Macroeconomics Prof. Juan Gabriel Rodríguez Chapter 1 National Accounts

Macroeconomics

Prof. Juan Gabriel Rodríguez

Chapter 1

National Accounts

Question

How can we measure aggregate economic activity?

National income and product accounts are essential for the understanding of macroeconomic functioning in society…

National Accounts

The output of a country is measured by National Accounts.

National Accounts is an accounting system that registers all transactions between economic agents in an economy.

– Aggregate Output Main determinant of standard of living Productivity is the key!

– The Unemployment Rate Main source of earnings for people

– The Inflation Rate Reduces real wages…which affects income distribution Modifies relative prices Increases uncertainty Reduces the

propensity to save Reduces investment Reduces the competitiveness of national firms

The Fundamental Macroeconomic Variables

What about the Income Distribution?...

GDP per Capita and Life Expectancy

BASIC DEFINITIONS

GROSS DOMESTIC PRODUCT (GDP) INFLATION RATEUNEMPLOYMENT RATETRADE DEFICITBUDGET DEFICIT

GROSS DOMESTIC PRODUCT

SOME ISSUES– SUM OF APPLES AND ORANGES: value (not quantity)– NOMINAL AND REAL FIGURES– DOUBLE COUNTING: Intermediate goods…

FLOW - A GIVEN PERIOD

RATE OF GROWTH - Expansions - Recessions

It is mainly used to measure economic activity

Measure of aggregate output in the national income accounts(The accounting system is on a statistical basis)

APPLES AND ORANGES…

GDP is the value of the final goods and services produced in the economy during a given period– A final good is a good used for

consumption or investment– An intermediate good is a good used in the

production of another good

FinalFinal

QpValueOutput

APPLES AND ORANGES…

GNP is the value of the final goods and services produced by national residents during a given period

Example: a owned plant in U.S. is not included in Spanish GDP

Net National Product (NNP) = GNP – consumption of fixed capital (depreciation)

National Income = Net National Product – Statistical discrepancies

NOMINAL Vs REAL GDP

Nominal GDP– Sum of final goods produced times their current price

Growth due to quantity Growth due to prices

Real GDP– Sum of final goods produced times their base year

price

ttt QpGDP nominal

tt QpG 0DP real

Nominal and real GDP in the U.S.

From 1960 to 2003, nominal GDP increased by a factor of 21. Real GDP increased by a factor of 4.

Double Counting

Wages=70

Profit=30

Wages=80 Profit=20

Revenues=200

Revenues=100

Intermediate good (Steel company)

Final good (Car company)

Intermediate Costs=100

Aggregate output can be measured by the value of final goods produced in the economy.

Double Counting

Wages=70

Profit=30

Wages=80 Profit=20

Revenues=200

Steel companyCar company


Aggregate output can be measured by summing the value added of all goods in the economy.

Revenues=100

VA1

VA2

VA=Revenues –intermediate costs

Double Counting

Wages=70

Profit=30

Wages=80 Profit=20

Revenues=200

Intermediate goodFinal good


Aggregate output can be measured by summing the incomes in the economy (wages, profits, …, interests, taxes,…).

CALCULATING GDP

AGGREGATE OUTPUT– Value of the final goods and services produced

by the economy in a given period.

SUM OF VALUED ADDED– Value added equals the value of a firm´s

production minus the value of the intermediate goods it uses in production.

SUM OF INCOMES IN THE ECONOMY– Value received by the factors of production for

their participation in the process.

FINAL GOODS FINAL SERVICES

GDP - METHOD OF OUTPUT

•CONSUMPTION

•INVESTMENT

•GOVERNMENT SPENDING

•IMPORTS / EXPORTS

Example

Wages=70

Profit=30

Revenues=200

Car company

Intermediate Costs =100

Car purchases …- Families Consumption- Firms Investment- State Public Expenditure- Foreign Sector Exports

The composition of GDP:

Output C + I + G + (X-IM)

Consumption (C): current expenditure of families in consumption goods and services in one year.

Investment (I): expenditure of firms in nonresidential investment, families in residential investment and inventory investment in one year.

