To analyze an economy:

some starting points

Simple indicators
Gross National Product
Balance of Payments
How do you describe an economy?
GDP Development
Growth Welfare
Unemployment Quality of life
Inflation Income distribution
Interest rates Rule of law
Exchange rate Democracy
Balance of Sustainability
Payments
Economic policy

Ari Kokko
 Basics
Gross national product (GDP)
the value of all goods and services
produced in an economy during a year
(aggregated value added)
rought proxy for development or welfare

national produkt = nationalvincome

since value added is what the firm pays to
employees and capital owners

Ari Kokko
How good a measure is GDP?
Includes mainly market transactions
(unpaid home work and black markets
excluded)
evaluation based on market (or based
on cost, as in the case of public
services)
does not say anything about income
distribution, environment, quality of life
but no simple alternatives available
Ari Kokko
Some identities

GDP = Consumption (C) + Investment (I)

+ [Exports (X) - Imports (M)]

Sometimes simpler to reshuffle and state

as
GDP + M = C + I + X
(supply = alternative uses)

Ari Kokko
Identities

Can be further manipulated to state the

relation between internal and external
balance

S-I = X-M
(internal balance = current account)

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Current account

Not only a measure of external balance,

but also reflection of internal balance
Deficits may or may not be serious
depending on
why a deficit has been generated
how the deficit is financed

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Balance of payments
Trade balance (X - M for goods)
+ Service balance (X - M for services)
+ In and outflows of capital incomes
+ In and outflows of transfers and gifts
= Current account

= Capital balance (with opposite sign) that

shows how a deficit is financed or how a
surplus is invested

Ari Kokko
Capital balance

Capital balance = foreign direct

investment + portfolio investment +
loans + changes in foreign reserves +
errors and omissions

Should always equal the current

account but with the opposite sign

Ari Kokko
Example: Sweden 1992 and 1995
1992 1995
Trade balance 36,5 114,8
Service balance -15,0 -12,0
Capital income -57,2 -45,0
Transfers -13,5 -22,2
Current account -49,2 35,6
FDI inflows -0,2 103,1
FDI outflows -2,4 -80,0
Portfolio investment 30,7 -16,6
Loans 30,6 -37,1
Capital balance 58,7 -30,69
Reserves 14,0 9,9
E&O -23,5 -14,9

Ari Kokko