World economy & international markets

Lesson 1: Economic development.

Dr. Gonzalo Sanz-Magallón Rezusta

2021-2022
Main objectives of Unit 1:

• Appreciate the importance of the concept “Economic

development”, and the differences between “economic
growth”, “economic development” and “social
development”.
• To learn how the economic development level is
measured and what are the advantages and disadvantages
of the different indicators that can be used.
• To know the differences between “GDP”, “GNP” and
“GNDI” and to be able to calculate de
“lending/borrowing position” of the economy.
• To understand what are the main obstacles for
developing countries to improve their economic
development levels.
• To know what are the main determinants of productivity
levels through the pillars of competitiveness model.

Unit 1: Economic development 2

 Unit 1

Unit 1: Economic development 3

 1. The definition of economic development

To differentiate between:
a. "economic growth" (quantitative), understood as the
actual increase in product or income.
b. "economic development" (a qualitative phenomenon),
considered to be the structural transformation that
improves the modes of production and the standard of
living of a certain economy. Key change: RISE OF
PRODUCTIVITY Productivity 

 Investment  Income

 Savings  Consumption

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1. The definition of economic development

Exercise: Classify the following indicators as

representative of “economic growth” or “economic
development” level
a. "economic growth" GDP grew by 2% in 2019 in the
USA
Agriculture production increased by 3%
in 2018 in Spain
b."economic Spanish GDPpc represents 91% compared with
development" the UE average
Labour productivity in India is 80% lower compared with
the OECD average
Consumption per capita in the USA is 30% higher
than in Italy

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Unit 1: Economic development 6
Unit 1: Economic development 7
Unit 1: Economic development 8
Japan
US
France
Germany
China
India
Italy
Britain
H
G
E

C
B
A

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 Structural ratios: Determinants of GDP p.h.

The GDP p.h. depends on:

1- Productivity (GDP / Hours worked)

2. Employment rate (Employment / working age population)

Two other variables:

3. Hours worked per employee

4. Dependency rate (working age population / total population)

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 GDP p.h. Decomposition

A) GDP/Population = [GDP / Employment] x [Employment /Population ]

(Productivity) (Employment ratio)

Working Age
GDP Employment Population
B) GDP / Population = x x
Employment Working Age Population
Population
(Productivity) (Employment ratio) (Dependency rate)

Total
Hours Working Age
GDP Worked Employment
Population
C) GDP / Pop. = x x x
Total Employment Working Age Population
Hours Population
Worked
(Productivity) (Work-Leisure) (Employment ratio) (Dependency rate)

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 GDP p.h. Decomposition

GDP / Population = [GDP / Employment] x [Employment / Population ]

(Labour productivity) (Employment ratio)

Labour productivity

Unit 1: Economic development

Employment ratio 12
 GDP p.h. Decomposition

Spain: 1960-2003
Analyze the
graph, which
represents the
evolution of
per capita
income,
Labour productivity (000 euros 2003)

productivity
and
employment
rate in Spain in
recent years.
Identify and
describe the
main stages
within the
period 1960-
2003

Employment ratio

Unit 1: Economic development 13

 GDP p.h. Decomposition

Analyze the
following graph and
draw conclusions
about the
performance of the
Spanish economy,
the Euro area
economy, and the
United States
economy during the
period 1960-2003

Unit 1: Economic development 14

 1. The definition of economic development
b. "economic development" considered to be the structural
transformation that improves the modes of production and
the standard of living of a certain economy

Indicators that can be used to measure the level of

Economic
GDP pc. development of country:
Labour productivity = GDP / Employment Consumption pc

Educational attainment Health conditions (child mortality or life expentancy)

Human Development Index

r indexes prepared by the United Nation are:

Inequality-adjusted human development index (I-HDI)

Gender inequality index (GII)

Index of multidimensional poverty (IMP)

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 A

Gini index: A / A+B; (0,1) 0= perfect distribution

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Unit 1: Economic development 17
1. The definition of economic development
b. "economic development" considered to be the structural
transformation that improves the modes of production and
the standard of living of a certain economy

Unit 1: Economic development 18

1800-2015 Unit 1: Economic development 19
1800-2019

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1800-2019

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2. The brakes on development

2.1. Lack of capital

2.2. The problem of the population explosion and

the unequal distribution of income

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1. The brakes on development

2.3. The absence of an institutional

framework favorable to growth

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3. The Global Competitiveness Report
 The GCR defines competitiveness as the set of institutions, policies, and factors that determine the
level of productivity of an economy, which in turn sets the level of prosperity that the country can earn
 WEF publishes GCR (“benchmarking” indicators) so it’s possible to compare each country position
towards the main productivity determinants, which are:

