Ecological EconomicsLecture 06

3rd May 2010

Tiago DomingosAssistant Professor

Environment and Energy SectionDepartment of Mechanical Engineering

Collaboration: Rui Mota

Growth accounting: Short-run sources of growth

• Break down observed growth in GDP, into components associated to changes in factors of production.

• Output growth only happens due to growth in productive inputs, including technology.

• Tehcnological progress is measured indirectly, i.e., as growth not attributed to changes in observable inputs.

• Solow refered to the residual as Total Factor Productivity (TFP)

( ) ( )( ) ( ) ( ) ( )

( ) ( )Y YK YL

K t L tg t t t R t

K t L t

( ) ( ), ( ), ( )Y t F K t A t L t

YY Y g

( )YX

F X

X Y

( ) YA

AR t

A

Growth accounting: Short-run sources of growth

•Solow model explains more than ½ of output growth.

•An important part of growth is attributed to exogenous “inputs”. What is technological progress? (the residual)

– Knowledge, institutions (property rights), education, culture, ...

Total Factor Productivity Growth in Portugal

-0,06

-0,04

-0,02

0

0,02

0,04

0,06

0,08

0,1

0,12

0,14

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

TFP growth

GDP growth [€2000]

Source: AMECO database

National Accounts

• The System of National Accounts is a comprehensive accounting framework within which economic data can be compiled and presented in a format that is designed for purposes of economic analysis, decision-taking and policy-making.

• Integrates a set of macroeconomic accounts, balance sheets and tables based on a set of internationally agreed concepts, definitions, classifications and accounting rules.

• Accounts compiled for a succession of time periods, thus providing a continuing flow of information, indispensable for the monitoring, analysis and evaluation of the performance of an economy over time.

Aggregation

• 5 Sectors:

– Households

– Firms

– Financial Intermediaries (banks, …)

– Governments (national and local)

– Rest Of the World (ROW)

• 4 Markets (Supply and Demand):

– Goods and services

– Resources (labor, land and capital)

– Money (loanable funds)

– Foreign exchange

Circular flow of income

• Factors: Labor, Land, Capital

• Factor payments: Wage, Rents, Interests, Profits – become income.

• Expenditures: on goods and services (output)

• 1 – Income approach: Y = Wage + Rent + interest + operating surplus

• 2 – Output approach: Y = market value of all produced output (Σ VA)

• 3 – Expenditure approach: Y = C

Households

Firms

OutputFactorsFactor payments: Y

Expenditures: C

1 2 3

€€

Circular flow of income

• Balance to:

– Households: Y - Tnet = C + S, Tnet = T- Tr

– Firms: Y = C + I + G + X - M

– Government: ΔGov = Tnet - G

– FI: S + ΔGov + B - L = I

– ROW: X - M = L - B

Households

Firms

C

FIS

I

Gov.

Y

T

Tr

G

ROW

X

M

ΔGov

BorrowLend

- Market for outputs

National Accounts Identity

CIXM

Main Aggregates

National(Residence)

- Primary income - Primary income flows to ROWflows to ROW

Product / Income

+ Primary income + Primary income flows from ROWflows from ROW

Domestic(Territory)

Net

+ Consumption + Consumption Fixed Capital Fixed Capital (CFC)(CFC)

Aggregate X - Consumption of - Consumption of Fixed Capital (CFC)Fixed Capital (CFC)

Gross

X – Domestic produc, Income, Saving, Disposable income, ...

• GNI = GDP + Y’RM . Where Y’RM = Net income payable to non-resident units for production factors.

Domestic Product vs. National Income

• The value added of a firm owned by Portuguese residents and functioning on our economic territory is part of the Portuguese GDP and GNI.

• The wage (or other factor payments) of a resident that during 6 months worked to a firm in Spain is a part of Spanish GDP and Portuguese GNI.

• The operating surplus (profits) – capital remuneration of a firm located in Portugal but owned by Germans – sent to Germany, is part of the Portuguese GDP and the German GNI.

• The income earned by Portuguese emigrants working abroad as residents is not part of the Portuguese GDP and GNI.

Domestic Product vs. National Income

Main Aggregates

GDP

+ Primary income flows from ROW

- Primary income flows to ROW

= Gross National Income (GNI)= Gross National Income (GNI)

+ Current net transfers from ROW

= Gross Disposable Income (GDI)= Gross Disposable Income (GDI)

- Final consumption (Private and Government)

= Gross Saving (S)= Gross Saving (S)

Net Domestic Product (NDP)

= Net National Income (NNI)= Net National Income (NNI)

= Net Disposable Income (NDI)= Net Disposable Income (NDI)

= Net Saving (NS)= Net Saving (NS)

Subtract CFC

Domestic Product vs. National Income

Source: AMECO database

Domestic vs National [euros 2000]

0

20

40

60

80

100

120

140

160

180

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Mil

liard

s e

uro

s

PT Domestic

Ireland Domestic

PT National

Ireland National

Gross Product vs. Net Product [euros 2000]

Source: AMECO database

0

20000

40000

60000

80000

100000

120000

140000

160000

1990 1995 2000 2005

Mil

lio

n e

uro

s

GDP

NDP

Gross/Net Saving in Portugal [euros 2000]

Source: AMECO database

-10000

-5000

0

5000

10000

15000

20000

25000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Mill

ion

eu

ros

Gross national saving

Net nation saving

Net Investment