gHealth Economics Chapter 2.

Macroeconomics, globalization and health

Chapter 2. Macroeconomics, globalization and health

Pre-test

Write your answer on the space provided.

________________ 1. It refers to the rising of the currency value relative to other
currencies.
________________ 2. It refers to the general rise in prices over time. This means that
money loses its value through time.
________________ 3. A positive change in the level of production of goods and services
by a country over a certain period of time.
________________ 4. A situation whereas a country sustained a long-term downturn in
economic activity-more severe than a recession.
________________ 5. Exchange rate that equates the price of a basket of identical traded
goods and services in different countries.
________________ 6. It refers to the falling of the currency value relative to other
currencies.
________________ 7. An indicator used to measure the output of an economy. It is the total
value of goods and services produced in one year in a country. It
is concerned with the output produced in a specific-geographic
location, regardless of the nationality of who produces it.
________________ 8. It measures the economic activities undertaken by citizens and firms
of that country, regardless of where it takes place.
________________ 9. It deals with the performance and functioning of the economy as a
whole.
________________ 10. It tells us how much one country’s money is worth in another
country’s currency.

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Health Economics Chapter 2. Macroeconomics, globalization and health
Learning Objectives:

After the completion of the chapter, the students will be able to:
1. Explain key macroeconomic terms;
2. Identify links between macroeconomic activity, health and health care;
3. Describe the relationship between health care expenditure and GDP, population and health;
and
4. Describe the impact of globalization to health and health care through international trade.

What is Macroeconomics?

Macroeconomics deals with the performance and functioning of the economy as a whole
the relationships between economic growth, output, employment and inflation.

Economic growth is a positive change in the level of production of goods and services by
a country over a certain period of time. There are two indicators to measure the size of output of
the economy: GDP (Gross Domestic Product) and GNI (Gross National Income).

GDP is the main indicator and measure the total values of goods and services produced
within one year in a country. On the other hand, GNI, formerly called ‘gross national product’, is
concerned with measuring the output of economic activities undertaken by citizens and firms of
that country, regardless of where that activity takes place. Per capita GNI is used by the World
Bank to classify countries into stages of development. Table 2.1 shows the classification of
countries based on annual GNI data in 2019.

Table 2.1 World Bank country classification

Group July 1, 2020 (new) July1, 2019 (old)

Low Income <1,036 <1,026

Lower-middle income 1,036 - 4,045 1,026 - 3,995

Upper-middle income 4,046 - 12,535 3,996 - 12,375

High Income > 12,535 > 12,375

According to Umar Serajuddin and Nada Hamadeh of World Bank, there are two reasons
for changes of classifications:
1. In each country, factors such as economic growth, inflation, exchange rates, and
population growth influence GNI per capita. Revisions to national accounts methods and
data can also influence GNI per capita.
2. To keep the income classification thresholds fixed in real terms, they are adjusted annually
for inflation. The Special Drawing Rights (SDR) deflator is used which is a weighted
average of the GDP deflators of China, Japan, the United Kingdom, the United States,
and the Euro Area. This 2020, the thresholds have moved up in line with this inflation
measure.
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Health Economics Chapter 2. Macroeconomics, globalization and health

Activity 2.1

Compare and examine the Per Capita GNI of the ASEAN Nations on 2018 and 2020.
Classify them according to their income. Follow the table below.
Group 2018 2020

Low Income

Lower-middle income

Upper-middle income

High Income

Inflation is another macroeconomic term which refers to the general rise in prices through
time which results in a decrease in the value of money. For example, if prices increase by 7
percent this year, the goods or services that you can buy last year for P100, will cost P107 for
this year. A peso today is worth less than a peso last year in terms of purchasing power.
Inflation therefore is being measured using a price index.

A price index is created by defining which goods are frequently purchased by

households, such as food items. To understand, goods are being placed in a virtual basket
wherein price is being monitored. The overall price change of the goods in the basket measures
inflation. The price index is set at 100 for a particular year (base year), subsequent changes in
prices are talked about relative to this base year. Thus, if the price index was set as 100 for the
year 2000, and the price index was 112.4 in 2001, the inflation for 2001 would be 12.4 percent.
Current value refers to the actual value spent. On the other hand, Constant value refers
to values that have been adjusted for inflation, and therefore reflects the ‘real’ or actual
purchasing power. In economic analysis, it is common to use constant values, so that real
trends can be analyzed over time after taking out the effect of inflation.
Exchange rates tell you how much one country’s money is worth in another country’s
currency. If the value of a currency is going down relative to another, it is depreciating. If it is
rising relative to other currencies, it is said to appreciate in value. Fluctuations in exchange rates
are very important as every country imports and exports goods and services. There are also
flows of money between countries. The balance of payments (BOP) is used to measure these
flows between countries. Usually, payments are measured in the currency of the country that is
paying. Payments made to other countries are seen as debits (e.g. imports), and payments
received from other countries are seen as credits (e.g. exports). So an important indicator of a
country’s performance in international trade and investment is the level of surplus or deficit in
their balance of payments.