Government Spending (G): purchases of goods and services by central, state and local governments in one year.

Net Exports (X-IM): difference between exports (X) and imports (IM).

GDP - METHOD OF OUTPUT

Types of investment

Fixed Investment or GFFC:• Nonresidential investment: new plants, new

machines …• Residential investment: new houses and

apartments. Inventory Investment: the difference

between goods produced and goods sold in a given year.

Production = Sales + inventory investment

Is important the inclusion of inventory investments?

Type Production(€)

Sales(€)

Goods and services bought by families 600 550

Goods bought by firms 120 120

Output: consumption (600) + investment (120), that is, 720.

But considering sales….Output=670 !!

Output = Consumption (550) + Fixed Investment (120)

+ Inventory Investment (50) = 720

Government Spending

Government Spending (G):

• It includes those services provided by the State (they are valued by their cost).

It does not include Public Transfers (Tr) to families and firms, e.g. Social Security payments, subsidies, interest payments on the government debt,….

LABOR INCOME CAPITAL INCOME

– INTEREST– PROFIT

INDIRECT TAXES

GDP - METHOD OF INCOMES

•CONSUMPTION

•SAVINGS

•GOVERNMENT INCOME

•TAXES

•TRANSFERS

BASIC IDENTITIES

Y = C + I + G +X - IM Y = YD + T = C + S + T

T = Direct + Indirect - Subsidies - TransfersGross Investment = Net Investment + Depreciation

Gross Variable - Depreciation = Net Variable

BASIC IDENTITIES

DEMAND PRODUCTION INCOME

PRIVATE SECTOR EXTERNAL SECTOR

PUBLICSECTOR

IMXTGIS

TSCYIMXGIC

BASIC IDENTITIES

• G<T: budget surplus. • G>T: budget deficit.

• IM<X: Trade surplus. • IM>X: Trade deficit.

)( IMXTGIS )( IMXGTIS

Debt Identity Investment-Saving Identity

INTERNATIONAL ACCOUNTS

Country S-I (2007)

S-I (2009)

S-I (2011)

T-G (2007)

T-G (2009)

T-G (2011)

EEUU -2.4 +8.1 +6 -2.9 -11.1 -10

Japan 8.5 9.8 11.1 -5.3 -7 -9.7

China 9.8 7 -0.4 -1

Euro Area 1 5.7 4.3 -2 -6.3 -4.5

Germany 6.6 8.3 6.7 0 -3.3 -2

Spain -13 6.1 2.2 2.2 -11.2 -6.3

The U.S. Balance of Payments, 2006 (in billions of U.S. dollars)

Current Account

Exports 1,436

Imports 2,200

Trade balance (deficit = ) (1) -763

Investment income received 620

Investment income paid 629

Net investment income (2) -9

Net transfers received (3) -84

Current account balance (deficit = -) (1) + (2) + (3) -856

Capital Account

Increase in foreign holdings of U.S. assets (4) 1,764

Increase in U.S. holdings of foreign assets (5) 1,049

Capital account balance (deficit = -) (4) (5) 715

Statistical discrepancy 141

The Balance of Payments

The Market of Factors

The Market of Goods

Supply labor, land and capital

Sell products and services

Spend money to buy goods and services

Pay salaries, interests, rents and

profits

Monetary Flow

Real Flow

Income (= GDP)

Production (= GDP)

Spending (= GDP)

Families (buyers)

Firms (sellers)

The circular flow of income

Model

PARTICIPATION RATE

= Labor force + NO Labor Force(neither working

nor looking for work)

Participation rate Labor force

Noninstitutional Civilian Population=

Noninstitutional Civilian Population (excluding those under 16, in the armed forces or behind bars)

UNEMPLOYMENT RATE

Labor force (L) = Employed (N) + Unemployed (U)

Unemployment rateUnemployed (U)

Labor force (L)

Labor force < PopulationLow participation rate is often linked to high unemployment.

Discouraged workers in Recessions!

=

Statistics about unemployment in Spain

Registered unemployment by the Instituto Nacional de Empleo (INEM).

Labor Force Survey (Encuesta de Población Activa- EPA).

