uses two approaches to

measure GDP:
▪ The expenditure approach
▪ The income approach

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 Measuring U.S. GDP

The Expenditure Approach

The expenditure approach measures GDP as the sum of
consumption expenditure, investment, government
expenditure on goods and services, and net exports.
GDP = C + I + G + (X − M)
Figure 21.2 illustrates the expenditure approach.

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 Measuring U.S. GDP

Nominal GDP and Real GDP

Real GDP is the value of final goods and services
produced in a given year when valued at the prices of a
reference base year.
Currently, the reference base year is 2009 and we
describe real GDP as measured in 2009 dollars.
Nominal GDP is the value of goods and services
produced during a given year valued at the prices that
prevailed in that same year.
Nominal GDP is just a more precise name for GDP.

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Measuring U.S. GDP

Calculating Real GDP

Table 21.3(a) shows the
quantities produced and
the prices in 2009 (the
base year).
Nominal GDP in 2009 is
$100 million.
Because 2009 is the base
year, real GDP equals
nominal GDP and is
$100 million.

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 Measuring U.S. GDP

Table 21.3(b) shows the

quantities produced and
the prices in 2016.
Nominal GDP in 2016 is
$300 million.
Nominal GDP in 2016 is
three times its value in
2009.

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Measuring U.S. GDP

In Table 21.3(c), we
calculate real GDP in 2016.
The quantities are those
of 2016, as in part (b).
The prices are those in
the base year (2009), as
in part (a).
The sum of these
expenditures is real GDP
in 2016, which equals
$160 million.

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 Measuring U.S. Economy

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Measuring U.S. Economy

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 Measuring U.S. Economy

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Measuring U.S. Economy

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 The Uses and Limitations of Real GDP

Economists use estimates of real GDP for two main

purposes:
▪ To compare the standard of living over time
▪ To compare the standard of living across countries

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The Uses and Limitations of Real GDP

The Standard of Living Over Time

Real GDP per person is real GDP divided by the
population.
Real GDP per person tells us the value of goods and
services that the average person can enjoy.
By using real GDP, we remove any influence that rising
prices and a rising cost of living might have had on our
comparison.

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 Measuring U.S. Economy

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Measuring U.S. Economy

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Real GDP per capita declines during recessions

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 Declines in Real GDP also tend to be
accompanied by increases in unemployment

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The annual changes in Real GDP

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 How big are these differences between the rich
and the poor countries? And how do we measure
these differences?

United States Central African Republic Mexico

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Real GDP per capita PPP

$54,500 per year

$17,800 per year

$600 per year

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 using a basket of groceries, can an average person buy
in a year

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Central African Republic

RGDPP=
$600 per year

an average person

can buy just 6

baskets of stuff in
a year

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 How many baskets do you think that
the average person in Mexico can
buy?

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 How many
baskets of
goods do you
guess that
the average
American can
buy in a
year?

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$54,500 per year

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Prosperity and poverty

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 Is Real GDP
per capita a
good
measure of
the standard
of living?

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Real GDP Per Capita and the Standard of Living

• Doesn't Real GDP per capita just measure the things we

buy?
• What about our health, our happiness, education?
Real GDP per capita -- it's not a perfect measure.
But Real GDP per capita is correlated with many of the
other things that we care about

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 Real GDP per capita and life expectancy

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Real GDP per capita and Human

Development Index

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 Real GDP per capita and life satisfaction

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How can the number of people

living in poverty be so different,
when Real GDP per capita is about
the same?

• GDP per capita misses the distribution of income.

• compare the Real GDP per capita of Nigeria, Pakistan,
and Honduras. It's actually pretty similar.
• So, we might think that all three countries have similar
living standards

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 Population lives on less than $2 a day

Nigeria, it's about 80%

Pakistan, it's only 60%.

Honduras, it's only 33%.

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GDP per capita & distribution of income

• The reason is that income in Nigeria is much

more unequally distributed than in Pakistan or
Honduras.
• Nigeria has many poor people, but also some
very rich people. So average income -- it's about
the same in Nigeria, Pakistan, or Honduras, even
though there are more poor people in Nigeria.

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 Potential and actual GDP

The potential GDP is a country's maximum, ideal

production with high employment across all sectors of
the economy while maintaining currency and price
stability. Real GDP is the actual measured economic
output for a country over a given interval.

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GDP Gaps and Policymaking

The output gap is the difference between how much we're
growing and how much we should grow if we wanted to be
at that ideal place.
The output gap could be positive, in other words, we are
growing too fast (overheating). Or, we could have a
negative output gap, where we're growing slower than we
would like to be.

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 Business Cycle and GDP
The business cycle might be growing fast and then
come down, come up again, deep down, go way down. It
doesn’t make a lot of sense to us until we think of them in
reference to the potential rate of GDP growth.

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The Uses and Limitations of Real GDP

Real GDP Fluctuations—The Business Cycle

A business cycle is a periodic but irregular up-and-down
movement of total production and other measures of
economic activity.
Every cycle has two phases:
1. Expansion
2. Recession
and two turning points:
1. Peak
2. Trough

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 GDP growth above potential GDP

GDP is growing at the beginning here at 5%, and

potential GDP growth is three.
Here at the beginning, the area where GDP is growing
too fast, where we're above potential. in other words,
the economy's growing too fast. these areas refer to
them as inflationary gaps or overheating, and we've
been talking about them as positive output gaps.

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GDP growth below potential GDP

• GDP is growing lower than potential.

• That doesn't mean that GDP is shrinking, it doesn't
mean it's a recession. But it's growing too slowly.
where GDP growth is too low. And we call these
areas recessionary gaps, it’s a recessionary gap
because GDP growth is lower than potential GDP
growth.
• We referred to these as negative output gaps or a
crisis. Because unemployment is high, and this
causes problems for the population.
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 The Uses and Limitations of Real GDP

Figure 21.4 shows U.S.

potential GDP per person.
Potential GDP per person
grows at a steady pace
because the quantities of
the factors of production
and their productivity grow
at a steady pace.
U.S. real GDP per person
fluctuates around potential
GDP per person.

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The Uses and Limitations of Real GDP

Potential GDP per person

growth rate is not constant.
It slowed from 2.8 percent
per year in the 1960s to
2.3 percent per year in the
1970s.
Real GDP per person:
Doubled between 1960
and 1988.
Was 3 times its 1960 level
in 2016.
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