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National Income and Product Accounting 1
Introductionand
NIPA Accounting
BA 282
Macroeconomics
Class Notes - Part 1
National Income and Product Accounting 2
Syllabus
Information about the class is on the website:
http://public.kenan-flagler.unc.edu/faculty/browngr/macroweb/
National Income and Product Accounting 3
What is Macroeconomics?
The biggest of “big pictures”
How the whole (global) economy works
Macroeconomics examines things like economic growth employment inflation
National Income and Product Accounting 4
Goals for Students To learn about the major economic factors
What they are... How they are measured... What they mean (and why we care) ...
To begin developing intuition about how economic factors are integrated
To get up-to-date with economic current events
National Income and Product Accounting 5
Why do we want this knowledge?
Answer: So we can make better business decisions!
To understand how macroeconomic conditions
affect individual companies
To understand the “business cycle” and
economic risk
To better understand financial markets and risk
National Income and Product Accounting 6
Goals for Me
To provide key knowledge and understanding about how the macro economy affects you and your business.
To teach you efficiently To get you excited about macroeconomics To have you rate this course as “excellent”
National Income and Product Accounting 7
Thinking Like an Economist
As scary as it sounds, thinking like an economist is important for business decisions
Let’s run through a common example that is important for our purposes:
Comparative advantage & gains from trade
National Income and Product Accounting 8
Comparative Advantage & Gains from Trade (1)
Assume a simple economy with only two goods: Beer and Movies
Let’s also assume for simplicity that there are only two countries The US and Canada
Now suppose that both countries can produce each good but the US is “better” at making movies and Canada is better at making beer. It is pretty obvious that the countries would benefit from
trade. How and why?
National Income and Product Accounting 9
Comparative Advantage & Gains from Trade (2)
Now let’s make the assumption that the US is better at making both beer and movies.
Specifically, lets assume each country has 10 “units” of labor and for each unit of labor they can produce the following:
Country Beer Movies
US 10 4
Canada 3 3
National Income and Product Accounting 10
Comparative Advantage & Gains from Trade (3)
Suppose there is no international trade and each country finds it optimal to devote 7 units of its labor to producing beer (and therefore 3 units of labor to producing movies). Then each country produces and consumes the following:
Country Beer Movies
US 7*10=70 3*4=12
Canada 7*3=21 3*3=9
National Income and Product Accounting 11
Comparative Advantage & Gains from Trade (4)
Now let’s allow the countries to specialize at producing one good and trade with each other. The US should make only beer and Canada should only make movies (why?). National production will be:
Country Beer Movies
US 100 0
Canada 0 30
National Income and Product Accounting 12
Comparative Advantage & Gains from Trade (5)
One possibility is that the US trades 25 beers for 15 movies and national consumption is then:
Country Beer MoviesUS 75 15Canada 25 15
Recall that previouslyCountry Beer MoviesUS 70 12Canada 21 9
What has happened? Is this realistic?
National Income and Product Accounting 13
Measuring Economic Activity To understand the economy we must measure the
economy There are many economic indicators
What are some you hear about frequently?
What we ultimately care most about are measures of overall economic activity
The broadest measure is
GNP = Gross National Product
National Income and Product Accounting 14
Gross National Product (GNP) GNP is:
the value of all final goods and services produced and sold
a measure of a country’s economic output (size) the sum of four components:
Consumption (C) Investment (I) Government expenditures (G) Net Exports (Exports - Imports = EX - IM)
We will use this identity often:GNP = C + I + G + EX - IM
National Income and Product Accounting 15
GNP vs. GDP In 1991 the US joined the rest of the world by using Gross
Domestic Product (GDP) as the measure of the economy GDP = GNP – Net Receipts of Factor Income Net Receipts of Factor Income =
income domestic residents earn on wealth held in other countries
– payments to foreign owners of domestic wealth So, GDP does not correct for domestic output produced by foreign
owned capital Example:
The earnings of an Irish computer factory that is owned by Dell (US) are counted in Ireland’s GDP and in US’s GNP.