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Unit 1: Economic development 25
Exercise

Relate the following indicators with the pillars used to measure competitiveness by the
WEF
Pillars:
1. Institutions Enrollment
Time needed rate a(%)
to Population
create newin company
college
2. Infrastructure
3. ICT Adoption GDP per capita
Inflation rate
GDP
4. Macroeconomic stability
Research & development expenditure / GDP
5. Health
6. Skills Internet users (% of population)
Attitudes towards entrepreneurial
Exchange rate risk
7. Product market
8. Labor market Level of corruption
9. Financial system Judicial
Redundancy % Illiterate
independence
costs
10. Market size Motorways (km)
11. Business dynamism Number of patents / population
12. Innovation capability Trade tariffs %

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 5. National accounts indicators

The national accounts systems calculates four main aggregates:

Gross Domestic Product (GDP) = value of domestic production (without including

intermediate goods and services)

Gross National Product (GNP) or Gross National Income (GNI) = income percieved
by people living in the country (residents in the country)

GNDI = income percieved by residents in the country plus (or minus) the Balance of
Transfers with the rest of the world

Lending / Borrowing position of the economy = calculated as the difference between

Gross National Savings – Gross Capital Formation. It has important implications for the
designing of the Monetary and Fiscal Policies

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GDP:

GCF

Transfers: one-way transfers of assets, without counterpart:

• Capital transfer: increase the stock of capital
• Current transfer: employed in current expenses: pension,
dole.
• National transfer: among national agents
• International transfer: with nonresidents

Unit 1: Economic development

Final Consumption: Consumption can be broken down into private and public consumption
Private consumption: Consumer expenditures on final goods and services
Public consumption: is the sum of government expenditures on public services
(education, security, etc.). It includes salaries of public servants and purchases that are
necessary to produce the services. It does not include any investment expenditure.
Tansfers: payments without a counterpart, such as social security or unemployment
benefits, remittances sent by migrants, international aid recieved
Intermediate consumption. The value of the goods and services consumed as inputs by a
process of production, excluding fixed assets whose consumption is recorded as
consumption of fixed capital. The goods and services may be either transformed or used up
by the production process.
Gross capital formation: all goods that are used to increase the stock of capital
Gross fixed capital formation: all goods that can be used repeatedly in the production
process. And also the value of the production of the building sector (including new houses,
upgradings and renovations)
Changes in inventories: includes raw materials, products in production line, products in
stock.

Fixed Capital Consumption. Loss of value of the stock of capital due to its use
Net value always means: Gross value – estimated Fixed Capital Consumption
i.e. Net Fixed Capital Formation = Gross Fixed Capital Formation – Fixed Capital
Consumption

Unit 1: Economic development

 GDP
GDP :: Total
Total value
value of
of final
final goods
goods and
and services
services
produced
produced within
within aa territory
territory during
during aa period
period of
of
time.
time.
Clarifications:
1. Only final goods and services: No double accounting of intermediate goods or
services.
2. Domestic: produced in the Spanish territory.
Gross National Product: production (or income) of the residents in Spain.
3. Two kind of services: a) Market services (no problem)
b) Non-market services or public services (defense, education). There is no
market price. They are included in the GDP by calculating the cost of production.
4. Activities that are not included in the GDP due to the difficulty to quantify them:
Housewife production (Pigou’s paradox)

5. Secondhand transactions: They are only included if there is a middleman or

intermediary that receives a commission.

Unit 1: Economic development

 There are three ways to calculate the GDP:
Production, Revenue, and Expenditure

consumers are interrelated in two different ways:

y income to consumers because they own the factors of p
rs pay firms for the final goods and services that they

1
Unit 1: Economic development
xpenditure=
xpenditure= Final
Final expenditure
expenditure of
of the
the owners
owners of
of the
the factors
factors of
of production
production
Private consumption
Public consumption Final consumption
Domestic
a) GFixedCF : Investment in equipments + Building sector production;
GCF demand
b) Change in stocks GDP
+ Exports of goods and services.
- Imports of goods and services. Trade balance

Value
Value added:
added: Value
Value created
created through
through production
production process
process

+ VA agriculture
+ VA Construction GDP Value added = Production - Intermediate consumption
+ VA Industry
+ VA Services

Revenue
Revenue == Value
Value distributed
distributed among
among factors
factors of
of production
production

+ Compensation of employees (Wages)

GDP
+ Gross operating surplus (Capital Profits)
(Profits, mixed income –self employed-, rental payments, interests,
etc.) Unit 1: Economic development
Exercise: Calculate GDP (using expenditure, value added and revenue methods), GNP and GNDI:

• A farmer produces and sells wheat to a mill at a price of 100 Monetary Units (MU)
(wages paid: 40 MU, land rental: 30 MU –paid to a Foreigner-, profits: 30 MU).
• The mill sells flour to a bakery at a price of 250 MU (wages paid: 90, interests paid: 30 MU,
Profits earned: 30 MU).
• The bakery produces bread that is sold at a price of 450 MU: 400 MU to the domestic market and
50 MU is exported (wages paid: 130 MU; profits earned: 70 MU). One employee of the bakery
has sent 5 MU to his relatives living in another country.

