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Introduction
and
National Income and Product Accounting
(NIPA)
MBA 774
Macroeconomics
Class Notes - Part 1
1
Syllabus
• Information about the class is on the course portal
and my personal website:
http://public.kenan-flagler.unc.edu/faculty/browngr/macroweb/
2
What is Macroeconomics?
• The biggest of “big pictures”
• How the whole (global) economy works
• Macroeconomics examines things like
– economic growth
– employment
– inflation
3
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
4
Course Road Map
• Part 1: The “Secret Language” of Macro
– learn about specific economic factors (historically and in real time)
– Develop intuition for how factors are related
• Part 2: Money
–
–
–
–
What is money and why is it important?
How is monetary policy executed?
Why do markets care so much about monetary policy?
Develop a standard model of the money market.
• Part 3: Foreign Exchange
– Understand currency trading and purchasing power parity
– Develop a model for FX markets based on interest parity
• Part 4: Bring It All Together
– Develop an integrated model for the product and financial markets
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
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 strongly agree that this course is
“excellent”.
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
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?
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
US
Canada
Beer
10
3
Movies
4
3
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
US
Canada
Beer
7*10=70
7*3=21
Movies
3*4=12
3*3=9
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
US
Canada
Beer
100
0
Movies
0
30
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
US
Canada
Beer
75
25
Movies
15
15
• Recall that previously
Country
US
Canada
Beer
70
21
Movies
12
9
• What has happened? Is this realistic?
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
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
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 2004
– Receipts (329.0B) - payments (273.9B) = 55.1B (or 0.5% of GNP)
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
17
US GDP
($ billions, nominal)
Gross domestic product
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Fixed investment
Nonresidential
Structures
Equipment and software
Residential
Change in private inventories
Net exports of goods and services
Exports
Goods
Services
Imports
Goods
Services
Government
Federal
National defense
Nondefense
State and local
1950
294.3
192.7
Percent
100.0%
65.5%
2000
9872.9
6728.4
Percent
100.0%
68.2%
30.7
98.2
63.7
10.4%
33.4%
21.6%
819.6
1989.6
3919.2
8.3%
20.2%
39.7%
54.1
18.4%
1767.5
17.9%
48.3
27.8
10
17.8
20.5
5.8
16.4%
9.4%
3.4%
6.0%
7.0%
2.0%
1718.1
1293.1
313.6
979.5
425.1
49.4
17.4%
13.1%
3.2%
9.9%
4.3%
0.5%
0.7
0.2%
-364.0
-3.7%
12.3
10.2
2.1
11.6
9.1
2.5
4.2%
3.5%
0.7%
3.9%
3.1%
0.8%
1102.9
785.6
317.3
1466.9
1244.9
221.9
11.2%
8.0%
3.2%
14.9%
12.6%
2.2%
46.9
15.9%
1741.0
17.6%
26
19.6
6.4
20.9
8.8%
6.7%
2.2%
7.1%
590.2
375.4
214.8
1150.8
6.0%
3.8%
2.2%
11.7%
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 adds a computer to 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
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
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 18%
• Unadjusted GDP is called Nominal GDP and Inflation
adjusted GDP is called Real GDP
• There are two common ways of adjusting for
inflation:
– Simple base year comparison
– Chain-weight comparison (latest and greatest method)
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
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 recent recession see:
http://www.nber.org/cycles/recessions.html
23
Real US GDP Growth
(1929-2005, annual, purple indicates year with NBER recession)
20%
15%
10%
5%
0%
-5%
-10%
20
04
19
99
19
94
19
89
19
84
19
79
19
74
19
69
19
64
19
59
19
54
19
49
19
44
19
39
19
34
19
29
-15%
24
19
88
:Q
1
19
89
:Q
1
19
90
:Q
1
19
91
:Q
1
19
92
:Q
1
19
93
:Q
1
19
94
:Q
1
19
95
:Q
1
19
96
:Q
1
19
97
:Q
1
19
98
:Q
1
19
99
:Q
1
20
00
:Q
1
20
01
:Q
1
20
02
:Q
1
20
03
:Q
1
20
04
:Q
1
20
05
:Q
1
20
06
:Q
1
20
07
:Q
1
Real US GDP Growth
(1988-present, quarterly, purple indicates quarter with NBER recession)
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
25
Contributions to Real GDP %Change
Gross domestic product
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Fixed investment
Nonresidential
Structures
Equipment and software
Residential
Change in private inventories
Net exports of goods and services
Exports
