Lecture 1 about Azerbaijan Economy

8/19/2019 Lecture 1 about Azerbaijan Economy

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Lecture plan:

Economics: Macroeconomics andMicroeconomics

Defnition o GDP

The components and measurement o GDP

Nominal and eal GDP

The !ircular"#lo$ dia%ram

GDP and &uman 'elare

Azerbaijan in f%ures


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Economics: Macroeconomicsand Microeconomics

An Economy ()atin oeconomia+ Gree, oikonomia- is set o the inter"related production+ distribution or tradconsumption o %oods and ser.ices acti.ities o di/erea%ents in a %i.en %eo%raphical location0

Economics+ brie1y+ is the study o ho$ society manascarce resources0 2n broad defnition+ Economics is ascience that studies ho$ indi.iduals+ frms+ %o.ernmenations ma,e choices on allocatin% scarce resources t

their unlimited $ants0


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Defnitions o Economics is classifed in threebroad approaches:

1. Wealth defnition o Economics (Adam 3mith-

2. Welfare defnition o Economics (Alred

Marshall-3. Scarcity defnition o Economics ()ionel

obbins-


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T$o major le.els o Economics are Macroeconomics andMicroeconomics as ollo$s:

I. Macroeconomics (rom the Gree, pref4 makro- meand economics- is a branch o economics dealin% $itperormance+ structure+ beha.ior and decision"ma,in

economy as a $hole+ rather than indi.iduals0 That innational+ regional and global economies0

II. Microeconomics (rom Gree, pref4 mikro- meanin%branch o economics that studies the beha.ior o indrms in ma,in% decisions re%ardin% the allocation oresources0



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Defnition o GDP

Gross domestic product (GDP- o a country is amonetary measure o the .alue o all fnal %oods andser.ices produced $ithin a country6s borders in a spetime period (7uarterly or yearly-0

Nominal GDP is the monetary .alue o all fnal %oods

ser.ices that are produced in the country0 Real GDP is a measure o the 7uantity o all fnal %oo

and ser.ices that are produced0 2n other $ords+ real Gis e7ual to the economic output adjusted or the e/ecin1ation0


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Te components andmeasurement o GDP

There are t$o major methods o GDP measurem

80 E4penditure approach

90 2ncome approach

Da.is+ M0 A0 (9;-0 Macroeconomics for MBs amasters of nance0 !ambrid%e


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E!penditure metod and itscomponents

2n this method+ economists fnd it useul to disa""re"ate GDP (

production- into a e$ ,ey components:

GDP # $ I $ G $ %& ' M( +$here

# = pri.ate consumption>

I = pri.ate in.estment>

G = %o.ernment spendin%>

& = e4ports>

M = imports+ and &)M = net"e4ports0

This is called the *e!penditure+ side o measurin% GDP+ since

output into cate%ories based on ho$ te output is spent0


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) #onsumption is anythin% that+ once enjoyed today+ can

enjoyed tomorro$0) In,estment is anythin% $e store a$ay that pro.ides uspotential or consumption tomorro$0 2n.estment does not $ith any utility today0

) Go,ernment spendin" or e!penditure includes all %o

consumption+ in.estment+ and transer payments0) Imports are %oods and ser.ices brou%ht into one countranother0

) E!ports reers to sellin% %oods and ser.ices produced incountry to other mar,ets0

) Net e!ports is the .alue o a country?s total e4ports mi

E!penditure metod and itscomponents


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Income metod and itscomponents

3o ar+ $e ha.e tal,ed about @e4penditure method0 &

e.ery time a manat spent is a manat is earned0 Thus+occurred to be *income+ metod as $ell0

Income metod is used as the sum o primary incomdistributed by resident producer units0 2n other $ordsmeasures GDP by addin% incomes that frms pay housactors o production they hire " $a%es or labour+ intecapital+ rent or land and profts or entrepreneurship0

Note-: 2n practice+ the e4penditure side does not e4actincome side+ the di/erence is called the @statistical discr


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The ormula or this methodis:

NI / $ R $ i $ PR0 $here

/ B )abor incomeR B ental income

I B 2nterest income

PR B Profts


T$o adjustments must be maGDP:

