Macroeconomics
Prof. Juan Gabriel Rodríguez
Chapter 1
National Accounts
Question
How can we measure aggregate economic activity?
National income and product accounts are essential for the understanding of macroeconomic functioning in society…
National Accounts
The output of a country is measured by National Accounts.
National Accounts is an accounting system that registers all transactions between economic agents in an economy.
– Aggregate Output Main determinant of standard of living Productivity is the key!
– The Unemployment Rate Main source of earnings for people
– The Inflation Rate Reduces real wages…which affects income distribution Modifies relative prices Increases uncertainty Reduces the
propensity to save Reduces investment Reduces the competitiveness of national firms
The Fundamental Macroeconomic Variables
What about the Income Distribution?...
GDP per Capita and Life Expectancy
BASIC DEFINITIONS
GROSS DOMESTIC PRODUCT (GDP) INFLATION RATEUNEMPLOYMENT RATETRADE DEFICITBUDGET DEFICIT
GROSS DOMESTIC PRODUCT
SOME ISSUES– SUM OF APPLES AND ORANGES: value (not quantity)– NOMINAL AND REAL FIGURES– DOUBLE COUNTING: Intermediate goods…
FLOW - A GIVEN PERIOD
RATE OF GROWTH - Expansions - Recessions
It is mainly used to measure economic activity
Measure of aggregate output in the national income accounts(The accounting system is on a statistical basis)
APPLES AND ORANGES…
GDP is the value of the final goods and services produced in the economy during a given period– A final good is a good used for
consumption or investment– An intermediate good is a good used in the
production of another good
FinalFinal
QpValueOutput
APPLES AND ORANGES…
GNP is the value of the final goods and services produced by national residents during a given period
Example: a owned plant in U.S. is not included in Spanish GDP
Net National Product (NNP) = GNP – consumption of fixed capital (depreciation)
National Income = Net National Product – Statistical discrepancies
NOMINAL Vs REAL GDP
Nominal GDP– Sum of final goods produced times their current price
Growth due to quantity Growth due to prices
Real GDP– Sum of final goods produced times their base year
price
ttt QpGDP nominal
tt QpG 0DP real
Nominal and real GDP in the U.S.
From 1960 to 2003, nominal GDP increased by a factor of 21. Real GDP increased by a factor of 4.
Double Counting
Wages=70
Profit=30
Wages=80 Profit=20
Revenues=200
Revenues=100
Intermediate good (Steel company)
Final good (Car company)
Intermediate Costs=100
Aggregate output can be measured by the value of final goods produced in the economy.
Double Counting
Wages=70
Profit=30
Wages=80 Profit=20
Revenues=200
Steel companyCar company
Intermediate Costs=100
Aggregate output can be measured by summing the value added of all goods in the economy.
Revenues=100
VA1
VA2
VA=Revenues –intermediate costs
Double Counting
Wages=70
Profit=30
Wages=80 Profit=20
Revenues=200
Intermediate goodFinal good
Intermediate Costs=100
Aggregate output can be measured by summing the incomes in the economy (wages, profits, …, interests, taxes,…).
CALCULATING GDP
AGGREGATE OUTPUT– Value of the final goods and services produced
by the economy in a given period.
SUM OF VALUED ADDED– Value added equals the value of a firm´s
production minus the value of the intermediate goods it uses in production.
SUM OF INCOMES IN THE ECONOMY– Value received by the factors of production for
their participation in the process.
FINAL GOODS FINAL SERVICES
GDP - METHOD OF OUTPUT
•CONSUMPTION
•INVESTMENT
•GOVERNMENT SPENDING
•IMPORTS / EXPORTS
Example
Wages=70
Profit=30
Revenues=200
Car company
Intermediate Costs =100
Car purchases …- Families Consumption- Firms Investment- State Public Expenditure- Foreign Sector Exports
The composition of GDP:
Output C + I + G + (X-IM)
Consumption (C): current expenditure of families in consumption goods and services in one year.
Investment (I): expenditure of firms in nonresidential investment, families in residential investment and inventory investment in one year.
Government Spending (G): purchases of goods and services by central, state and local governments in one year.
Net Exports (X-IM): difference between exports (X) and imports (IM).
GDP - METHOD OF OUTPUT
Types of investment
Fixed Investment or GFFC:• Nonresidential investment: new plants, new
machines …• Residential investment: new houses and
apartments. Inventory Investment: the difference
between goods produced and goods sold in a given year.
Production = Sales + inventory investment
Is important the inclusion of inventory investments?