Imports
Government
Federal
National defense
Nondefense
State and local
2002
1.6
1.9
2003
2.5
1.9
2004
3.9
2.7
2005
3.2
2.4
2006
3.3
2.2
0.6
0.5
0.8
0.5
0.6
0.8
0.5
0.7
1.5
0.5
0.9
1.1
0.4
0.8
1.1
-0.4
0.5
1.5
0.9
0.7
-0.8
-1.1
-0.6
-0.5
0.2
0.4
0.5
0.1
-0.1
0.2
0.4
0.0
1.1
0.6
0.1
0.5
0.5
0.4
1.2
0.7
0.0
0.6
0.5
-0.3
0.5
0.7
0.3
0.5
-0.3
0.2
-0.7
-0.4
-0.7
-0.3
0.0
-0.2
-0.5
0.1
-0.6
0.9
-1.5
0.7
-0.9
0.9
-1.0
0.8
0.5
0.4
0.2
0.4
0.4
0.3
0.1
0.4
0.4
0.4
0.1
0.0
0.3
0.3
0.0
0.1
0.1
0.1
0.0
0.1
0.1
0.1
0.1
0.3
26
Last Time Was Different
(contributions to US GDP growth around 2001 recession)
5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
-3.00
-4.00
C (incl Residential)
I (excl Residential)
19
99
:Q
1
19
99
:Q
2
19
99
:Q
3
19
99
:Q
4
20
00
:Q
1
20
00
:Q
2
20
00
:Q
3
20
00
:Q
4
20
01
:Q
1
20
01
:Q
2
20
01
:Q
3
20
01
:Q
4
20
02
:Q
1
20
02
:Q
2
20
02
:Q
3
20
02
:Q
4
20
03
:Q
1
20
03
:Q
2
-5.00
27
Global GDP in USD 2005
(most recent year with comprehensive data)
Rank
1
2
3
4
5
6
7
8
9
10
Country
United States
Japan
Germany
China (Ex. Hong Kong)
United Kingdom
France
Italy
Canada
Brazil
Spain
All Countries
European Monetary Union
OECD (30 Rich Countries)
Rest of World
GDP (bln)
10,764
4,933
1,956
1,715
1,578
1,415
1,114
789
655
655
35,111
6,476
26,526
8,585
GDP/Capita
37,323
38,811
23,710
1,319
26,796
23,818
19,243
25,464
6,495
15,898
5,756
17,114
23,193
1,732
(calculated using market exchange rates)
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)
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 (called
‘classical utilitarian’)
– Minimum of all consumers (Rawlsian)
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
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).
32
US National Income
Or looking at it the other way:
National Income
USD (bln)
9,707.8
Compensation of Employees
Proprietors' Income
Rental Income
Corporate Profits
Net Interest Income
Taxes on Imports and Production
Net Subsidies & Other
6,203.0
846.9
164.2
1,069.9
583.2
788.7
52.0
Percent
100%
63.9%
8.7%
1.7%
11.0%
6.0%
8.1%
0.5%
(percentages do not add to 100% because of rounding errors)
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
34
U.S. CPI Percent Change
(From 12 Months Prior, All Urban Consumers)
15.0%
12.5%
10.0%
7.5%
5.0%
2.5%
0.0%
20
05
20
00
19
95
19
90
19
85
19
80
19
75
19
70
19
65
19
60
19
55
19
50
-2.5%
35
Recent CPI and CPI ex. Food & Energy
(Percent Change from 12 Months Prior)
7.0%
CPI- All Items
6.0%
CPI Excluding Food and Energy
5.0%
4.0%
3.0%
2.0%
1.0%
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
0.0%
36
Components of PPI
(Index Levels—not percent change, Monthly)
220
Finished
Intermediate
Crude
200
180
160
140
120
100
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
80
37
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
38
20
04
20
00
19
96
19
92
19
88
19
84
19
80
19
76
19
72
19
68
19
64
19
60
19
56
19
52
19
48
US Unemployment Rate
(Percent)
12
10
8
6
4
2
0
39
US Non-Farm Payrolls (1,000s)
139,000
137,000
135,000
133,000
131,000
129,000
9
0
1
2
3
4
5
6
7
Ja
n-9
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
127,000
40
Civilian Labor Force
Participation Rate
67.5
67.0
66.5
66.0
9
0
1
2
3
4
5
6
7
Ja
n-9
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
Ja
n-0
65.5
41
What Happened Here?
136000
Payroll Survey (left scale)
Household Survey (right scale)
135000
145000
143000
134000
141000
133000
139000
137000
132000
135000
131000
133000
129000
129000
Ma
r-0
Se
p-0
1
Ma
r-0
2
Se
p-0
2
Ma
r-0
3
Se
p-0
3
Ma
r-0
4
Se
p-0
4
Ma
r-0
5
Se
p-0
5
Ma
r-0
6
Se
p-0
6
131000
1
130000
42
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
• How does CA relate to
– Foreign indebtedness?
– Intertemporal consumption patterns?
43
US Exports, Imports, & CA Deficit
(Quarterly, Percent of GDP, 2000 Dollars)
20.0%
Imports
Exports
CA
15.0%
10.0%
5.0%
0.0%
-5.0%
20
05
20
00
19
95
19
90
19
85
19
80
19
75
19
70
19
65
19
60
19
55
19
50
-10.0%
44
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)
45
US Balance of Payments (2003)
Exports
Goods
Services
Income Receipts
Imports
Goods
Services
Income Payments
Net Unilateral Transfers
Current Account Balance
Capital Account
US Assets Held Abroad
Official Reserve Assets
Other Assets
Foreign Assets Held in US
Official Reserve Assets
Other Assets
Financial Account Balance
Statistical Discrepancy
Credits
1,314.9
713.1
307.4
294.4
Debits
-1,778.1
-1,260.7
-256.3
-261.1
-67.4
-530.7
-3.1
-283.4
1.5
-284.9
829.2
248.6
580.6
545.8
-12.0
46
Current Account and Net Foreign
Wealth
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
S = I + CA
48