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L11200 Introduction to Macroeconomics 2009/10 Lecture 2: National Income Accounting Reading: Barro Ch.2 28 January 2010 Introduction • Last time: introduction to the course – Textbook: Barro, R.J. ‘Macroeconomics: A Modern Approach (International Edition) – 2 central topics in the course: economic growth and economic fluctuations • This lecture: national income accounting – Defining and explaining basic terminology and measurement for macroeconomics – GDP, unemployment, inflation etc.. 1. Gross Domestic Product (GDP) • An economy is composed of: • Non-productive wealth: – Houses, parks, cds, furniture, ipods, paintings. • Productive assets: (the factors of production) – Capital: machines, factories, computers – Labour: workers (including their skills) • If we added up the value of all this, we could measure ‘the total value of the U.K.’ GDP Basics • Non-productive wealth doesn’t make anything • Productive assets can be used to make: – More productive assets (e.g making new machines). We call this investment. – Goods and services for consumption. • Durables, which add to wealth (e.g. furniture) • Non-durables, which are one-off consumption (e.g. icecreams, hair cuts) – The total value of goods + services + investment is known as Gross Domestic Product (GDP). GDP Basics • So GDP is a flow variable: a stream of output. – i.e. if the economy froze for 1 year, total wealth would be unchanged, but GDP would be 0. • GDP growth is the change in GDP between the last period and this one. • So GDP growth can be positive or negative (at the moment it is negative). Real GDP • GDP is measured in £s (nominal GDP). • Figures have to be adjusted to take account of inflation (real GDP) Real GDP • So can calculate ‘GDP at constant prices’ – But prices change over time to reflect changing value of production, not just inflation – e.g. computers have fallen in cost over time, so using 1995 prices would overstate true price – Instead use average prices over consecutive years – This is know as chain-weighted real GDP, see example in Barro Ch.2 Measuring GDP • Three ways to measure GDP – Total expenditure = personal consumption + gross private domestic investment + government purchases + (exports – imports) – Total income = value added by all stages in production process – Total production = total value of all output produced in the economy – All 3 measures should be identical 2. Employment and Unemployment • Every person is either – Out of the labour force: doesn’t want a job e.g. retired, sick, looking after children – In the labour force: wants a job • Of which some are employed (have a job) • Or unemployed (do not have a job) • The term ‘working age population’ refers to everyone aged 16-65 (men) 16-60 (women) – i.e. above school age and before retirement age 3. Prices and Inflation • The aggregate price level is calculated by: – Recording the price of goods and services – Weighting goods and services by how much consumers purchase (using a survey) – Calculating a weighted average using the above • The change in the price level is the inflation rate – 2% inflation rate means prices are, on average, 2% higher this year than last year 4. Interest Rates • The price of money is given by an interest rate – The price applies for a time period (how long you want to borrow the money for • Historically, influencing interest rates in the economy has been a policy tool – Changes to the price of money impact on borrowing / saving, and so influence demand – The key interest rat is the bank of England repo rate (‘base rate’) which affects all other rates. Summary • Key variables in macroeconomics: GDP, unemployment, inflation, interest rates • More detail on calculation and measurement in Barro Ch.2 • Next time: begin first major section of course on economic growth