Does not matter much in practice for US, for 2001:Q1 Income receipts (378.9B) - Income payments (389.4B) = -10.5B
National Income and Product Accounting 16
GNP/GDP Component Detail C = Private Consumption Expenditures
Durable goods Nondurable goods Services
I = Gross Private Domestic Investment Fixed Investment
Nonresidential structures Nonresidential equipment and software Residential
Change in Private Inventories EX-IM = Net Exports
Goods Services
G = Government Consumption Expenditures and Gross Investment Federal nondefense Federal defense State and local
National Income and Product Accounting 17
US GDP ($ billions, nominal)
1950 Percent 2000 PercentGross domestic product 294.3 100.0% 9872.9 100.0%Personal consumption expenditures 192.7 65.5% 6728.4 68.2% Durable goods 30.7 10.4% 819.6 8.3% Nondurable goods 98.2 33.4% 1989.6 20.2% Services 63.7 21.6% 3919.2 39.7%Gross private domestic investment 54.1 18.4% 1767.5 17.9% Fixed investment 48.3 16.4% 1718.1 17.4% Nonresidential 27.8 9.4% 1293.1 13.1% Structures 10 3.4% 313.6 3.2% Equipment and software 17.8 6.0% 979.5 9.9% Residential 20.5 7.0% 425.1 4.3% Change in private inventories 5.8 2.0% 49.4 0.5%Net exports of goods and services 0.7 0.2% -364.0 -3.7% Exports 12.3 4.2% 1102.9 11.2% Goods 10.2 3.5% 785.6 8.0% Services 2.1 0.7% 317.3 3.2% Imports 11.6 3.9% 1466.9 14.9% Goods 9.1 3.1% 1244.9 12.6% Services 2.5 0.8% 221.9 2.2%Government 46.9 15.9% 1741.0 17.6% Federal 26 8.8% 590.2 6.0% National defense 19.6 6.7% 375.4 3.8% Nondefense 6.4 2.2% 214.8 2.2% State and local 20.9 7.1% 1150.8 11.7%
National Income and Product Accounting 18
What Counts in GNP/GDP? (and Where?)
Which of the following are included in GNP or GDP You buy a box of Garden Burgers at the grocery store A farmer sells soybeans to the local silo A car dealer sells a 1998 Ford Escort to a college student A car dealer sells a new panel van to a florist Compaq manufactures a computer to build up inventory You sell your house to a couple that just moved from FL The Federal government builds a new bridge Texas state government pays unemployment benefits to
former Enron employees GM imports steel for use in a new car
National Income and Product Accounting 19
What Counts in GNP/GDP? Let’s track parts of a hypothetical product through
its production and see how it enters into the NIPA accounts GM imports 800 lbs. of steel from Korea for use in
manufacturing a Chevy Malibu at a cost of $1,300
GM manufactures the Malibu and sells it to a dealer in Dallas for $12,700
The dealer sells the new Malibu to a rodeo queen for $16,800
National Income and Product Accounting 20
Real vs. Nominal So far we have not adjusted for inflation Why would we need to do this?
Compare 8% growth in GDP in the US where inflation is about 3% with Venezuela where inflation is about 25%
Unadjusted GDP is called Nominal GDP and Inflation adjusted GDP is called Real GDP
There are two common ways of adjusting for inflation: Base year comparison Chain-weight comparison
National Income and Product Accounting 21
GDP Deflator GDP Deflator is an index (standardized to
2000=100) that changes nominal GDP to real GDP
Real GDP = Nominal GDP / (GDP Deflator/100)
The percent change in the GDP Deflator is a measure of inflation
The GDP Deflator is the broadest measure of inflation for an economy
National Income and Product Accounting 22
What is a Recession? National Bureau of Economic Research (NBER)
determines official dates for the “business cycle” A committee of top economists called the “Business
Cycle Dating Committee” makes the call: “A recession is a significant decline in activity spread
across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. A recession begins just after the economy reaches a peak of output and employment and ends as the economy reaches its trough.”