Another important element of macroeconomics is international trade. According to the

‘law of comparative advantage’, free trade between countries is justified because it encourages
countries to export goods that they are best at producing – i.e. specialization. The reason why
one country might be better at producing a certain type of good than another is simply that it is
endowed with the combination of resources that are most suitable for producing that good. For
instance, a country with lots of sunshine and wide-open spaces of land could be seen to have a
comparative advantage in agriculture. Each trader engages in the production of a good that best
suits their endowment of skills and resources such that they can specialize in its production and
then trade their good for other goods from others who are similarly relatively more efficient at
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Health Economics Chapter 2. Macroeconomics, globalization and health

producing those other goods. Thus, through specialization, free trade increases global
production, which increases product variety and reduces the cost of goods generally such that
overall wealth is increased. Those countries that engage in trade will therefore see increasing
GDP, a wider selection of available goods and services, higher employment and higher
government revenues (due to higher income). The problem of course is that, in practice, many
countries create barriers to trade to ‘protect’ domestic industries – barriers such as tariffs, import
restrictions and bans. The effect of such protection is that it enables countries to continue to
produce goods in which they have no comparative advantage, but at the same time discourages
those countries who do actually hold the comparative advantage in such products. Why would a
country do this? Usually it is to protect a specific interest group (e.g. a farm lobby, unions,
industry groups, etc.).

The Link between Macroeconomics and Health

Figure 2.1 shows the linkages between the national and international macro level on
health.

Figure 2.1 Elements and linkages between health and national and international macro level
Source: Smith (2006)

The lower half of the figure represents the individual country under consideration, and the
upper half shows the aspects of the international system, which has expanded considerably in
influence in recent decades through globalization. The arrows between the various components
indicate the major linkages.

‘Health’ is highlighted as the major element at the bottom of the figure. A range of
influences are seen to impact upon health (including the health sector of course). Taking the
lower half of the figure first, what we may term as the ‘standard’ influences on health are
illustrated.
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Health Economics Chapter 2. Macroeconomics, globalization and health

These include risk factors, representing genetic predisposition to disease, environmental

influences and infectious disease. Next is what is termed the ‘household economy’, which
represents factors associated with how people behave and, crucially, invest (or disinvest) in their
health by what they consume and in the activities they undertake. We then have the health
sector, which comprises those goods and services consumed principally to improve health
status. Finally, encompassing all these, we find the national economy, representing the meta-
influences of government structures, markets and their influence on economic well-being.

In the upper half of the figure, shows other influencers outside the national economy. For
example, there are a wide variety of international influences directly upon risk factors for health,
including: an increased exposure to infectious disease through cross-border transmission of
communicable diseases; marketing of unhealthy products and behaviours; and environmental
degradation, the effects of which are often not contained within country borders. Increased
interaction in the global economic system will also affect health through influences upon the
national economy and wealth (Sachs 2001; Blouin et al. 2009). It is well established for instance
that economic prosperity is generally positively associated with increased life expectancy,
although increased wealth often brings with it an increase in many chronic illnesses. Finally,
health care will be affected through the direct provision and distribution of health-related goods,
services and people, such as access to pharmaceutical products, health-related knowledge and
technology (e.g. new genomic developments) and the movement of patients and professionals
(Smith et al. 2009). Also note that in the upper half of the figure we see the importance of
international legal and political frameworks that underpin much of these activities, such as
bilateral, regional and multilateral trade agreements.

In terms of linkages between these influences, the black arrows indicate those between
elements at the global or national level, and the striped arrows indicate specific forms of linkages
between the global and the domestic circumstance. The first striped arrow shows how increased
macroeconomic trade will bring associated changes in risk factors for disease. These will include
both communicable diseases, as trade encourages people and goods to cross borders; and non
communicable diseases, as changes in the patterns of food consumption, for example, are
influenced by changes in income and industry advertising. Second, increased macro-level
interaction will impact upon the domestic economy through changes in income and the
distribution of that income, as well as influencing tax receipts. This will influence the household
economy and also the abilities of government to be engaged in public finance and/or provision
of health care. Finally, the third striped arrow indicates that there will be direct interactions in
terms of health
related goods and services, such as pharmaceuticals and associated technologies, health care
workers and patients.

Communicable and Non-Communicable Disease

The spread of Communicable Diseases takes two ways: (1) the overall environment in
which people live (concerned with pollution, sanitation, etc.) is determined – in large part- by their
income and wealth; and (2) the increase in international movement of people, animals and goods
associated with increased trade will affect the movement of disease, i.e. COVID 19.

