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“The Economic Way of Thinking” 12th Edition Chapter 12: The Overall Performance of Economic Systems 1 Chapter Outline Gross Domestic Product(GDP) GDP or GNP? GDP as Total Income Created in the Domestic Economy GDP is not a Measure of All Purchases in the Economy GDP as Total Value Added Is Value Added Always Positive? 2 Chapter Outline Loose Ends: Unsold Inventories and Used Goods Aggregate Fluctuations Unemployment and Non-employment Employed, Not Employed and Unemployed Labor-Market Decisions Unemployment and Recessions 3 Chapter Outline Inflation The Difficulties of Monetary Calculation Recession and Inflation Since 1960 What Causes Aggregate Fluctuations? Appendix: Limitations of National Income Accounting Appendix: The Dangers of Aggregation: A Methodological Approach 4 Introduction Microeconomic Analysis – supply and demand in a particular market or industry. Macroeconomic Analysis – performance of the overall economy. Macroeconomic problems are often news topics(新 闻主题), and a source of seemingly endless debate among newpaper columnists, political figures, axgrinders(别有用心的人), the general public, and even among economists themselves! Everybody seems to have an opinion! 5 Introduction Macroeconomic problems Is Chinese economy “strong”, or is it “weak”? Is it growing, ir is it falling into a recession? Will the future bring us inflation(通胀), deflation (通缩), or relatively stable prices? What’s happening to the unemploment rate(失业 率) in China? Will the Central Bank (i.e.the People’s bank of China) raise or lower interest rates? 6 Introduction Macroeconomic problems(continued) What’s the status of government’s budget? Is it balanced(持平), in a surplus(盈余), or in deficit(赤字)? Should taxes be raised or lowered? What impact will that have on overall economic conditions? What is the present administration(政府当局) doing to improve the economy? 7 Introduction We shall begin to clear up the muddle by further developing the economic way of thinking on these grand, economy-wide issues in the remaining chapters. This chapter focuses on the most widely used (and, literally, “grossest”) indicator of overall economic performance, Gross Domestic Product(国内生产总值)。 8 Gross Domestic Product (GDP) How nice it would be if we have one single concept and, indeed, one single number which could summarize the overall performance of the economy! if we can discover strict interdependencies among, say, the total quantity of money in circulation, total employment, total output of the economy, etc! It is tempting to do so and would simplify economic reasoning enormously! 9 Gross Domestic Product (GDP) GDP is meant to be such a concept used to measure variations of economic growth and welfare! GDP – market value of final goods and services produced within a country in a particular time period. 10 Gross Domestic Product (GDP) 2008年中国GDP为30.067万亿元,约合4.333 万亿美元( 按照2008年底汇率:1美元--6.8346元人民币 ),增长了9%;人均GDP约 为3313美元。 2008年美国GDP为14.265万亿美元,增长了 3.9%;人均47440美元。 11 Gross Domestic Product (GDP) Market values measured by market prices. Final goods (and services)(最终物品和服务) purchased by ultimate user(最终使用者), whether or not that user is in a household, business, or government bureau. Purchased without the goal of reselling it or further processed and manufactured. Compare with Intermediate good(中间物品) 12 Gross Domestic Product (GDP) Within a country, regardless of the nationality or citizenship of the people owning or producing those goods. Time period is usually a year. 13 GDP or GNP? GDP – performance of the domestic economy. GNP (Gross National Product,国民生产总值) The market value of final goods and services produced by permanent citizens(永久居民)of a country in a particular period of time. performance of the nation’s citizens. regardless of where they are producing. 14 GDP or GNP? 过去常用GNP来衡量国民收入,但是从1991 年开始,国民收入核算人员和政策制定者开始 把关注焦点转向GDP 。 主要原因 GNP需要统计所有永久居民的收入,随着经济一体 化趋势的加强,人员流动频繁,统计起来很不方便, 按照地域统计起来会更方便些。 两者差别一般不是很大。 15 GDP as Total Income Created in the Domestic Economy GDP One way for measuring GDP Purchases of final goods. Adding up the monetary value of all the purchases ―the expenditures(支出)― on final goods and services. “2008年中国GDP为30.067万亿元”,这意味着中国 境内的家庭、企业和政府机构中的个人在最终产品和 服务上总共支出了30.067万亿元(考虑到中国出口与 进口的净差额)。 16 GDP as Total Income Created in the Domestic Economy A purchase always involves a sale. 例如,在最终产品和服务上支出的30.067万亿元,为国内经 济中与生产这些产品和服务相关的人员(即资源提供者)创 造了价值30.067万亿元的收入(income)。 