1

Welcome to ECON 372:

Comparative Economic Systems

By: Dr. Jacqueline Khorassani

Week Two Lecture SlidesSource: Chapter 1

(pp 15-)

Marietta College, Spring 2011

2

Teams

Have you divided the tasks? What tasks?

Have you started reading? What should you be reading?

In you paper you must use the 6 criteria to classify your economies.

Criteria For Evaluating Economies

3

4

First Criterion

The level of output GDP Real/nominal? Why? Per capita real GDP? Better than that is real purchasing

power parity per capita GDP

5

PPP per capita RGDP

Suppose Yland and Xland both have the same per capita RGDP = $10,000

but a two-bedroom apartment is rented for $100/month in Yland and for $200/month in Xland.

Citizens of which country is better off?– Yland

PPP per capita RGDP adjusts per capita RGDPs for the differences in the cost of living.

Example: PPP per capita RGDP = $10,000 in Yland and $5000 in Xland

6

What about the role of the size of Underground economy? Shadow economy? Informal economy?

7

How are these economies different or similar?1. Informal economy consist of

a) Household production No country includes this in GDP But it can be estimated

b) Small mostly home based enterprises that don’t pay taxes They should be a part of GDP But they are not, why?

8

How are these economies different or similar?2. Underground economy

consist ofa) Production of illegal goods/services

Is not a part of GDP anywhere But it can be estimated

b) Small- home based enterprises that don’t pay taxes

Should be a part of GDP But they are not

9

How are these economies different or similar?3. Shadow economy consist of Market based production of legal

goods and services that is not included in the official measure of GDP. – Excludes illegal goods and services– Includes small-home based enterprises– In addition, includes big companies that hide a

portion of their output form government; why? Excluded from GDP everywhere But, it can be estimated

10

These definitions are not always mutually exclusive

Shadow Economy

Informal Economy

Underground

Economy

Household production

Illegal goods/ser

11

Economic activity or inactivity? (Shadow? Informal? Underground?)

12

Children at work ….(Shadow? Informal? Underground?)

13

Excuse me, are you a registered worker?

14

This guy says he makes R$100 per DAY. His wife who is a registered worker in the local spa made R$400 per MONTH.

15

Oh yes, I was active in Brazilian shadow market too. The price was right and quality was great.

16

Excuse me, do you pay taxes?

17

Is this maid registered?

18

And, there are big companies such as

Tax evasion by Tatuzinho (Producer of hard liquor in Sao Paulo)

Illegal imports of Channel and Gucci bags by Daslu (importer of high end fashion in Sao Paulo)

Shadow, informal, underground?

19

The Size of Brazil’s Shadow Economy (as a percentage of GDP in 1999-2000)

05

1015202530354045

USA Brazil AverageOECD

AverageSouth and

CentralAmerica

Based on finding by Schneider, 2004

Second Criterion

Growth in output Percentage change in real GDP

– In your paper, you need to report 10 years worth of data on this

20

Third Criterion Composition of output Example

– % of consumption in GDP– % of investment in GDP– % of government expenditures in GDP

Or % of government expenditures on education

Or % of government expenditures on Military goods and services

Why do these things matter? 21

22

Fourth Criterion:The degree of static efficiency Maximized output given what is

available= efficiency in production We have achieved efficiency in

production if we can’t produce more of one thing without having to produce less of another thing.– Remember PPF

Production efficiency operating on PPF– No unemployment or unemployment = natural rate– No underemployment

– What should we look for in our paper? Unemployment rate Underemployment rate What else?

Maximized satisfaction given the distribution of output = efficiency in consumption

Pareto Optimality Efficiency in consumption exits when no one can be made better off without making someone else worse off.

Variables to look at for efficiency in consumption– Index of economic happiness–Economic Freedom Index–What else?

Poverty rates? Income distribution figures?

23

24

5. The degree of dynamic efficiency Is efficiency sustainable over

time? Are there policies in place to

increase efficiency in the future? Involves collection of efficiency

related time-series data

25

The 6th criterion

Macroeconomic stability– Stability in the following variables

over time (10 years in your paper) Output Employment Prices Exchange rate volatility (value of

currency) What else?

The 7th criterion Economic security of individual

– Income Per capita Distribution Poverty rate

– Employment Unemployment rate/underemployment

– Health care % of population with health insurance Infant mortality Life expectancy

– Others? 26

8th criterion

The degree of income or wealth equality? – What is the difference between

income and wealth? Which one is flow? Which one is stock?

27

28

One measure of income distribution

Lorenz Curves% of national income

% of population

45o

Perfect income equality

100

100

Nation’s curve

50

20

29

Measure of income distribution Gini coefficient= area between

the Lorenz curve and the 45 degree line/total area under the 45 degree line– If =0 complete _______– If =1 complete _______

Equality Inequality

30

Quintile Another measure of income inequality What is it?

– Here is how it is constructed 1. Obtain income data for every household in

a given year. 2. Arrange the data in a list ranging from the

household with the lowest income to the household with the highest

3. Divide the list into equal fifths (or "quintiles").

4. Divide the income share going to the top quintile by the income share going to the bottom quintile.

The higher the quintile ratio, the _______ the inequality.

Higher

31

The 9th criterion

Degree of economic freedom EFI = Economic Freedom Index

Takes a value between 1 (free) to 5 depending on 10 sub indexes having to do with– Corruption, trade barriers, tax rates,

efficiency of law enforcement, regulatory burden on business, restrictions on banks, labor market regulations, informal market activities.

32

Another way to measure the 9th criterion

Brazil Latin America & Caribbean Countries

OECD Countries

Steps to launch a business 17 11.4 6.5

Rigidity of employment index (0 to 100)

56 40.3 35.8

Hiring cost (% of salary) 26.8 15. 9 20.7

Taxes as percentage of gross profits of a mid size company

71.7 52.8 45.4

Steps to comply with licensing and permit requirements for on going operation

19 16.3 14.1

Source: World Bank, 2005

33

HDI: Human Development Index

Takes a value between 0 (bad) to 1 depending on– Per capita income– Life expectancy– Adult literacy– Education enrollment

Which of the 9 criteria are reflected in this index?

34

Let’s look at Tables 1.1 and 1.2, Pages 18 and 19.Who is doing better than us (USA) in different area?–Why?