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“The Economic Way of Thinking”
12th Edition
Chapter 12: The Overall
Performance of Economic Systems
1
Chapter Outline
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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
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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
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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
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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
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Macroeconomic problems
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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
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Macroeconomic problems(continued)
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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）。
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Gross Domestic Product (GDP)

How nice it would be
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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。
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Gross Domestic Product (GDP)

Market values
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
measured by market prices.
Final goods (and services)（最终物品和服务）
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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.
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GNP (Gross National Product，国民生产总值)
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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
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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。
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GDP as Total Income Created
in the Domestic Economy
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GDP
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One way for measuring GDP
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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）。
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GDP as Total Income Created
in the Domestic Economy

A purchase always involves a sale.
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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.
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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
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GDP Is Not a Measure of All
Purchases in the Economy
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GDP
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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
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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
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GDP as Total Value Added

The last columan, “value added”, represents
the net income enjoyed by each of the
producers.
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Three ways to conceptually measure GDP:

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Expenditures on final goods and services.
Total income generated in the economy.
Total value added in the economy.
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Is Value Added Always Positive?
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Nominal wages, rents and interest will be
positive.
Profit may be positive, or negative (i.e.loss).

How are losses accounted for in GDP?
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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
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Loose Ends:
Unsold Inventories and Used Goods
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Unsold Inventories = gross business
inventory investment（总商业存货投资）.
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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
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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
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Aggregate Fluctuations
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The Great Depression in US– 1929-1933
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Real GDP fell by 30%.
1933 GDP – 40% less than would have been
forecasted in 1929 (assume 3% annual growth).
Unemployment
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1929 – 3.2%
1933 – 24.9%
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Unemployment and Non-Employment
（失业和未就业）
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Observations
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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
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Unemployment and Non-Employment
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How do we distinguish problem
unemployment from non-problem
unemployment?
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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
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How do we distinguish the unemployed from
the not employed?
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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.
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Employed, Not Employed and Unemployed
（就业的、未就业的和失业的）
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Unemployment data
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Bureau of Labor Statistics in US (BLS，劳工统计
署)
Current Population Survey（当前人口调查 ）
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The Bureau of the Census（人口普查局）
Monthly survey – 60,000 households
30
Employed, Not Employed and Unemployed
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Who is counted?
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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
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Employed
Unemployed
Not in the labor force
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Employed, Not Employed and Unemployed
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Unemployed
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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
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Economic theory tries to explain all behavior
as the consequence of choice ―under
constraints, of course.
Unempolyment results from the choices
people make

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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