收入的形式:工资,租金,利息,和利润(或亏损) So, GDP can be regarded as a measure of national income (国民收入)created in the domestic economy. 17 GDP as Total Income Created in the Domestic Economy Value of national output = value of national income (考虑到出口与进口的净差额) Every dollar paid for output = income for someone Sales taxes = income for government 18 GDP Is Not a Measure of All Purchases in the Economy GDP Purchases of final goods. All income created in the economy. Not all expenditures,excluding expenditures on intermediate goods. All expenditures would be double counting. An example 19 GDP Is Not a Measure of All Purchases in the Economy Produceer Begins with Ends with value added 伐木工 一棵树 $50(砍伐,卖给锯木厂厂主) $50 锯木厂厂主 $50的木材 $75(制成板材,卖给木工) $25 木工 $75的木板 $250(做成木书柜,卖给零售商) $175 零售商 $250 的木书柜 $400(把木书柜卖给你) 总支出= $775 $150 总计附加值 = $400 表 12-1 20 GDP as Total Value Added The last columan, “value added”, represents the net income enjoyed by each of the producers. Three ways to conceptually measure GDP: Expenditures on final goods and services. Total income generated in the economy. Total value added in the economy. 21 Is Value Added Always Positive? Nominal wages, rents and interest will be positive. Profit may be positive, or negative (i.e.loss). How are losses accounted for in GDP? The example (continued) 22 Is Value Added Always Positive? Produceer Begins with Ends with value added 伐木工 一棵树 $50(砍伐,卖给锯木厂厂主) $50 锯木厂厂主 $50的木材 $75(制成板材,卖给木工) $25 木工 $75的木板 $250(做成木书柜,卖给零售商) $175 零售商 $250 的木书柜 $200(把木书柜卖给你) 总支出= $575 -$50 总计附加值 = $200 表 12-2 23 Loose Ends: Unsold Inventories and Used Goods Unsold Inventories = gross business inventory investment(总商业存货投资). Estimate market values of unsold goods. Revise GDP with actual market values. Used Goods GDP accounts for added value ―market value of the service provided. 24 Aggregate Fluctuations Economic growth occurs through cycles of expansion and contraction(扩张和收缩的循 环). Fluctuations in output and income are significant. The most troubling consequence, in the public mind, of reductions in GDP are the increased levels of unemployment that always follow them 25 Aggregate Fluctuations The Great Depression in US– 1929-1933 Real GDP fell by 30%. 1933 GDP – 40% less than would have been forecasted in 1929 (assume 3% annual growth). Unemployment 1929 – 3.2% 1933 – 24.9% 26 Unemployment and Non-Employment (失业和未就业) Observations Approximately half of the people in the US are not employed ―neither earning a wage by working for someone else nor working for themselves in a business that they own. A quarter are under the age of 16 One-eighth are over 65 Many of those between 16 and 65 are quite fully employed, although not in the sense just described ―raising children and caring for a household 27 Unemployment and Non-Employment How do we distinguish problem unemployment from non-problem unemployment? Above the level of purely “fractional unemployment”? fractional unemployment(摩擦性失业): the amount of unemployment that poses no problem because it represents ordinary labor-market turnover. But ordinary labor-market turnover is a variable 28 Unemployment and Non-Employment How do we distinguish the unemployed from the not employed? 那些说自己为了工作“不顾一切”的人,为了找到 更好的工作,也会拒绝某些工作机会 只有极少数说自己“不想工作”的人,会拒绝他们 面前的所有工作机会 那些所自己“无法找到工作”的人,意思是他们无 法找到自己愿意接受的工作 It is not easy for an outside observer to make a distinction. 29 Employed, Not Employed and Unemployed (就业的、未就业的和失业的) Unemployment data Bureau of Labor Statistics in US (BLS,劳工统计 署) Current Population Survey(当前人口调查 ) The Bureau of the Census(人口普查局) Monthly survey – 60,000 households 30 Employed, Not Employed and Unemployed Who is counted? Non-institutional people over age 16,即:16岁以 上居住在美国50个州和哥伦比亚特区,不在监狱或 精神病院居住,不在现役的武装部队 Classifications Employed Unemployed Not in the labor force 31 Employed, Not Employed and Unemployed Unemployed In the non-institutional population. Over age 16. Without employment during survey week. Made efforts to find employment during the last 4 weeks. Be presently available for work. 32 Employed, Not Employed and Unemployed Deriving Unemployment Data Total population – under 15 or institutionalized = noninstitutionalized population – not in the labor force = labor force – employed = unemployed 33 Employed, Not Employed and Unemployed Unemployment Rate(失业率) = Unemployed / Labor Force 34 Labor Market Decisions Economic theory tries to explain all behavior as the consequence of choice ―under constraints, of course. Unempolyment results from the choices people make on the basis of one’s expected