For details on the current situation see:http://www.nber.org/cycles/recessions.html
National Income and Product Accounting 23
Real US GDP Growth(1929-2003, annual, purple indicates year with NBER recession)
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%19
29
1934
1939
1944
1949
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
National Income and Product Accounting 24
Real US GDP Growth(1988-present, quarterly, purple indicates quarter with NBER recession)
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1988
:Q1
1989
:Q1
1990
:Q1
1991
:Q1
1992
:Q1
1993
:Q1
1994
:Q1
1995
:Q1
1996
:Q1
1997
:Q1
1998
:Q1
1999
:Q1
2000
:Q1
2001
:Q1
2002
:Q1
2003
:Q1
2004
:Q1
National Income and Product Accounting 25
Contributions to Real GDP %Change
2001 2002 2003 2004-I Gross domestic product 0.5 2.2 3.1 3.9 Personal consumption expenditures 1.7 2.4 2.2 2.6 Durable goods 0.4 0.6 0.6 -0.3 Nondurable goods 0.4 0.6 0.8 1.4 Services 1.0 1.2 0.9 1.6
Gross private domestic investment -1.5 -0.2 0.6 1.4 Fixed investment -0.5 -0.6 0.7 0.8 Nonresidential -0.6 -0.8 0.3 0.5 Structures -0.1 -0.6 -0.1 -0.2 Equipment and software -0.5 -0.2 0.4 0.7 Residential 0.0 0.2 0.4 0.2 Change in private inventories -0.9 0.4 0.0 0.7
Net exports of goods and services -0.2 -0.7 -0.4 -0.7 Exports -0.6 -0.2 0.2 0.7 Imports 0.4 -0.5 -0.6 -1.4
Government 0.5 0.7 0.6 0.5 Federal 0.2 0.5 0.6 0.6 National defense 0.2 0.4 0.4 0.6 Nondefense 0.1 0.1 0.1 0.0 State and local 0.3 0.2 0.1 0.0
National Income and Product Accounting 26
This Time Was Different(contributions to GDP growth)
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
1999
:Q1
1999
:Q2
1999
:Q3
1999
:Q4
2000
:Q1
2000
:Q2
2000
:Q3
2000
:Q4
2001
:Q1
2001
:Q2
2001
:Q3
2001
:Q4
2002
:Q1
2002
:Q2
2002
:Q3
2002
:Q4
2003
:Q1
2003
:Q2
C (incl Residential)
I (excl Residential)
National Income and Product Accounting 27
Global GDP in USD - 2002Rank Country GDP GDP/Capita
1 United States 10,446 36,2192 Japan 3,992 31,4103 Germany 1,990 24,1244 United Kingdom 1,557 26,4395 France 1,423 23,9556 China (Ex. Hong Kong) 1,237 9527 Italy 1,188 20,5178 Canada 728 23,4779 Spain 655 15,90110 Mexico 642 6,358
Total 32,024 5,250EU - 15 8,629 22,804OECD (30 Rich Countries) 26,351 23,040Rest of World 5,674 1,145
(calculated using market exchange rates)
National Income and Product Accounting 28
Problems with Product Accounting
NIPA accounting can be misleading and difficult in practice
Problems include: Black market Household production Fixed capital replacement (e.g., from a disaster) Certain government services (e.g., national security) Externalities (e.g., environmental impact) Quality / technology adjustment (e.g., automobiles)
National Income and Product Accounting 29
Social Welfare We have talked about how to measure the
economy but not how to directly measure the well-being of consumers How might the two differ?
We could use a “social welfare function”
Examples Add up the “utility level” of all consumers (classical
utilitarian or Benthamite) Minimum of all consumers (Rawlsian)
National Income and Product Accounting 30
National Income We have defined GDP in terms of production of
goods and services
We can also think about GDP in terms of national income (Y). Why?
Economists often assume Y=GDP but there is a slightly different precise definition of national income
National Income and Product Accounting 31
National Income
GNP
less: Consumption of Fixed Capital (Depreciation)
= Net National Product
less: Indirect Business Tax
less: Business Transfer Payments
less: Statistical Discrepancy
plus: Subsidies less current surplus of government
= National Income
To keep things simple we will always assume GDP=GNP=National Income (unless otherwise stated).
National Income and Product Accounting 32
National Income
Or looking at it the other way: Y2001 Percent
National Income 9,707.8 100%Compensation of Employees 6,203.0 63.9%
Proprietors' Income 846.9 8.7%
Rental Income 164.2 1.7%
Corporate Profits 1,069.9 11.0%
Net Interest Income 583.2 6.0%
Taxes on Imports and Production 788.7 8.1%
Net Subsidies & Other 52.0 0.5%
(billions USD - percentages do not add to 100% because of rounding errors)
National Income and Product Accounting 33
Inflation Measures Price indexes are used to measure inflation The three most common price indexes are
GDP deflator Consumer price index (CPI)
Prices of finished or retail goods and services Index set to 100 for base year(s), currently 1982-1984 average
Producer price index (PPI) Measures the cost of a given basket of crude goods (raw
materials), intermediate goods, or finished goods (3 indices) Constructed from prices at the level of the first significant
commercial transaction
National Income and Product Accounting 34
CPI Percent Change(From 12 Months Prior, All Urban Consumers)
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%19
50
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
National Income and Product Accounting 35
Recent CPI and CPI ex. Food & Energy(Percent Change from 12 Months Prior)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%19
88
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
CPI- All Items
CPI Excluding Food and Energy
National Income and Product Accounting 36
Components of PPI(Index Levels, Monthly)
80
90
100
110
120
130
140
150
160
170
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Finished Intermediate Crude
National Income and Product Accounting 37
Comparing GDP deflator, CPI, & PPI GDP deflator measures a much wider group of
goods than does the CPI or PPI
CPI & PPI measure a fixed basket of goods, GDP deflator measures things produced in a given year
Inflation over last 20 years as measured byGDP Deflator 3.3%CPI 4.1%PPI 2.3%
What explains these differences?
