Why East Asian economy?

& Basic economic concepts for this course

Introduction 1
 Why EA economy?

 Successful economic development over ext

ended period
• A single region where many regional countries
could get out (or be getting out) of the developing c
ountry status
• Japan- Four East Asian NIEs (Four Tigers)- Firs
t comer Southeast Asian NIEs and China- Late c
omer SEA economies
• Some people called “Flying geese pattern”
• The pattern has become no longer valid (why?)
 Why EA economy?
 Many EA economies had some common charac
teristics in their economic development
• Distinguished from the prescriptions of the mainstr
eam economics (“Washington Consensus”)
* Homework: What is Washington Consensus?
• Some suggest “East Asian Model” of economic dev
elopment (a debatable issue)
• Though substantial differences exist among EA econo
mies
• What are key characteristics of the ‘East Asian Mode
l?’
 Key Questions
Q1. What countries are included in EA (this course)
?
* Geographic, cultural, or economic?
* How homogeneous are these EA countries? Cultural s
imilarity & regional identity consciousness
Q2. How similar are they, particularly in their patt
ern of economic development?
* “EA model” exists or not?
Q3. How much integrated are the EA economies?
* Show synchronous business cycle?
* Functional (market-based) integration vs. institutiona
l integration <cf: Europe
 Key economic concepts

• GDP (Gross Domestic Product): “Market value of

all final products produced within a country for a
period of time (year)”
• Each product is valued with its market price
• Some products not traded in markets are not include
d
• Intermediate products not included to avoid double
counting
• GDP measures total production, total income & total
expenditure of a country (essentially, identical)
• Y= C + I + G + NX(=Exp-Imp): aggregate demand (tota
l expenditure)
= Cd + Id +Gd + Export
 Figure 1
The circular flow
This diagram is a
schematic representation of
the organization of the
economy. Decisions are
made by households and
firms. Households and
firms interact in the markets
for goods and services and
in the markets for the
factors of production. The
outer set of arrows shows
the flow of dollars, and the
inner set of arrows shows
the corresponding flow of
inputs and outputs.

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 (Continued)
 Nominal GDP vs. Real GDP
• Valued at current price vs. constant price (base year price)
• Growth rate is computed with real GDP data over time
 GDP as a measure of the living standard (well-bein
g)
• Per capita GDP(=GDP/population): average total potentia
l income per person
• Widely used as a measure of material well-being
 Flaws of GDP as a measure of the living standard:
• non-market production (self-consumed products) excluded
• not consider leisure, environment (pollution), etc
• not consider income distribution
 (cont’d)
 Economic growth
• A general concept to measure the change in the real
GDP (per capita) over time
 Economic Development
• Applied to developing countries
• Economic Growth + Structural change
• Key structural change in the early stage of develop
ment: “rising share of industry (falling share of agricultu
re) in both GDP and employment”
• industrialization (& urbanization)
•<cf: Rise in per-capita GDP of resource-rich countries
 (Continued)
 International comparison of GDP
• Need to denominate GDP of countries in common curr
ency (US$), typically using the official exchange rate
• Limits of the exchange rate in evaluating relative purc
hasing power of different currencies
• Enduring price differences for non-tradables (eg. services) ac
ross countries
• https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
 PPP-based GDP
• Try to correct the above limits, by applying the same v
alues for the same products in a fixed basket of goods an
d services for all countries (Purchasing Power Parity)
• Increase the GDP size for low-income countries
• https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)
 “Vicious Cycle of Poverty”
 A jargon coined by R. Nurkse
• Describe the fundamental condition (problem) of poor coun
tries:
• “low income- low saving (surplus)- low investment- low capita
l stock- low production (productivity)- low income”
• (physical) capital (K): Stock of equipments (machinery,
etc.) and structures (factory, infrastructure) used to produce
• Investment (flow): activities to increase the capital stock fo
r a certain period (eg. one year)
 Breaking the vicious cycle is the key for igniting economi
c development of poor countries
• What is the key link in this vicious cycle to break?
 Other evaluation criteria
 Distribution Equity:
•Diverse criteria (not a single criterion)
• Reduce the degree of inequality in income or
wealth distributions
• Improve the condition of the worst-off people
• Reduction of (absolute) poverty
• Inequality Index (measure):
• Gini coefficient (0<Gini coefficient<1)
• Lorenz Curve
•R10= (Top 10% share/Bottom 10% share) ratio
 Market Failure
 Market Failure
•(In narrow sense) Market fails to achieve efficiency u
nder certain conditions
 A major cause of market failure: externality
•“uncompensated effect of one’s action (production or co
nsumption) on the well-being of the third party”
• Positive externality vs. negative externality
• Externality in consumption vs. production
• Under negative (positive) externality, the market outcome w
ill be excessive (insufficient) production
Market failure due to information as
ymmetry
 Adverse selection
• Due to information asymmtry on characteristics
• Tendency for the unobserved characteristics to become und
esirable from the standpoint of an uninformed party
• Lemon (in the used car market), financial market (for loan)
 Moral hazard
• Due to information asymmtry on action (behavior)
• Tendendy for a person who is imperfectly monitored to eng
age in dishonest (socially undesirable) behavior
• eg. principal-agent problem