by Max Barry

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ECONOMY LECTURE 1: OUTPUT OF THE MIZIA ECONOMY


ECONOMY

This portion of the factbook is taken from relevant portions of lectures delivered by Monsieur Mercer Ratté in Winter Semester 2019 (January 2019-March 2019) for lower level undergraduates at the University of Euskania Bonn Campus. Portions pertaining to course requirements and administrative matters have been omitted.


ECONOMY LECTURE 1: OUTPUT OF THE MIZIA ECONOMY

Before we delve into discussions about the Mizia Economy, I would like to clarify two terms here: Economy and Economics. Since these terms do not have any concrete definitions, it is better to have an understanding of what they actually mean and understand the relations between them.

Adam Smith characterised Economics as “An inquiry into the nature and cause of wealth of nations”. Actually the horizon of Economics is very wide. It talks about scarce source like diamond and also resources like air which are abundant in nature. As diamond is scare it is priced high and as air is abundant so it priced zero. So it talks about the price of both, the scarce one and the abundant one. Adam Smith found that “the things which have greater value in exchange has almost negligible value in use and vice versa”. For example, water, it has great value in use. We can't live without it, but hardly we can buy anything by exchanging it. And look at diamond, we can buy many things but can we eat/drink/breath it? But as the human tendency is to care for scarce more so Economics talks about scarcity more often than not.

Thus, Economics is the study of how society use scarce resources to produce valuable commodities and distribute them among different people.

Now Economy - Economy is Economics at play in a certain region.

Let's understand this. We know what economics is. That is how we can produce more with less resources with prioritising our wants. This is a theory. And we apply all those theories we have planned on a territory say a country. Then the whole things become ECONOMY.

Over the course of next 12 weeks we will be talking and discussing at length about “Mizia Economy”, not economics. I have divided the course into the following parts:

- Output of Mizia Economy
- A Brief Introduction to the Mizia Economy
- Economic History of Mizialand: From 1912 to the Present Times
- Infrastructure Development (not covered in the Factbook)
- Government Finances (not covered in the Factbook)
- Banking (not covered in the Factbook)
- Inflation (not covered in the Factbook)
- The Export Led Growth – the SEZs
- Growth and Challenges of the Mizia Economy

The idea of this lower level undergraduate course is to acquaint you with the very basics of the Mizia Economy. Those of you who would go on to major in Economics will learn in greater detail about ‘Economics’ and the theories and terms therein which are not discussed here. Thus I want to clarify that this course is about the ‘Mizia Economy’, not Economics.

Keeping that in mind let’s start with the concept of ‘Output’. The economies of Lorecia are the largest in Astyria. What do mean by this statement? They are largest in terms of ‘output’. In every economy ‘goods’ are being produced, that is, raw material is being converted into finished goods like cement, cars, trains, bicycles, crops and so on. Similarly, services are being rendered like banking, hospitality, insurance and so on. All these have some monetary value. Some of your mothers may be working in your homes as stay at home mums (now a day there is a trend of stay at home dads which is a good thing). Of course they are doing important work but does it have any ‘monetary value’? No, because they don’t receive any salary for it. Now, coming back to output. We can thus define output as monetary value of all goods and services. But this definition is still incomplete. Here comes the concept of ‘final goods’ and ‘intermediate goods’. Take for example wheat, its milling as flour and consequent making of bread. Here the monetary value of making bread includes that of making wheat and flour, thus we would not count them (wheat and flour) separately because that would entail double counting. We will, rather, count only ‘bread’. But what about the sale of second hand goods like cars. Will we count them? No, as they have been already counted when they were in fresh production. So we define output as ‘final value of all goods and services’. But the definition is still incomplete. This has to counted in a given frame of time like quarter (3 months), half yearly (6 months) or yearly. Thus finally output is defined as: ‘Final monetary value of all goods and services in a given time period.’ Now when we limit it to a particular region, say Mizialand, we get ‘Domestic Product’. Let’s discuss this at greater length.

You know about expats. Will their income be counted in ‘Domestic Product’? No. Will their income be counted in ‘National Product’? Yes. The guest workers in Mizialand are sending a portion of their income as remittance to their home countries. Will that be counted in ‘National Product’ of Mizialand? No. In Domestic Product? Yes. The profits of a foreign company operating in Mizialand? No. The profits of a Mizia company in some foreign country? Yes. So finally we can say:

Domestic Product + Income of Mizias from abroad – Income of foreigners in Mizialand = National Product.

Now, lets say that you want to sell a car that you purchased 5 years ago. Will you sell it at the same price? Of course not because it has undergone some wear and tear. Similarly, the output of an economy also consists of production of machinery which are consumed every year. This is referred to as ‘depreciation’ or 'consumption'. Thus if the output of an economy ignores depreciation, it is called ‘Gross’ and when its accounts for it, it is called ‘Net’. Thus, we have GDP and GNP, and NDP and NNP. NNP and GNP are gradually losing significance since countries that have high external debt tend to service it through increased internal resources which increases outflow and reduces GNP/NNP.

Let’s talk about two more concepts: GDP (nominal) and GDP (PPP). There are two ways to measure GDP (total income (by the way, income and product are the same things) of a country) of different countries and compare them. One way, called GDP at exchange rate, is when the currencies of all countries are converted into USD (Universal Dollar). The second way is GDP (PPP) or GDP at Purchasing Power Parity (PPP). Purchasing Power Parity (PPP) is measured by finding the values (in USD) of a basket of consumer goods that are present in each country (such as pineapple juice, pencils, etc.). If that basket costs $100 in Earent and $200 in Mizialand, then the purchasing power parity exchange rate is 1:2.

For example, suppose that Mizialand has a higher GDP per capita (US$18) than Earent (US$16). This means that the average Mizia person makes $2 more than the average Earent. However, this does not necessarily imply that the Mizias are more affluent. Suppose that one litre of orange juice costs $6 in Mizialand, and $2 in the Earent, i.e. $6 buys a good in Mizialand that can be purchased in Earent for $2. 1 litre of orange juice is taken as a reference good in this example. Simply, 1 litre of orange juice can be bought in Mizialand, versus 3 litre in Earent, with an equivalent amount of money. We can calculate a PPP index for Earent vs. Mizialand equal to 1/3.  According to orange juice prices, Earents have stronger purchasing power, or are able to buy more value with their money. Earent has a PPP-adjusted GDP of $16, which has not changed since in this example we are taking their currency as reference. Mizialand’s GDP, however, is only $6 when adjusted for PPP. This is calculated by multiplying Mizialand’s unadjusted GDP by the PPP index. In reality, a much wider range of goods that includes much more than just orange juice is taken to calculate the PPP index, so that it accurately reflects the average cost of living.

Now apply this to daily life. The orange juice represents the previously mentioned "basket of goods" which represents the cost of living in a country. Therefore, even if a country has a higher GDP per capita (individual income), that country's people may still live poorer if the cost of living is higher.

Finally let us conclude this lecture with the following statistics and graphs :

  • GDP (nominal) USD 1,437,047 million

  • GDP (nominal per capita) USD 55,692

  • GDP (PPP) USD 1,312.53 billion

  • GDP (PPP per capita) USD 49,882

  • GDP Growth Rate 1,5%
    As of March 2019.


GDP Growth Rate 2004-2018


GDP Growth Rate in 2018

The Kingdom of Mizialand

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