Download Lecture 1: Introduction

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