relative costs and benefits This doesn’t necessarily means that Everyone has good choices Unemployed people enjoy their condition 35 Labor Market Decisions Non-institutional Population Seeks employment (in the labor force) Accepts employment (employed) Does not seek employment (not in the labor force) Does not accept employment (unemployed) 36 Labor Market Decisions BLS definition of unemployed implies: A decision to actively seek employment ―the fork (分岔点) that leads either to employment or to continued unemployment. A decision not to accept any of the employment opportunities available ―the fork that leads either to being unemployed or being out of the labor force. 37 Unemployment and Recessions in US 美国的经济衰退和失业(1950-2000) 38 Unemployment and Recessions in US Recessions Unemployment Rate 1954 5.5% 1958 6.8% 1961 6.7% 1975 8.5% 1982 9.7% 1992 7.4% Recovery Peak Unemployment Rate 1953 2.9% 1957 4.3% 1960 5.5% 1973 4.9% 1979 5.8% 1990 5.5% 1998 4.4% 39 Inflation One cannot use unadjusted changes in GDP to measure changes in the total output of goods. Why? 40 Inflation Nominal(名义的) GDP Product of prices and quantities (P x Q). If prices increase and quantities remain unchanged, nominal GDP increases. Question If prices increase and quantities remain the same, has the real output of the economy increased? 41 Inflation Adjusting GDP for Price Changes Real(真实的) GDP The value of all final goods and services produced in a year stated in unchanging prices(以不变 价格), the prices that held in whatever year is being used as the base year(基准年). 42 Inflation GDP Deflator(平减指数) Nominal GDP/Real GDP × 100% The most comprehensive measure of changes in the purchasing power of money But not the best-known measure 43 Inflation Consumer Price Index (CPI,消费价格指数) Measures changes in the money price of all the goods and services that enter into the budgets of typical urban consumers. CPI经常是每月报纸的头条,尤其是在大众对 通货膨胀非常关注的时候 为何大家都关注通货膨胀?到底什么是通货膨 胀? 44 Inflation Inflation Is not a rise in the cost of living Is basically a fall in the value or purchasing power of money(货币价值或货币购买力的下降) Is a rise in the money price of goods, where the key word is money If inflation does not actually raise the cost of living, why is it a problem? 45 Inflation Uncertianty caused by inflation! The future value of money cannot be predicted Inflation distorts the signals that are provided through market prices 每个人都能预期的稳定的高通胀率与难以预测的低 通胀率带来的问题相比更小 46 Inflation Deflation(通货紧缩) A rise in the value or purchasing power of money It also introduces uncertainty into the calculations of planners Disinflation(通胀减缓) A slowing down of the inflation rate. 47 The Difficulties of Monetary Calculation Inflation, deflation and disinflation make monetary calculations difficult. Household budget planning Saving and investment decisions Wage and salary agreements The entrepreneurial calculation of profit and loss 48 Recession and Inflation Since 1960 美国的总产出和物价水平波动(1960-2000) 49 Recession and Inflation Since 1960 Recessions(经济衰退)in US 1960, 1970, 1974, 1975, 1980, 1982, 1990, and 1991 Inflation in US 1960’s – 2.5% / year 1970’s – 7.5% / year 50 Recession and Inflation Since 1960 Stagflation(滞涨)– a stagnating economy with inflation. Inflation can occur during recession. 1974 – 1975 Severe recession 10% inflation Recession and Inflation are not simple opposites. 51 What Causes Aggregate Fluctuations? Fluctuations may reflect the natural adjustment of markets to external shocks. Fluctuations may be driven by relatively small changes in one sector of the economy that multiplies through many sectors. 52 What Causes Aggregate Fluctuations? Fluctuations may reflect the natural adjustment of markets to external shocks. Fluctuations may be driven by relatively small changes in one sector of the economy that multiplies through many sectors. 