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2017 Spring
Macroeconomics
Lecture 1
Macroeconomic Variables
System of National Accounts (1)
Business Macro Lecture 1 Page1
Lecture Outline
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What is macroeconomics? － comparison with microeconomics
＊ Economics can be divided roughly into microeconomics and macroeconomics. Compared with
microeconomics, what are characteristics of macroeconomics?
●
Lectures 1 and 2: Measuring macroeconomic activities- definitions of important macroeconomic
variables and relations among different variables
How to capture macroeconomic activities of real economy conceptually and quantitatively so that they can be analyzed using theories
(models) ? (Since economic theories are expressed in mathematical equations, macroeconomic activities must be captured quantitatively.)
Macroeconomic theories describe relations among macroeconomic variables.
–
System of National Accounts (SNA) ＊ an accounting system for grasping economic activities of a national economy. Many of important
macroeconomic variables such as GDP are defined and measured in SNA.
–
Gross domestic product (GDP)
＊ an indicator of the production level of an economy; the central concept in SNA
–
Nominal GDP and real GDP ＊ Comparison of production levels over time
–
Price index: GDP deflator, CPI (consumer price index)
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What is macroeconomics?
－ Comparison with microeconomics
＊ Briefly introduce what the subjects of macroeconomics are and what kind of approaches of analysis it adopts.
(1) Subjects of analysis
Microeconomics: analyzing economic activities of a specific firm, market, industry, or household. ＊ the most
Price theory: In a market, how many goods are produced and at what prices they are transacted. In addition, how they are affected
by changes in “environments,” or government policies. Game theory: can be applied to analyze strategic interactions among firms.
＊ Besides goods markets (consumption goods, capital goods, and intermediate goods), “market” also includes rental markets for
production factors (labor, capital (physical production equipment such as plant and machinery)) and the financial/capital market.
* Households: the basic residential unit such as an individual and a family. Economic activities of a household includes marriage,
childbirth, etc. as well as work and consumption.
Macroeconomics: analyzing aggregate economic activities of a country (or the world). The two major topics
are business cycle (short-term fluctuations of economic activities) [and macroeconomic policies] and
economic growth (long-term movements)). (explain with a graph)
＊ Economic growth focuses on changes in levels of economic activities for several decades or more. (explain with an example)
Themes: Why do business cycle and economic growth occur? What kind of policies should be taken in face of them? etc.
＊ Many other economic problems concerning the overall economy of a country are subjects of macroeconomics. For example,
changes in a country's income distribution. Or to be more specific, the influence of the declining birthrate and aging population on
the Japan's economy. Because these problems are related to changes in a country-level economic activities, theories learned in this
course are foundations in analyzing macroeconomic problems other than business cycle and economic growth as well.
＊ Note that an economic problem can often be analyzed from both the microeconomic viewpoint and the
macroeconomic one.
＊ For example, the performance of a firm. Though basically this depends on the strategy and luck of the firm and the growth of
the industry, it is also affected by macroeconomic factors such as the business condition of the national and the world economies,
changes in the industry structure, and so on.
＊ Alson, the development of the Japanese economy depends on not only on macroeconomic factors (such as government policies,
the population structure etc.) but also on micr factors- e.g. how good products and services developed by individual firms are and
how hard individuals work and improve their abilities.
＊ Thus, for economic problems studied in microeconomics, though the importance of microeconomics is relative high, it does not
mean that macroeconomics is unnecessary, and vice versa.
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What is macroeconomics?
－ Comparison with microeconomics (2)
(2) Approaches of analysis
Microeconomics: A bottom-up approach. Approach economic phenomena of interest from decision-making
problems of individual economic agents (such as households and firms).
●
＊ For example, in price theory (analyzing the determination of prices and quantities of goods traded in markets. The
most important theory in microeconomics.), solving profit-maximization problems of firms and utility-maximization
problems of consumers, deriving market equilibria, and calculating prices and quantities (demanded and supplied) of
goods.
●
Macroeconomics (of the undergraduate level): models are constructed based on observed relations among
aggregate variables that capture economic activities of a country (macroeconomic variables, e.g. GDP).
Although decision-making problems of individual economic agents are behind the models, in many cases,
they are not described explicitly. ＊ Micro-level decision-makings are taken into account when constructing
a model, but not shown explicitly.
