National Income Accounting.pdf2

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National Accounting Classical Economics Says Law Quantity Theory of Money The Old Classical Model

Introduction to Macroeconomics:Classical Macroeconomics

Andrea Roventini

1,2

Email: [email protected]

Webpage: http://dse.univr.it/roventini/

1

University of Verona2SantAnna School of Advanced Studies

February 25, 2010
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General Introduction

The course provides a gentle introduction tomacroeconomics

In this course we are going to study the development of

macroeconomics from the Thirties to the Seventies

This period is characterized by the rise and fall ofKeynesian macroeconomics

The final objective is to increase your comprehension on

what has been going on in order to better assess moden

macroeconomics

You are going to see that in macroeconomics there are

very significant intellectual cycles!
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Outline of the Talk

1 National Accounting

2 Classical Economics

3 Says Law

4 Quantity Theory of Money

5 The Old Classical Model
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Outline of the Talk



3 Says Law


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Outline of the Talk



3 Says Law



N i l A i Cl i l E i S L Q i Th f M Th Old Cl i l M d l
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Outline of the Talk



3 Says Law



N ti l A ti Cl i l E i S L Q tit Th f M Th Old Cl i l M d l
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Outline of the Talk



3 Says Law





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National Accounting Classical Economics Say s Law Quantity Theory of Money The Old Classical Model

Outline



3 Says Law



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What is GDP?

GDP is the total value of all final goods and services

produced in an economy in a given time period

GDP can be defined in three equivalent ways considering

productionincome

expenditures

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Production Perspective

GDP is equal to the sum of value added (VA) generated by

all the industries within a country in a given time period

GDP VA = value of production - cost of intermediategoods

GDP VA = turnover + change in inventories - cost ofintermediate goods

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Income Perspective

GDP is equal to the sum of income (Y) generated by a

country in a given period

GDP VA Y = compensation of employees + profits +taxes less subsidies on production and imports

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Expenditure Perspective

GDP is equal to the total expenditures for all final goodsand services produced within a country in a given period

GDP VA Y C + I + G + X - M

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g y y y y

Some Remarks

GDP is gross because depreciation of capital stock is not

subtracted out of GDP

Investment includes also change in inventories

GNP = GDP + net foreign income



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g y y y y

Savings and Investment

Y = C + I + G + X - M

Y - C - G = I + X - M

S = I + X - M

In a closed economy: S = I



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More on Savings

S= Y CG

S= Spriv+ Spubb

Spriv = Shouse+ Sfirm= Y T+ TR

Shouse= Yd C= Y up T+ Tr

Sfirm= up

Spubb= T TrG

S= Y T+ Tr+ T TrG= Y CG



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Personal Saving Rate

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Price Indexes

The most common price indexes are the GDP deflator and

the consumer price index (CPI):

GDP deflator =nominal GDP

real GDP

CPI=pcurr qrepr

prp qrepr

Differences:

GDP deflator is a flexible-weight (Paasche) indexCPI is a fixed-weight (Laspeyres) index

Other indexes: PPI, HICP

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CPI Inflation

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Main Labor Market Indicators

Unemployment rate (u):

u=unemployed workers

labor force

Activity rate (ar):

ac=labor force

working-age population

Employment rate (ar):

er=employment

working-age population

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Unemployment Rate

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Employment-Population Rate

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Outline



3 Says Law



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Old Classical Macroeconomics: Introduction

Old Classical Macroeconomics (OCM), i.e.macroeconomics before Keynes is grounded on two pillars

Says LawQuantity Theory of Money

Both pillars are necessary to get the main classicalmacroeconomics results, namely:

stable full employment equilibrium (absence of involuntaryunemployment)perfect dichotomy between real and nominal variable

(neutrality of money)no stabilizing role for monetary and fiscal policies

A note of caution about the definition of Old Classical

Macroeconomics



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Old Classical Macroeconomics: Introduction

Old Classical Macroeconomics (OCM), i.e.macroeconomics before Keynes is grounded on two pillars

Says LawQuantity Theory of Money

Both pillars are necessary to get the main classicalmacroeconomics results, namely:

stable full employment equilibrium (absence of involuntaryunemployment)perfect dichotomy between real and nominal variable

(neutrality of money)no stabilizing role for monetary and fiscal policies

A note of caution about the definition of Old Classical

Macroeconomics



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Suggested Readings

Trevithick, J. A. (1992), Involuntary Unemployment:

Macroeconomics from a Keynesian Perspective,

Prentice-Hall, ch. 2 and 3

Snowdon, B. and Vane, H. R. (2005), Modern

Macroeconomics: : Its Origins, Development and Current

State, Edward Elgar: Cheltenham, ch. 2



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Outline



3 Says Law



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Introducing Says Law (1803)

Famous dictum: Supply

creates its own demand

An increase in productiongenerates an equal increase in

income, which is fully spent to

buy the increase of production

There cant beunderproduction and

overproduction problems

J. B. Say

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Says Law

Source: Trevithick (1992)

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The Weak Version of Says Law

We have just presented the weak version of Says law,

which does not guarantee the automatic convergence of

the economy to the full employment equilibrium

The weak version of Says law is grounded on theClassical theory of interest rate

According to the Classicals, the interest rate isdetermined by the forces of thrift and productivity:

market of loanable fundsY= C(r) + I(r)YC(r) = S(r)S(r) = I(r)



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The Classical Theory of Interest Rate


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Keynes vs. British Treasury


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The Strong Version of Says Law

The strong version of Says law

postulates that if competition is

allowed to work, the economy will

automatically converge to the full

employment equilibrium

As a consequence, the possibility of

involuntary unemployment is ruled

out

The strong version of Says law is

grounded on the Classical theory

of labor market

A. C. Pigou

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The Strong Version of Says Law

The Classical theory of employment is nothing but the

standard labor market theory presented in microeconomics

textbooks

In such a theory, the perfect flexibility of the real wage rateguarantees that the labor-market is always in equilibrium

Real wage flexibility works through nominal wage

movements because price are determined by the quantity

theory of money

Unemployment is only voluntary or frictional

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The Classical Theory of Employment

Figure: Snowdone and Vane (2005)

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Outline



3 Says Law



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The Quantity Theory of Money

The quantity theory of money explains the determination ofnominal variables in the economic system

Thanks to the classical dichotomy between real and

nominal variables, this can be done taking real variables as

datum

The microfounded theory of value is separated from the

macroeconomic theory of money

In this framework, money is neutral

Two versions:

Fisher transactions approachCambridge cash-balance approach


Fi h T i A h
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Fisher Transactions Approach

MV PY

MV= PY

MV= PY M P

M= P

i= rn+ dP/P= rn+ dM/MI. Fisher


C b id C h B l A h
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Cambridge Cash-Balance Approach

1 Md = kPY

2 Ms fixed by the Central Bank

3 Ms= Md = Ms= kPY

A. Marshal


Wi k ll d th N t l R t H h t i
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Wicksell and the Natural Rate Hyphotesis

In the full-employment equilibrium,the natural interest rate (rn)

equates savings with investment

In the short-run, the market interest

rate (rm) can fluctuate around rn

So in the short-run, money is not

neutral

However, if rm = rn price inflation ordeflation occur to restore the

long-run equality

Business cycle implications and the

role of banks

K. Wicksell


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Outline



3 Says Law




The Old Classical Model
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The Old Classical Model!

Source: Bonifati (2006)


Fiscal Policy
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Fiscal Policy

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Neutrality of Money
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Neutrality of Money!

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National Income Accounting.pdf2