– Random sample of 60.000 households.– A person is considered to be occupied if she/he declares that

she/he is working during the week of survey.– A person is considered to be unocuppied if she/he is not

working and has been looking for a job in the last four weeks.

The unemployment rate in Spain

Oil CrisisIncorporation of Spain to the EU Openness of

Spain to competence

Economic growth phase (15 years)

Housing Bubble

The participation rate in Spain

Why do economists care about unemployment?

Two reasons:

Direct effects on the welfare of the unemployed family problems, health problems, poverty, violence, …..

Signal that the economy may not be using some of its resources efficiently rigidities in mobility, no correspondence between the characteristics of workers and jobs.

THE INFLATION RATE

A price index (P) is a measure of weighted prices for a set of goods that considers a base year.

One good:

Two goods:

0

tt p

pP

expensesTotalAon Expenses

QpQp

Qpg,

pp

gpp

gP BBAA

AAA

B0

BtB

A0

AtA

t

Weights

The GDP Deflactor

The GDP deflactor is 100 in the base year.

The variation rate of the GDP deflactor is the inflation rate:

( )P P

Pt t

t

1

1

The GDP deflactor in the year t is the quotient between Nominal GDP and Real GDP in the year t:

t

tt GDP real

GDP nominalP

The Consumer Price Index (CPI)

The GDP deflactor is an average price for all goods and

services that are produced in a country.

The CPI is an average price for all goods and services that are consumed by families in a country. It measures the cost of living.

The CPI measures the cost of a basket of goods that typically a representative family consumes in one period of time.

Construction of the CPI

We know that…

Relative Prices Monthly survey in establishments. Weights Encuesta Continua de Presupuestos

Familiares (ECPF). Weights must change from time to time to adapt the

index to changes in family consumption habits.

expenses TotalAon expensesFamily

g,pp

gpp

gCPI AB0

BtB

A0

AtA

t

Calculating the CPI in Spain

The inflation rate in Spain

Spain

The GDP growth rate

The GDP growth rate is:

1

1)(

t

tt

YYY

According to the Federal Reserve System: Two consecutive quarters of positive GDP growth is

an expansion. Two consecutive quarters of negative GDP growth is a

recession.

Economic Growth

GDP per cápita is:

It indicates the standard of living in a country:

t

tt Pop

YGDPpccapitaperGDP

)ln()ln(ln

)ln()ln(ln

ttt

ttt

PopYGDPpc

PopYGDPpc

A country may present a low GDPpc (and therefore, a low standard of living) but a large rate of GDP growth China

The Evolution of Macroeconomics

Foundation– Hume, Locke, Cantillon

The clasics and neoclasics– Smith, Ricardo, Marx– Marshall, Fisher, Wicksell

The Quantitative Theory of MoneyThe quantity of money determines the level of prices

David Hume, 1711-1776

– National Accounts (W. Mitchell)– The Great Depresion

Deflation, stagnation of production, unemployment

– Failure of classic macroeconomics

Unemployment queue in Germany, 1930


John Maynard Keynes– “The general theory of

employment, interest and money” (1936)

– Rigidities in prices and salaries

– Government action– Principle of the

efective demand

John Maynard Keynes, 1883-1946


The neoclassical synthesis (1940-1970)– The IS-LM model– Samuelson and Tobin– Microeconomic

foundation of macroeconomics Consumption function,

investment function, money demand, etc

– Macroeconomic models

Paul Samuelson, 1915-2009


Monetarism (1960-1970)– Inflation (años 60)

Stagflation (70’s)– Fiscal policy is

ineffective– Return to the

quantitative theory of money

Milton Friedman, 1912-2006


The new classical macroeconomics (1970- ...)– Inclusion of expectations– Hipothesis of rational

expectations (Robert Lucas) Individuals learn and

anticipate Policy is ineffective

– Real Business Cycles (Edward Prescott) Relevance of tecnological

progress

Robert Lucas, 1937


The New Keynesianism– Expectations are

important but limited

– There are ridigities in markets Wages… Menu costs, ....

Joseph Stiglitz, 1943


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Macroeconomics Prof. Juan Gabriel Rodríguez Chapter 1 National Accounts