＊ Why is this approach adopted? (1) subjects of macroeconomics are enormous and complicated – Approaches
based on microfoundations should be adopted for the consistency of models. In fact, it is actually the mainstream of
modern macroeconomics (macroeconomics above graduate level). However, about 60 years ago when the IS-LM model,
which is the basis of undergraduate-level macroeconomics, was built, microeconomics had not reached the level of
adopting this approach. It is not possible to learn the modern, micro-founded macroeconomics without mastering
microeconomics. (2) simple but powerful － Though the approach is simple, it is able to capture rough behaviors of real
economy. In contrast to models with microfoundations, which may sometimes be very complicated, the models we are
going to learn can be analyzed using simple graphs.
Theories of microeconomics and macroeconomics are fundamental tools for studying various applied fields,
such as international economics, development economics etc.
Speaking exaggerately, economics is the field that applies the theories of microeconomics and macroeconomics (especially
●
the former) to analyze economic issues of any kind. And, econometrics is the tool needed for evaluating theories based on
data of real economy.
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System
of
National
Accounts
Measuring macroeconomic activities
In order to analyze a macro (a country's) economy, first it is necessary to grasp
macroeconomic activities under study. That is, it is necessary to categorize economic activities of individual economic agents such as consumers,
firms, and the government, by their natures and aggregate the categorized activities by each type of economic agents. Because the understanding
of the overall economic activities of a country is the basis of economic policies, this task is carried out by government institutions. The central
“measurement system” is –
●
System of National Accounts (SNA)
The accounting system for recording aggregate economic activities of a nation. Many of important
macroeconomic variables such as GDP are defined, measured, and related to each other in the SNA.
●
＊ What SNA does is that it tries to capture various relations and “transactions” (or flows of money and goods) among different sectors of the
economy systematically .
＊ The United Nations presents the international standard and advocates its use to member nations. In Japan, the Economic
and Social Research Institute of the Cabinet Office constructs the SNA. The international standard used in Japan since
December 2016 is 2008SNA.
＊ Broadly speaking, SNA consists of five accounts: national income account (production, distribution, and expenditure), IO table, flow-of-funds
statistics, balance of payments statistics, and national balance sheet (the record of stock). In a narrow sense, it refers to national income account.
(1) Recording flow-side economic activities: flows of goods and services (production, distribution, and
expenditure), and funds.
Flow variables: measured as quantities/values per period. Example: GDP
In a given period (one year, one quarter), what and how much are goods and services produced in each sector constituting the
economy? Where and at what prices are they sold? How are the generated income distributed and expended (consumption,
investment)? Responding to these activities, how do funds flow?
(2) Recording stock-side economic activities: assets and debts.
Stock variables: measured as accumulated quantities/values at a specific point in time. Example:
government debt
At a specific point (e.g. March, 2011), how much do assets (physical assets such as housing, production equipment, land, and inventory,
and financial assets such as cash, deposits, and stocks) and debts (financial assets, trade payable( 買入債務 )) exist in each sector? (ber
of hirings and separations, and the number of employed and unemployed individuals. Also use the example of dam, if necessary.)
＊ Here we focus on important variables measuring flow-side economic activities. ＊ Variables in models taught in
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this course are mostly flow variables. (Unemployment rate is a stock variable.)
Gross Domestic Product (GDP)
●
Gross domestic product (GDP) ＊ the most basic macroeconomic variable.
(Definition of GDP, 1) the total value (price×quantity) of all the final goods (includes services) produced
within a country in a given period
a given period: a flow variable. 1 year or 1 quarter (the shortest interval of measurement). Sales of used goods produced before
the current period (transfer of ownership between traders) and inventory (counted when it was produced) are not included.
final goods (↔intermediate goods)values of goods and services used as inputs in producing other goods (intermediate goods)
is not included. It only includes goods used for final consumption and investment (in macro, investment is expenditure on production
equipment (such as machines) and structure (such as buildings)) (explain with a graph) (see the note below for the case where foreign
tradevalue: Since different goods and services have different market prices (evaluated differently), just summing up quantities is not
correct. (Treatment of goods and services that are not traded in markets will be explained later.
Example: an economy composed of a rice farm and a rice store GDP is 2.5 million yen, which is the revenue from the
final good, the polished rice. The 1 million yen gained from the sale of the intermediate good, the unpolished rice, is not included.