Unit 1: Economic development

 Should the economic policy promote the GDP or
sable income? Is it positive the change in Norway since

Unit 1: Economic development

lassify the following transactions into Intermediate consump
Gross Fixed Capital Formation, or Exports:

buys shoes
of gasoline by a taxi driver
of a washing machine by a family
of a washing machine by a laundry company.
of a washing machine by a foreigner.
of crude oil to use in a refinery.
of an automobile by a driving school.
dental services to individuals.
f a car by foreign tourists.
on of a new home by a family

Unit 1: Economic development

Which country is richer, A or B?

Country GDP pc GNP pc GNDI pc

A 80 60 65
B 75 85 80

Unit 1: Economic development 36

Classify the following distribution operations
into: Compensation of employees, Gross Operating
Surplus, Taxes on production and imports,
Production Subsidies, Current Transfers:

• Payments to workers for overtime

• State payments to pensioners
• Payment of a fee of 7 per 100 on the value of an
imported commodity
• Sending of money by Spanish emigrants living
abroad
• Payment of VAT by employers
• Public Administration Grants to cover operating
costs
• Productivity bonus payments to workers
• Corporations earnings
• Payments of unemployment insurance
Unit 1: Economic development by the Public
he impact on GDP and GNDI of the following:

any X produces 100 m.u. of corn, with the GVA

of 40 m.u
lls to Mr. B a used vehicle worth 30 m.u.
y purchases stocks worth 50 um through a middleman who
fee of 2 m. u.
cipality X increases spending on the police service in
al Security pays unemployment benefits totalling 70 m.u
stry of Public Works invests in Barajas Airport 80 m.u.
ish laborers receive in France 80 m.u. as workers in th
rape harvest.
rians laborers in Spain receive 80 m.u as workers in th
est

Unit 1: Economic development

 Circle “True” or “False” in the following statements.
“Purchase of an automobile by a driving school” is an “intermediate consumption” True False
transaction

“Acquisition of a new home by a family” is a “private consumption” operation True False

“State payments to pensioners” is a “capital transfer” True False

“Corporations earnings” are included in the Gross Operating Surplus True False

“Sending of money by Spanish emigrants living abroad” is a compensation of employees True False
operation

GDP is the difference between Total output and Gross Operating Surplus True False

GNDI includes transfers received from the rest of the world True False

Gross Savings is the difference between GNDI and Private Consumption True False

Lending/borrowing position is the difference between Gross Savings and Gross Capital True False
Formation
Lending/borrowing position equals the Current Account Balance True False

Unit 1: Economic development

1. A farm worker resident in Romania carries out temporary work in Spain. The
wages received in Spain for this activity are part of:
a) Spanish GNP.
b) Spanish GNDI.
c) GNP of Romania.
d) GDP of Romania.

2. The profits of capital assets located in Spain owned by residents in Canada:

(a) Are part of Spanish GDP.
b) Are part of Canadian GDP.
c) Are not part of the GNI of Canada.
d) Are part of the Spanish GNP.

3. Money that Colombian workers living in Spain send to relatives in Colombia:

a) Reduce the Spanish GDP.
b) Increase the GDP of Colombia.
c) Reduce the GNI of Spain.
d) Reduce the Spanish GNDI.

4. Current transfers received by Spain from the European Union:

a) Increase the GNDI of Spain.
b) Increase the GDP of Spain.
c) Increase the GNP of Spain.

5. An economy will run a lending capacity when

a) Its disposable income exceeds consumption.
b) Gross national savings is positive.
c) Gross national savings exceeds its investment (gross capital formation).

Unit 1: Economic development 40

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COVID-19 Impact on the Spanish National Income
(2nd quarter 2020)

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Spain

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9 Impact on the Spanish Accounts for the Institutional S
2nd quarter 2020

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Spain

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Spain

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COVID-19 Impact on the Spanish National Income
(2nd quarter 2020)

Unit 1: Economic development 48

COVID-19 Impact on the Spanish National Income
(2nd quarter 2020)

Unit 1: Economic development 49