Download National Accounts - juan gabriel rodriguez

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.
The Fundamental
Macroeconomic Variables
–
Aggregate Output

–
The Unemployment Rate

–
Main determinant of standard of living  Productivity is the key!
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
What about the Income Distribution?...
GDP per Capita and Life Expectancy
BASIC DEFINITIONS
GROSS DOMESTIC PRODUCT (GDP)
 INFLATION RATE
 UNEMPLOYMENT RATE
 TRADE DEFICIT
 BUDGET DEFICIT

GROSS DOMESTIC PRODUCT
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)

SOME ISSUES
– SUM OF APPLES AND ORANGES: value (not quantity)
– NOMINAL AND REAL FIGURES
– DOUBLE COUNTING: Intermediate goods…
RATE OF GROWTH - Expansions - Recessions
FLOW - A GIVEN PERIOD
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
Output  FinalValue  Final p  Q
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
nominal GDPt  pt  Qt

Real GDP
–
Sum of final goods produced times their base
year price
real GDPt  p0  Qt
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
Revenues=200
Wages=70
Profit=30
Aggregate output can be measured
by the value of final goods produced
in the economy.
Revenues=100
Intermediate
Costs=100
Wages=80
Profit=20
Final good
(Car company)
Intermediate good
(Steel company)
Double Counting
Revenues=200
Wages=70
VA2
Profit=30
Aggregate output can be measured
by summing the value added of all
goods in the economy.
Revenues=100
Intermediate
Costs=100
Wages=80
Profit=20
Car company
Steel company
VA=Revenues –intermediate costs
VA1
Double Counting
Revenues=200
Wages=70
Profit=30
Intermediate
Costs=100
Final good
Aggregate output can be measured
by summing the incomes in the
economy (wages, profits, …,
interests, taxes,…).
Wages=80
Profit=20
Intermediate good
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.
GDP - METHOD OF OUTPUT


FINAL GOODS
FINAL SERVICES
•CONSUMPTION
•INVESTMENT
•GOVERNMENT SPENDING
•IMPORTS / EXPORTS
Example
Revenues=200
Wages=70
Profit=30
Intermediate
Costs =100
Car company
Car purchases …
- Families  Consumption
- Firms  Investment
- State  Public Expenditure
- Foreign Sector  Exports
GDP - METHOD OF OUTPUT
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).
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,….
GDP - METHOD OF INCOMES



LABOR INCOME
CAPITAL INCOME
– INTEREST
– PROFIT
INDIRECT TAXES
•CONSUMPTION
•SAVINGS
•GOVERNMENT INCOME
•TAXES
•TRANSFERS
BASIC IDENTITIES
Y = C + I + G +X - IM
Y = YD + T = C + S + T
T = Direct + Indirect - Subsidies - Transfers
Gross Investment = Net Investment + Depreciation
Gross Variable - Depreciation = Net Variable
BASIC IDENTITIES
DEMAND
PRODUCTION
INCOME
C  I  G  X  IM  Y  C  S  T
S  I  G  T  X  IM
PRIVATE
SECTOR
PUBLIC
SECTOR
EXTERNAL SECTOR
BASIC IDENTITIES
Debt Identity
S  I   T  G  ( X  IM )
• G<T: budget surplus.
• G>T: budget deficit.
• IM<X: Trade surplus.
• IM>X: Trade deficit.
Investment-Saving Identity
S  I  G  T   ( X  IM )
INTERNATIONAL ACCOUNTS
Country
S-I
S-I
S-I
T-G
T-G
T-G
(2007)
(2009)
(2011)
(2007)
(2009)
(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 Balance of Payments
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
Sell products and services
The Market
of Goods
Production (= GDP)
Firms (sellers)
Spend money
to buy goods
and services
The circular
flow of income
Model
Pay salaries,
interests,
rents and
profits
Income (= GDP)
Spending (= GDP)
Families (buyers)
Monetary Flow
Real Flow
Supply labor, land and capital
The Market
of Factors
PARTICIPATION RATE
Noninstitutional Civilian
Population
(excluding those under
16, in the armed forces
or behind bars)
= Labor force +
Participation rate =
NO Labor Force
(neither working
nor looking for work)
Labor force
Noninstitutional Civilian Population
UNEMPLOYMENT RATE
Labor force (L)
=
Unemployment rate
Employed (N)
=
+
Unemployed (U)
Unemployed (U)
Labor force (L)
Labor force < Population
Low 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
Economic
growth phase
(15 years)
Oil Crisis
Incorporation
of Spain to
the EU
Openness of
Spain to
competence
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:
Pt  g A 
A
t
A
0
pt
Pt 
p0
p
p
 gB 
p
p
Weights
B
t
B
0
, gA 
p A  QA
p A  QA  p B  QB

Expenses on A
Total expenses
The GDP Deflactor
The GDP deflactor in the year t is the quotient
between Nominal GDP and Real GDP in the year t:
nominal GDPt
Pt 
real GDPt
The GDP deflactor is 100 in the base year.
The variation rate of the GDP deflactor is the inflation
rate:
( Pt  Pt 1 )
Pt 1
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…
B
p At
B pt
CPI t  g  A  g  B
p0
p0
A



Family expenses on A
, g 
Total expenses
A
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.
Calculating the CPI in Spain
The inflation rate in Spain
Spain
The GDP growth rate
The GDP growth rate is:
(Yt  Yt 1 )
Yt 1
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:
Yt
GDP per capita  GDPpct 
Popt
 It indicates the standard of living in a country:
ln GDPpct  ln( Yt )  ln( Popt )
 ln GDPpct   ln( Yt )   ln( Popt )
 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 Money
The quantity of money determines the level of prices
David Hume, 1711-1776
The Evolution of Macroeconomics
–
–
National Accounts (W. Mitchell)
The Great Depresion

–
Deflation, stagnation of production, unemployment
Failure of classic macroeconomics
Unemployment queue
in Germany, 1930
The Evolution of Macroeconomics

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 Evolution of Macroeconomics

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
The Evolution of Macroeconomics

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 Evolution of Macroeconomics

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 Evolution of Macroeconomics

The New
Keynesianism
–
–
Expectations are
important but limited
There are ridigities in
markets


Wages…
Menu costs, ....
Joseph Stiglitz, 1943