Farm
Rice store
＊ (Note) The case where foreign trade exists: intermediate goods exported
revenue 1 million revenue
2.5 million to foreign countries are final goods to the home country. (because they are
not used for the production of other goods in the home country) Thus, they
expenditure
are included in GDP. On the other hand, intermediate goods imported from
wage
1.5 million foreign counties (before tariff) are final goods for foreign countries and
purchase of brown rice 1 million being counted in GDPs of foreign countries. Therefore, it is necessary to
deduct this part from the value of the final goods produced domestically
＊ Value added (of a producer): (value of production) － (value of purchased intermediate goods) ＊ The value of production
includes the (indirect tax – subsidy) imposed on the production of the good. In addition, in the case of imported goods, the tariff revenue is
counted as value added. As mentioned above, production of goods and services is carried out by using not only production factors like labor and capital
(here capital means physical (nonhuman) production equipment such as plants and machinery) but also intermediate goods, that is, goods and services such
as raw materials and components of final goods. (explain with a graph)
the above example:
the value added from farm's production activity is 1 million, and that from the rice store's is 1.5 million yen
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Gross Domestic Product (GDP) (2)
(Definition of GDP, 2) the sum of value added generated in a country in a given period
the above example: GDP=1+(2.5-1)=2.5 (million yen). Note that simply summing up revenues from sales results in double
counting. ＊ When foreign trade exists, the valued added base GDP is easier to understand.
Gross National Income (GNI)＝Gross National Product (GNP): the value (price×quantity) of final goods
produced by nationals of a country in a given period
GNI (GNP) = GDP + (net factor income receipt from abroad) *To be precise, after 68 SNA there is no “national”
●
concept since receiving capital income from foreign economies takes time.
nationals: To be precise, domestic residents. In 93SNA, they are individuals (including foreigners) and firms engaged in economic
activities domestically for more than one year, excluding foreign students.
factor income: I
or
income from abroad＝income from production factors in foreign countries possessed by residents in Japan – income from factors
ponet:ssessed in Japan by residents in foreign countries. (explain with a specific example) Asset income such as the interest revenue
from foreign government bonds of residents in
Japan is also included.
＊ ains
●
Treatment of goods not traded in markets
●
Governmental services are reflected in GDP and GNI.
●
But, in the private sector, most of goods and services traded outside markets are not reflected.
Thus, GDP and GNI do not capture many production activities, especially in developing economies
where non-market transactions and the underground economy are important. *Underground economy:
●
economic activities the government cannot capture, such as illegal transactions and unregistered economic activities. ＊
Should “negative production activities” such as pollutions and crimes.
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Nominal GDP and Real GDP
●
Comparison of production levels at different points of time
–
Nominal GDP: GDP calculated with current prices of goods and services. The GDP mentioned so far. It is
not appropriate for comparison of production levels at different points of time.
–
(Fixed base year) Real GDP : GDP calculated with prices of goods at a certain base year.
(Example) an economy which produces only rice and wheat
year 0
rice
wheat
nominal GDP
year 1
rice
wheat
nominal GDP
quantity (ton)
price (10,000 yen/ton) value of production
1000
10 100 million yen
500
5 25 million yen
125 million yen
500
10 50 million yen
1000
10 100 million yen
150 million yen
Real GDP of year 1 calculated with the price of year
0:
500*10+1000*5＝100 million yen
< real GDP of year 0　Real GDP of year 0 calculated with the price of year
1: 1000*10＋500*10＝150 million yen
＝GDP of year 1. Note that the choice of the base
year affects not only the value of real GDP but
also the relative magnitude of real GDPs of
different periods.　＊ In order to avoid the influence of the choice of base year, the chain-weighted method, which updates base
year every year, has been adopted since December, 2004 in Japan. (Currently, the chain-weighted series is the
formal series from the first quarter of 1994.) This is calculated by changing the base year every year, and
(real GDP of time t) ＝ (real=nominal GDP of time 0 [the reference year])*(the real GDP growth rates of all the years after year
0) (To be mentioned at the end of the lecture, if time permits.)
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＊ The data can be downloaded from
the homepage of Economic and
Social Research Institute (ESRI),
Cabinet Office. Most of the data
used in this course can be
downloaded from the homepages of
the institutes creating the data.
Nominal and Real GDP
(1955-2015 fiscal year, 2011 calendar year price)
GDP (trillion yen)
600
＊ 68SNA GDP : only the data before
2000 is available.
Nominal GDP
500
Real GDP
93SNA (chain-weighted):
the available data is from 1980.
400
＊ Fiscal year: in Japan, April to
March of the next year.
300
200
100
0
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Fiscal year
＊ The two series coincide in the
benchmark year, 2000. If there is an
increasing trend in the price level, it
should be that before the base year:
real > nominal, after the base year:
nominal > real. However, after the
90s, the relative magnitude became
the opposite. This reflects deflation
after the latter half of the 90s.