Perhaps less obvious is the relationship between macroeconomic activity and non
communicable diseases. Although macroeconomic growth can be beneficial when it leads to an
expansion in the consumption of the goods that improve health, such as clean water, safe food
and education, it also facilitates the increased consumption of goods which may be harmful or
hazardous to health, which may be termed ‘bads’. Trade liberalization will reduce the price of

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Health Economics Chapter 2. Macroeconomics, globalization and health
 imported ‘bads’, through reduced tariff and non-tariff barriers, and increase the marketing of
‘bads’, such as tobacco, alcohol and ‘fast food’. In the case of alcohol and tobacco, the
development of regional trade agreements (RTAs) has helped to significantly reduce barriers to
trade in these products, by breaking up the hitherto protected markets that contribute to
enhanced consumption (Onzivu 2002; OECD 2003).

In terms of food-related products, increased macroeconomic integration will affect the

entire food supply chain (levels of food imports and exports, foreign direct investment in the agro
food industry and the harmonization of regulations that affect food), which subsequently affects
what is available at what price, with what level of safety, and how it is marketed. For example, in
what is termed the ‘nutrition transition’, populations in developing countries are shifting away
from diets high in cereals and complex carbohydrates, to high-calorie, nutrient-poor diets high in
fats, sweeteners and processed foods (Popkin 1998). Increased trade liberalization is one driver
of the nutrition transition because it has had the effect of increasing the availability and lowering
the prices of foods associated with the growth of diet-related chronic diseases, as well as
increasing the amount of advertising of high-calorie foods worldwide (Hawkes 2006).

Activity 2.1 Where did your budget go?

You are responsible for procuring drugs in your country. The Department of Health has a major
effort to improve drug supplies and almost doubled the drug budget over the past five years.
However, the extra effort did not have any effect. Complete the table to find out why it did not
become effective.

Answer the following:

1. Most of your drugs are imported from neighboring countries and usually paid in US$.
Calculate the total amount available in your drugs budget in US Dollars for the years 2017-2020.

2. Compare the difference in your purchasing power through deflator: Price Index (base
year) ÷ Price index (current year)

3. Calculate the ‘real’ purchasing value of your US Dollar drugs budget. [Current US$ x
deflator]

4. What happen to your budget through time? Did the DOH make right decision? Explain
2015 2016 2017 2018 2019 2020

Drugs Budget
5,452,156.00 6,542,587.20 7,851,104.64 9,421,325.5 11,305,590.68 13,566,708.82
7

Exchange Rate 42.01 43.67 45.89 46.03 48.67 51.08

Total Current
US$ 229,045,073.56 285,714,783.02

Price Index of 100 112.4 126.3 142 159.6 160.4

country where
drugs are
imported from
(2015=100)

Deflator 1 0.89

Total in real US$

229,045,073.56 254,194,646.82
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Health Economics Chapter 2. Macroeconomics, globalization and health

Trade of health-related goods and services

Finally, the health sector is increasingly involved in the direct trade of health-related
goods and services. For instance, spending on pharmaceuticals represents a significant portion
of health expenditure in all countries. They are also the single most important health-related
product traded, comprising some 55 per cent of all health-related trade by value (the share of
the next most significant health-related goods traded, small devices and equipment, is 19 per
cent). The market is highly concentrated, with North America, Europe and Japan accounting for
around 75 per cent of sales (by value) (Smith et al. 2009).

Overall, HICs produce and export high value patented pharmaceuticals and LICs and
MICs import these products, although some produce and export low-value generic products. This
leads to many developing countries experiencing a trade deficit in modern medicines, which
often fuels an overall health sector deficit. Interestingly, however, even among most HICs there
are considerable trade deficits in pharmaceuticals, given their overall levels of consumption.
Trade in health services has also expanded greatly in the last decade due to the push by the
World Trade Organization (WTO) for trade in services more generally under the General
Agreements on Tariffs and Trade (GATTs).

Globalization has in part been made possible due to improvements in information and
communication technology (Yach 1998). These improvements have also contributed to the
remote provision of health services from one country to another, known as ‘e-health’. Examples
of services provided include diagnostics, radiology, laboratory testing, remote surgery and tele
consultation.

Another type of trade in health services arises from the consumption of health services
abroad. This is also known as ‘health tourism’ and entails people choosing to go to another
country to obtain health care treatment. This attracts approximately 4 million patients each year,
with the global market being estimated to be $US40– 60 billion (Datta and Krishnan 2003).

As liberalization increases and migration becomes easier, the movement of people

across borders also increases. As a result, many health professionals choose to leave their
home countries for richer, more developed ones. This is the case for doctors, nurses,
pharmacists, physician assistants, dentists and clinical laboratory technicians. It is estimated
that in the UK the total number of foreign doctors increased from 20,923 in 1970 to 69,813 in
2003 (Connell et al. 2007). These figures may not seem that significant, but they often represent
a large share of a country’s total doctors. In Ghana, for example, the number of doctors leaving
accounts for 30 per cent of the total number of doctors (Connell et al., 2007).

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