Category Archives: Growth

Future of capitalism

Below is CNBC video which looks at what capitalism is and the history behind it. It began in the 17th century in Europe and has spread to most parts of the world. Critics of the present form of capitalism argue that it harms the environment, increases inequality and slows economic growth. The video has some good data on inequality and discusses the fact that shareholder value is no longer the main priority of some firms.

What sectors made up the GDP of New Zealand – 1972-2018

Statistics New Zealand produced a great interactive graphic showing which industries have contributed to New Zealand’s GDP. It takes the top 10 industries that contributed most to the production measure of gross domestic product (GDP) in a given year. Industries are coloured based on four broad industry groups:

  • Goods-producing industries: manufacturing; electricity, gas, water, and waste services; and construction industries.
  • Primary industries: agriculture, forestry, fishing, and mining industries.
  • Service industries: wholesale trade; accommodation and food services; retail trade; transport, postal, and warehousing; information, media, and telecommunications; finance and insurance services; rental, hiring, and real estate services; professional, scientific, technical, and admin support services; government administration; health; education; and other service industries.
  • Taxes on production: includes GST, import duties, and stamp duties.

Below the doughnuts show the changes from 1973 to 2018.

Components of GDP in New Zealand – 1972
Components of GDP in New Zealand – 2018

Things to note:

  • The contribution from the goods sector has fallen from 33% to 19%
  • The service sector has increased from 51% to 65% over the period
  • The primary sector has halved over the period from 14% to 7% – agriculture was the biggest industry in 1972 at 11.2 but by 2018 this figure was 4.3% and the industry was relegated to10th in 2018

Click here to go the interactive – well worth a look and great for Macro at NCEA Level 2 and 3.

A2 Economics – The Accelerator

This part of the syllabus will come up either as a multiple-choice question or part of an essay. The accelerator theory states that investment is determined by the RATE AT WHICH INCOME, AND HENCE OUTPUT, CHANGES OVER TIME. The principle states simply that unless the rate of increase in consumption is maintained, the previous level of investment will not be maintained.

This theory assumes that firms try to maintain some constant relationship between the level of output and the stock of capital required to produce that output. In other words, we assume a constant capital-output ratio which can be expressed in either physical terms or money terms. The accelerator helps us to understand how small changes in demand in one sector can be magnified and spread throughout the economy. The example below assumes that the firm starts with 8 machines each year and 1 machine wears out each year and that each machine can produce 100 units of output per year. In the second year, demand rises for capital goods rises by 200% (from 1 to 3). When the rate of growth of demand for consumer goods slows in year 4, demand for capital goods falls. In year 6 demand drops and they is no requirement for any investment.


Limitations of Accelerator:

* Firms can meet output with stocks – may not need investment
* Changes in technology may mean firms don’t need to invest in as much capital as before
* Firms need to be convinced that demand is long-term to warrant investment
* Limited supply of technology available

Adapted from CIE AS and A Level Economics Revision Guide by Susan Grant

AS and A2 Macroeconomics: Internal and External Balances

In explaining the differences between internal and external balances I came across an old textbook that I used at University – Economics by David Begg. It was described as ‘The Student’s Bible” by BBC Radio 4 and I certainly do refer back to it quite regularly. Part 4 on macroeconomics has an informative diagram that shows the impact of booms and recessions on the internal and external balances.

Internal Balance – when Aggregate Demand equals Aggregate Supply (potential output). And there is full employment in the labour market. With sluggish wage and price adjustment, lower AD causes a recession. Only when AD returns to potential output is internal balance restored.

External Balance – this refers to the Current Account balance. The country is neither underspending nor overspending its foreign income. For a floating exchange rate, the total balance of payments is always zero. Since the balance of payments is the sum of the current, capital, and financial accounts, saying the current account is in balance then also implies that the sum of the capital and financial accounts are in balance.

In the diagram right the point of internal and external balance is the intersection of the two axes, with neither boom nor slump, and with neither a current account surplus nor a deficit.

The top left-hand quadrant shows a combination of a domestic slump and a current account surplus. This can be caused by a rise in desired savings or by an adoption of a tight fiscal policy and monetary policy. These reduce AD which cause both a domestic slump and a reduction in imports.

The bottom left-hand corner shows a higher real exchange rate, which makes exports less competitive, reduces export demand and raises import demand. The fall in net exports induces both a current account deficit and lower AD, leading to a domestic slump.

In a downturn a more expansionary fiscal and monetary policy can hasten the return to full employment eg. Quantitative easing, tax cuts, lower interest rates. However one could say that today it doesn’t seem to be that effective.

A2 Economics Revision – National Income

GROSS DOMESTIC PRODUCT (GDP) – Under new definitions introduced in the late 1990s, Gross Domestic Product is also known as Gross Value Added. It is defined as the value of output produced within the domestic boundaries of the NZ economy over a given period of time, usually a year. It includes the output of foreign owned firms that are located in NZ, such as the majority of Trading Banks in the market – ASB, Westpac, ANZ, BNZ etc. It does not include output of NZ firms that are located abroad. There are three ways of calculating the value of GDP  all of which should sum to the same amount since by identity:

NATIONAL OUTPUT = NATIONAL INCOME = NATIONAL EXPENDITURE

1.       THE EXPENDITURE METHOD – This is the sum of the final expenditure on NZ produced goods and services measured at current market prices (not adjusted for inflation). The full equation for calculating GDP using this approach is: GDP = Consumer expenditure (C) + Investment (I) + Government expenditure (G) + (Exports (X) – Imports (M))

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

2.       THE INCOME METHOD – This is the sum of total incomes earned from the production of goods and services. By adding together the rewards to the factors of production (land, labour, capital and enterprise), we can see how the flow of income in the economy is distributed. The rewards to the factors of production can be loosely summarised by the following:

Land – Rent. Labour – Wages and Salaries. Capital – Interest. Enterprise– Profit.