*Observe the sharp drop after the
Lehman shock.
(Source) SNA, Economic and Social Research Institute, Cabinet Office
The data follows 68SNA until 1979 and 93SNA (the chainweighted method) for 1980-1993, and 2008SNY after 1994.
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Nominal and Real GDP growth rates
(1955-2014 FY, Reference year =2005)
25
20
Nominal GDP growth rate
Real GDP growth rate
Growth rate (%)
15
10
5
0
-5
-10
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Fiscal year
(Source) SNA, Economic and Social Research Institute, Cabinet Office.
The data follows 68SNA until 1979 and 93SNA (the chainweighted method) after 1980.
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Price Index
●
Price level: aggregate measure of prices of various goods in the economy
●
Inflation (deflation): sustained increase (decrease) in the price level
＊ Since it changes over business cycle, it is important for assessing the state of the economy. Note that it is different from the relative price
between different goods. (In microeconomics, only relative prices are important.) The price index that can be derived directly from GDP is –
Two important price indices measuring the price level of the economy
●
＊ GDP deflator:
By the definition of real GDP, it is 1 in the base (reference)year.
1 if higher than the base (reference) year.
＊ Consumer Price Index (CPI): a price index used frequently, though it is not related to SNA. Corporate goods price index
(changed from wholesale price index after 2002) is also used frequently.
Differences between the two indices ＊ There are 2 types of GDP deflators, the one explained here which is calculated from the production
side and the other one calculated from the expenditure side. The latter one is obtained by first summing up real gross domestic expenditure calculated by
aggregating each item of nominal expenditure using a Paasche price index, and then dividing the real expenditure by the nominal expenditure.
●
(1) Composition of goods
GDP deflator: By the definition of GDP, it consists of only the goods produced domestically, not including imported
goods. It is necessary to deduct not only imported final goods but also imported intermediate goods (before tariff) from
the value of final goods produced domestically.
Consumer price index: consisting of goods consumed by households, including imported goods. Capital goods and services
related to corporate activities are excluded. It can be regarded as an index focusing on households' consumption activities. Similarly,
corporate price index and corporate services price index are regarded as indexes focusing on trades between campanies.
(2) Method of calculation
Laspeyres price index
Paasche price index
∑ i pit qi 0
∑ i pi 0 qi 0
∑ i p it qit
∑ i pi 0 qit
* Calculation of real GNI: simply adding real value of
net factor income receipt from abroad to real GDP is incorrect
It is necessary to add trading gains.
trading gains = (net export/trade deflator)
- (export/export df - import/import df) Business Macro Lecture 1 Page11
Price Index (2)
Rates of change of GDP deflator and CPI
(1955-2015FY)
25
Rate of change (%)
20
GDP deflator
CPI
15
10
5
0
196019651970197519801985199019952000200520102015
-5
Fiscal year
(Sources) SNA, Economic and Social Research Institute, Cabinet Office.
(2) Method of calculation (continued)
(Fixed year base) GDP deflator: it compares the current
price with the base year price, using quantities of goods produced
in the current period as weights (Paasche). Because of high
weight of goods like computers characterized by rapid
technological progress and rapid decrease in price and increase in
production [since their present production levels are high], it
tends to overestimate deflation (underestimate inflation). This is
one of main reasons to adopt chain-weighted method.
Consumer price index: Compares current price with base
year price, using quantities of goods consumed in base year as
weights (Laspeyres). Opposite to GDP deflator, it overestimates
inflation, the change in cost of living in the context here.
(Consumption and investment of a good usually decrease if its
relative price is higher than that of the base year. However, CPI
uses the base year quantities as weights for the prices of this kind
of goods.) In Japan, base year is changed every 5 year. There
exists a reference (informal) series calculated based on the
chain-weighted method.
Left figure ＊ As for the GDP deflator, the tendency explained
above is observed.
＊ The two series show extremely similar movements except the
first half of the 60s. Note that during the 2 oil crises, the growth
rate of CPI increased more. (likely to reflect hikes of prices of
imported consumption goods such as gasoline)
The data follows 68SNA until 1979 and 93SNA (the chain- * The recent hike in the rate of change is mostly due to the
weighted method) for 1980-1993, and 2008SNY after 1994. increase in the consumption tax rate.
Statistics Bureau, Ministry of Internal Affairs and
Communications, Consumer Price Index (General index with
imputed rent for owner-occupied dwellings excluded)
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