National Income and Product Accounting 38
Employment and Wages Another important measure of the economy is
employment and labor income (wages + benefits)
The most common measure of the number of jobs in the US is called “nonfarm payroll employment”
Also frequently reported is the “unemployment rate”
number of people seeking jobs =
number of people in the labor force
National Income and Product Accounting 39
Non-Farm Payrolls (1,000s)
127,000
128,000
129,000
130,000
131,000
132,000
133,000
Jan-
99M
ay-9
9S
ep-9
9Ja
n-00
May
-00
Sep
-00
Jan-
01M
ay-0
1S
ep-0
1Ja
n-02
May
-02
Sep
-02
Jan-
03M
ay-0
3S
ep-0
3Ja
n-04
May
-04
National Income and Product Accounting 40
Unemployment Rate(Percent)
0
2
4
6
8
10
12
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
National Income and Product Accounting 41
Recent Employment and Labor Force(Labor Force and Employment in 1,000s, Unemployment Rate in Percent)
132,000
134,000
136,000
138,000
140,000
142,000
144,000
146,000
148,000Ju
l-00
Oct
-00
Jan-
01A
pr-0
1Ju
l-01
Oct
-01
Jan-
02A
pr-0
2Ju
l-02
Oct
-02
Jan-
03A
pr-0
3Ju
l-03
Oct
-03
Jan-
04A
pr-0
4
3.8
4.2
4.6
5.0
5.4
5.8
6.2
6.6Labor Force Employment Unemployment Rate (right scale)
National Income and Product Accounting 42
Adjusted Unemployment Rate
3
4
5
6
7
8
9
10Ja
n-01
Apr
-01
Jul-0
1O
ct-0
1Ja
n-02
Apr
-02
Jul-0
2O
ct-0
2Ja
n-03
Apr
-03
Jul-0
3O
ct-0
3Ja
n-04
Apr
-04
Unemp-Reported
Unemp-Using Population Growth
National Income and Product Accounting 43
What’s Going On?
129,500
130,000
130,500
131,000
131,500
132,000
132,500
133,000
133,500
134,000M
ar-0
1Ju
n-01
Sep
-01
Dec
-01
Mar
-02
Jun-
02S
ep-0
2D
ec-0
2M
ar-0
3Ju
n-03
Sep
-03
Dec
-03
Mar
-04
May
-04
134,000
135,000
136,000
137,000
138,000
139,000
140,000
Payroll Survey (left scale)
Household Survey (right scale)
National Income and Product Accounting 44
Current Account Current Account (CA) is defined as the difference
between Exports (EX) and Imports (IM)
CA = EX - IM CA < 0 is defined as current account deficit CA > 0 is defined as current account surplus CA is also called net foreign investment. Why?
How does CA relate to Foreign indebtedness? Intertemporal consumption patterns?
National Income and Product Accounting 45
US Exports, Imports, & CA Deficit(Quarterly, Percent of GDP, 1996 Dollars)
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%19
50
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
Imports Exports CA
National Income and Product Accounting 46
Current Account and Net Foreign Wealth
National Income and Product Accounting 47
Current Account and National Savings
National Savings (S) is defined as the portion of national income not devoted to consumption or government expenditures. So,
S = Y - C - G
S = (C + I + G +EX - IM) - C - G
S = I + EX – IM = I + CA
National Income and Product Accounting 48
Balance of Payments Three types of transactions are recorded in the
balance of payments Current Account Transactions: transactions that involve
the export or import of goods or services Such as exporting computers or consulting services
Financial Account Transactions: transactions that involve the purchase or sale of an asset Such as money, stocks, bonds, factories, government debt, land,
or collectibles. Capital Account Transactions: everything else
acquisition or disposal of nonproduced, nonfinancial, and some intangible assets (debt forgiveness, transfer of trademarks, etc)
National Income and Product Accounting 49
US Balance of Payments (2000)Credits Debits
Exports 1,414.9 Merchandise 773.3 Investment Income Received 296.2 Other Services 345.4 Imports -1,797.1 Merchandise -1,222.8 Investment Income Paid -215.2 Other Services -359.1 Net Unilateral Transfers -53.2Current Account Balance -435.4
Capital Account 0.7
US Assets Held Abroad -553.3 Official Reserve Assets -0.3 Other Assets -553.0 Foreign Assets Held in US 952.4 Official Reserve Assets 35.9 Other Assets 916.5Financial Account Balance 399.1
Statistical Discrepancy 35.6
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