Introduction to Macroeconomics and National Income Accounting

Lecture Notes I: Introduction to Macroeconomics and National Income Accounting Jai Leonard I. Carinan

Lecture Notes 1

Introduction to Macroeconomics and National Income Accounting Macroeconomics

the study of the economy as a whole it deals with broad aggregates but uses the same style of thinking about economic issues as in

microeconomics. Some key issues in Macroeconomics

Inflation o the rate of change of the general price level

Unemployment o a measure of the number of people looking for work, but who are

without jobs Output

o real gross national product (GNP) measures total income of an economy it is closely related to the economy's total output

Economic growth o increases in real GNP, an indication of the expansion of the

economys total output Macroeconomic policy

o a variety of policy measures used by the government to affect the overall performance of the economy taxes government spending money supply interest rates exchange rates

Main Macroeconomic Variables

GDP/GNP Inflation Interest Rates Exchange Rates Unemployment Rate Stock Market


The Circular flow Model

Assumptions Factor income = household spending

o all income is spent The value of output = spending

o all goods are sold value of output = households income

o profits, wage or rent to households

FirmsHouseholds

Services of productive factors

Factor Incomes

Goods & Services

Spendings on Goods & services


Investment and Saving

Investment o is the purchase of new capital goods by firms

Saving o is that part of income which is not spent buying goods and

services

National Income Accounting National Income Accounting is a branch of macroeconomics that captures the total flows of income as well as of goods and services within a certain period. GDP and GNP

Gross domestic product (GDP) Gross Domestic Product is the market value of all final goods and services produced within a country within a year.

Gross national product (GNP)

o measures the total income earned by domestic citizens GNP = GDP + net income from abroad Y : GDP C: households spending on consumption S: saving S Y - C or Y C + S Y or GDP by expenditure

Firms Households

Goods & Services

Spendings on Goods & services

Services of productive factors

Factor Incomes

Investmentspending

Saving


Y C +I or Y C + I = C + S thus S I

Over any given period of time, the National Income Accounting Definitions are such that the amount of Investment Spending must be exactly equal to the amount of Household Saving (in the simple economy so far considered). The circular flow of income, expenditure and output

Government in the circular flow

Government o collects direct taxes on factor income

wages, profit, rent Td o collects indirect taxes (sales taxes) on sales Te

in Turkey KDV (katma deger vergisi) o Spends on goods and services G

wages of civil servants, military expenses, health, education, all equipment

Y

Households Firms

C + I

I

C S


Three Measures of National Output

A. Expenditure Approach

the sum of expenditures in the economy Y = C + I + G + X Z

Components of GDP

Consumption expenditures are for Durable goods, products that last more than one year (cars,

appliances) Nondurable goods, products that last less than one year (food,

clothing) Services (medical care, insurance)

Investment includes: Business Fixed Investment

Nonresidential - business purchases of plant and equipment

Residential - construction of new houses Change in Business Inventories

The difference between what a firm produces and what it sells within the year

Economic investment does not include purchases of stocks, bonds, and other financial assets

Government Spending

Y

C + I + G

I

C S

Households Firms Government

C + I + G - Te

TG

B - TdY + B

T


Government expenditures may also be classified as consumption and investment spending.

Government transfer payments are not included in GDP.

Net Exports + Spending by foreigners on local production - Spending by local consumers, businesses, government on foreign

production.

B. Income Approach the sum of incomes paid for factor services

Components of National Income

Compensation of Employees Wages and salaries paid to individuals and employer contributions

for social security and other pension and health funds Proprietors Income

Earnings of sole proprietorships and partnerships Rental Income

Income from property, received by households Net Interest

Income private businesses pay to households that have lent them money

Corporate Profits Revenue left after compensation to employees, rents, and interest

have been paid

C. Output Approach the sum of output (value added) produced in the economy Measures economic activity from the product side. It focuses on

the value added within a country. Gross value added is the sum of all output values corrected for intermediate inputs

D. Personal Disposable Income

Personal Disposable Income (PDI) is the amount of income individuals have left after paying all personal taxes.

PDI is the amount of income individuals have to spend on goods and services.

E. Welfare Considerations

Legal nonmarket activities are excluded from GDP. Illegal nonmarket activities are excluded from GDP. Resource depleting activities are included in GDP.


In terms of formulae We know from the expenditure approach that everything produced in a country in a period is consumed, in the wider sense, as private consumption, government consumption, investment, and net exports. This can be expressed in a basic formula: GDP= Y= C+ I+ G + (X-M) Approaching from the income side, we see that all income is spent on consumption, savings, or taxes. Accordingly, we receive:

GDP= Y= C + S + T Both are identities that have to hold all the time. We can therefore always combine them to get C + S + T= C+ I+ G + (X-M) which can obviously be rewritten as (S-I)+ (T-G)= (X-M) NOTE:

In a closed economy: X-M=0 Private savings are invested or pay a government budget deficit

Without a government: T-G=0 Private savings are invested at home or

abroad

Closed economy without government: S=I! References

Dornbusch, R., Fischer, S. and Startz, R., Macroeconomics, 7th edition, 1998. Colander, David C. Macroeconomics, 6th edition, Wall Street Journal Edition, Irwin/McGraw Hill.

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Introduction to Macroeconomics and National Income Accounting