53 Appendix: Limitations of National Income Accounting GDP gets some sense of economic performance only imperfectly Some difficulities encountered by GDP 54 Appendix: Limitations of National Income Accounting Ignores all non-market forms of production Underestimating actual performance of the overall economy Ignores illegal production Underestimating actual performance of the overall economy 55 Appendix: Limitations of National Income Accounting Ignores economic profits and losses Economic profit will typically be less than accounting profit But GDP accounts can’t possibly determinate all the implicit or opportunity costs of all the entrepreneurs across the economy, so only accounting profits are used to measure GDP GDP overestimates actual performance of the overall economy 56 Appendix: Limitations of National Income Accounting Anything that leads to a transaction in monetary form is recorded as positive, no matter what is being sold This goes against common sense Why should all products and services be treated alike? If I don’t like more nuclear weapons, why should I accept a measurement that includes them as part of the “growth” of the economy? “拆掉重建也能增加GDP” 57 Appendix: Limitations of National Income Accounting GDP measures, or rather express, as positive the malfunctions(运转失常) of the economic system or society If cars break down and other disasters occur, that require repair ―up goes the GDP If industry pollutes the air and we creat other industries which remove the polluting substances ―up goes the GDP. If we pollute less, then GDP may goes down. How can one find a “measure” which tells simultaneously opposite sides of the functioning of a complex system in one single scalar number? 58 Appendix: Limitations of National Income Accounting The corrections of GDP figures that are made by elimination of the effect of seasonal variations, of price changes, etc., therefore obtaining a stable basis, eliminating the influence of distortion caused by inflation, in on way touch the fundamental issues and objections! 59 Appendix: The Dangers of Aggregation Measuring the overall performance of an economy A rather difficult task More broader problem: emphasis on statistical aggregates GDP Price level Unemployment rate Etc. 60 Appendix: The Dangers of Aggregation One of the temptations of macroeconomic theory To study the economy by focusing largely (if not exclusively) on the relationships between the aggregate variables themselves [通过主要(甚至 专门)关注一些总量变量自身之间的关系研究经济] 61 Appendix: The Dangers of Aggregation But this is quite a problem [这样做是相当有问 题的] It appears that somehow the aggregates are interacting with one another [它使得这些总量之间 看起来,不知何故,是相互作用的] Policymakers be tempted merely to get the aggregates right 62 Appendix: The Dangers of Aggregation Never forget The economy is always and everywhere composed of individuals Only individuals choose Individuals act and interact Individuals attempt to coordinate their plans through the market process Individuals seek and creat wealth 63 Appendix: The Dangers of Aggregation The economy is of high complexity Therefore, that its description, or rather its change, could be given and measured accurately by one scalar number(标量)is absurd 64 Appendix: The Dangers of Aggregation A heavy focus on the interactions among clusters of data (the aggregates themselves) might make us lose sight of the specific pieces of information (and often heterogeneous information) Individual decision makers themselves use these information to coordinate their everyday plans and projects E.g. the same increase in the quantity of money will have very different consequences when it goes to consumers rather than to producers. This is obscured when one restricts oneself to the macro entities. 65 Appendix: The Dangers of Aggregation From 1950’s to 1970’s macroeconomists Believe that supply and demand theory, and the basic conception of the individual decision maker was inherently limited and couldn’t explain overall economic phenomena Placed the individual chooser in the scrapheap (废物箱) of macroeconomic thought―useful only for micro but not for macroeconomic theory 66 Appendix: The Dangers of Aggregation Since 1980’s more macroeconomists Believe aggregate analysis itself is limited Search for the “microeconomic foundations of macroeconomics”(宏观经济学的微观基础) Rediscovered the value of supply and demand analysis and the formation of relative market prices, and price expectations 67 Once Over Lightly Gross Domestic Product – GDP GDP Measurements (3) Unsold Goods Market Values of Services Many people not employed are not in the labor force – and not unemployed. Difference between not employed and unemployed is not always clear. 68 Once Over Lightly Expected advantages of alternative opportunities determine decisions as to labor force entry. Inflation is a decrease in purchasing power of money Deflation is a sustained rise in purchasing power of money. 69 Once Over Lightly Disinflation is a slowing down of the rate of inflation. GDP Deflator is a measure of inflation Economic growth Recession Aggregate Fluctuations Limitations of GDP measurement The Dangers of Aggregation 70