80 Addin% indirect 1usinessince those ta4es are not o business6s income0

2. Depreciation (or capitalconsumption allo$ance- is

%et rom net domestic pro%ross domestic product0 3$ould ha.e subtracted throm their calculation o psubtractin% depreciation ae4pense+ $e should add t@%ross domestic product0


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La1or Income %/(:3alaries+ $a%es+ and rin%e benefts such as health or retirealso includes unemployment insurance and %o.ernment ta43ecurity0

Rental Income %R(: This is income recei.ed rom property recei.ed by househorom patents+ copyri%hts and assets as $ell as imputed ren

Interest Income %i(:

2ncome recei.ed by households throu%h the lendin% o theicorporations and business frms0 Go.ernment and househopayments are not included in the national income0

Profts %PR(: The amount frms ha.e let ater payin% their rent+ interest

employee compensation0 GDP calculation in.ol.es accountnot economic roft0



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E!amples or 1otcalculation metods

Transfer Payments 54 m.

Interest Income 150 m.Depreciation 36 m.

Wages 67 m.

Gross Private Investment (I1!4 m.

"#siness Profits !00 m.

In$irect "#siness Ta%es 74 m.&enta' Income 75 m.

et )%ports (*+,1- m.

Government P#rcases (G156 m.

/o#seo'$ ons#mption (304 m.


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Nominal and Real GDP

Jnce a%ain+ to compare those t$o concepts+ the defnitiare:

Nominal GDP is the monetary .alue o all %oods andser.ices that are produced in the country0

Real GDP is a measure o the 7uantity o all %oods anser.ices that are produced0 2n other $ords+ real GDP e7ual to the economic output adjusted or the e/ects in1ation0


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'e could see that di/erence bet$een .ia the ollo$in% simple e4ample usas our uni7ue product in economy:

3uppose e.eryone pic,s apples rom trees0

Denote the price o an apple in year t as pa+t 0

The number o apples pic,ed in year t is %i.en by at0

Thus+ nominal GDP in year t is pa+tKat0

eal GDP in year t is at0As re%ardin% to our defnition+ real GDP increases+ $hen the 7uantity o aare more plentiul0

&o$e.er+ nominal GDP increases by more than real GDP $hen the price increases0



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No$ u can as,+ then $hy and ho$ the real GDP o $hole economy measured in monetary unitsL

&ere is the procedure0

#or some arbitrary year (currently 9-+ nominal GDP is set e7ual GDP0 This should tell you ri%ht a$ay that the le.el o real GDP is mesince it is arbitrary0

eal GDP98 = a98Kpa+9 = K9 m0=8 m0


6ear a pa a-pa Nom.GDP Real GDP7 ,alue8uantity

9 9 m0 m0 m0 m0

98 9 m0 89 m0 89 m0 8 m0


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Te #ircular)9lo dia"ram

The circular ;o dia"ram (also called the circular1o$ model- is perhaps the simplest dia%rammodel oeconomics to understand0 2n essence+ the circular 1o$dia%ram displays the relationship o resources andmoney bet$een frms and households0


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Te #ircular)9lo dia"ram


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2n the model+ frms and households interact $ith one

in both the !roduct market (or %oods mar,et- and theof !roduction market (or actors mar,et-0 The producmar


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#rom the resources pro.ided by households+ business"oods and ser,ices+ $hich are then sold in the prodmar


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GDP and 4uman /elareeepin% the notations the same rom the pre.ious e4amplebetter understand the relationship+ $e need to defne the %both nominal and real GDPs0 3o+

Gro$th in nominal GDP rom year t to year t $ = is:

pa+tH8KatH8pa+tKat

Gro$th in real GDP rom year t to year t H 8 is:

atH8at

2 $e suppose households obtain utility rom apples0 Threal GDP increases+ utility has increased0

3o in this simple e4ample+ "rot in real GDP is inormabout "rot in li,in" standards %utility(0


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A>er1ai?an in f"ures


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Tan< you or yourattention@

Lecture 1 about Azerbaijan Economy

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