Only those incomes generated through the production of a marketed output are included in the calculation of GDP by the income approach. Therefore we exclude from the accounts items such as transfer payments (e.g. government benefits for jobseekers allowance and pensions where no output is produced) and private transfers of money.The income method tends to underestimate the true value of output in the economy, as incomes earned through the black economy are not recorded.

3.  THE OUTPUT MEASURE OF GDP – This measures the value of output produced by each of the productive sectors in the economy (primary, secondary and tertiary) using the concept of value added. Value added is the increase in the value of a product at each successive stage of the production process. For example, if the raw materials and components used to make a car cost $16,000 and the final selling price of the car is $20,000, then the value added from the production process is $4,000. We use this approach to avoid the problems of double-counting the value of intermediate inputs. GDP will, therefore, be equal to the sum of each individual producer’s value added.

Below is a useful mindmap using OminGraffle software (Apple). It is adapted from CIE A Level Economics Revision Guide by Susan Grant

What is a recession?

Here is another very useful video from CNBC which focuses on what actually is a recession. By definition it is two consecutive quarters of negative GDP. Between 1960 and 2007 there were 122 recessions in 21 advanced economies although those economies were only in recession around 10% of the time. The video is well worth a look and presenter Tom Chitty does a good job explaining things.

Economics can make better use of culture

Once shunned by leading economists like Robert Solow, society’s beliefs and values are just as significant for economic progress as is capital accumulation. Joel Mokyr in his book ‘A Culture of Growth The Origins of the Modern Economy’ describes culture as:

‘A set of beliefs, values, and preferences, capable of affecting behaviour, that are socially (not genetically) transmitted and that are shared by some subset of society’.

Economics has traditionally been focused on rational self-interest as the guiding light of human behaviour. The true catalyst for kick-starting the industrial revolution was not cheap labour and capital accumulation but the continent-wide evolution in beliefs. Mokyr believes that the drivers of technological progress and eventually economic performance are attitude and aptitude.

Attitude – the willingness and energy with which people try to understand the natural world around them.
Aptitude – this determines their success in turning such knowledge into higher productivity and living standards.

Mokyr’s ideas gave rise to how economists can make better use of culture with an evidence-based humanistic approach to scientific inquiry which led to a shift in behaviour that enabled industrialisation. Cultural barriers create a gap between classes and can hinder the flow of ideas and work environments – the modern economic experience cannot be explained without it. The cultural changes in the political economy over the past century cannot be explained solely on the basis of rational self-interest e.g. the fortunes of racial minorities and the increased presence of women in aspects of society. Cultural change can act as a catalyst to the economic potential of people and ideas, and matter for reasons other than their effect on GDP.

Evolving norms that allow women, ethnic minorities, immigrants, and gay and transgender people to play full roles in society not only boost growth but reduce human suffering. But because these shifts matter economically, the dismal science needs a better understanding of when and how cultures change—especially now. These norms shaped behaviour, which enabled progress. But cultures change.

Source: The Economist July27th 2019 – The uncultured science

Liberalism v GDP per capita

Martin Wolf in the FT wrote an interesting piece entitled ‘Liberalism will endure but must be renewed’. He states that liberalism is not a precise philosophy, it is an attitude. Liberals share a belief and trust in the capacity of human beings to decide things for themselves and express opinions and participate in public life.

Liberals share a belief that agency depends on possession of economic and political rights. As Martin Wolf stated ‘institutions are needed to protect those rights’ but liberalism also depends on markets to co-ordinate independent economic actors, free media to allow the spread of opinions, and political parties to organise politics. The graph below shows that economic growth and political freedom tend to go together as both depend on the rule of law. Liberal societies tend to be rich and rich societies tend to be liberal. Note that :

  • New Zealand is one of the most liberal economies – approx 98 on the index – with its GDP per head being just over US$40,000.
  • Singapore has a GDP per head over US$100,000 in relation to a Liberal Freedom index of approximately 72.
  • Eritrea ranks as the lowest

Bill Phillips and the working MONIAC

When Bill Phillips is mentioned most people think of the Phillips Curve. However, while a student at the LSE, Phillips used his training as an engineer to develop MONIAC, an analogue computer which used hydraulics to model the workings of the British economy, inspiring the term hydraulic macroeconomics. A live demonstration of the only working MONIAC in the Southern Hemisphere. This is located in the Reserve Bank Museum & Education Centre, Wellington, New Zealand. The video below is very informative.

A2 Revision – Costs and Benefits of Growth – Mindmap

With the June exams approaching I thought it appropriate to share some mindmaps. Below shows the definition, policies, costs and benefits of Economic Growth. The costs and benefits of Economic Growth is a common essay question at A2 Level.

A country’s gross domestic product (GDP) is a measure of economic activity during a set period of time, normally reported on a quarterly and an annual basis. It is the sum of money values of all final goods and services produced in an economy over a set period. The primary indicator used for tracking economic performance over time is known as real gross domestic product, or real GDP. Real GDP is gross domestic product adjusted for changes in prices.