Type Production(€)
Sales(€)
Goods and services bought by families 600 550
Goods bought by firms 120 120
Output: consumption (600) + investment (120), that is, 720.
But considering sales….Output=670 !!
Output = Consumption (550) + Fixed Investment (120)
+ Inventory Investment (50) = 720
Government Spending
Government Spending (G):
• It includes those services provided by the State (they are valued by their cost).
It does not include Public Transfers (Tr) to families and firms, e.g. Social Security payments, subsidies, interest payments on the government debt,….
LABOR INCOME CAPITAL INCOME
– INTEREST– PROFIT
INDIRECT TAXES
GDP - METHOD OF INCOMES
•CONSUMPTION
•SAVINGS
•GOVERNMENT INCOME
•TAXES
•TRANSFERS
BASIC IDENTITIES
Y = C + I + G +X - IM Y = YD + T = C + S + T
T = Direct + Indirect - Subsidies - TransfersGross Investment = Net Investment + Depreciation
Gross Variable - Depreciation = Net Variable
BASIC IDENTITIES
DEMAND PRODUCTION INCOME
PRIVATE SECTOR EXTERNAL SECTOR
PUBLICSECTOR
IMXTGIS
TSCYIMXGIC
BASIC IDENTITIES
• G<T: budget surplus. • G>T: budget deficit.
• IM<X: Trade surplus. • IM>X: Trade deficit.
)( IMXTGIS )( IMXGTIS
Debt Identity Investment-Saving Identity
INTERNATIONAL ACCOUNTS
Country S-I (2007)
S-I (2009)
S-I (2011)
T-G (2007)
T-G (2009)
T-G (2011)
EEUU -2.4 +8.1 +6 -2.9 -11.1 -10
Japan 8.5 9.8 11.1 -5.3 -7 -9.7
China 9.8 7 -0.4 -1
Euro Area 1 5.7 4.3 -2 -6.3 -4.5
Germany 6.6 8.3 6.7 0 -3.3 -2
Spain -13 6.1 2.2 2.2 -11.2 -6.3
The U.S. Balance of Payments, 2006 (in billions of U.S. dollars)
Current Account
Exports 1,436
Imports 2,200
Trade balance (deficit = ) (1) -763
Investment income received 620
Investment income paid 629
Net investment income (2) -9
Net transfers received (3) -84
Current account balance (deficit = -) (1) + (2) + (3) -856
Capital Account
Increase in foreign holdings of U.S. assets (4) 1,764
Increase in U.S. holdings of foreign assets (5) 1,049
Capital account balance (deficit = -) (4) (5) 715
Statistical discrepancy 141
The Balance of Payments
The Market of Factors
The Market of Goods
Supply labor, land and capital
Sell products and services
Spend money to buy goods and services
Pay salaries, interests, rents and
profits
Monetary Flow
Real Flow
Income (= GDP)
Production (= GDP)
Spending (= GDP)
Families (buyers)
Firms (sellers)
The circular flow of income
Model
PARTICIPATION RATE
= Labor force + NO Labor Force(neither working
nor looking for work)
Participation rate Labor force
Noninstitutional Civilian Population=
Noninstitutional Civilian Population (excluding those under 16, in the armed forces or behind bars)
UNEMPLOYMENT RATE
Labor force (L) = Employed (N) + Unemployed (U)
Unemployment rateUnemployed (U)
Labor force (L)
Labor force < PopulationLow participation rate is often linked to high unemployment.
Discouraged workers in Recessions!
=
Statistics about unemployment in Spain
Registered unemployment by the Instituto Nacional de Empleo (INEM).
Labor Force Survey (Encuesta de Población Activa- EPA).
– Random sample of 60.000 households.– A person is considered to be occupied if she/he declares that
she/he is working during the week of survey.– A person is considered to be unocuppied if she/he is not
working and has been looking for a job in the last four weeks.
The unemployment rate in Spain
Oil CrisisIncorporation of Spain to the EU Openness of
Spain to competence
Economic growth phase (15 years)
Housing Bubble
The participation rate in Spain
Why do economists care about unemployment?
Two reasons:
Direct effects on the welfare of the unemployed family problems, health problems, poverty, violence, …..
Signal that the economy may not be using some of its resources efficiently rigidities in mobility, no correspondence between the characteristics of workers and jobs.
THE INFLATION RATE
A price index (P) is a measure of weighted prices for a set of goods that considers a base year.
One good:
Two goods:
0
tt p
pP
expensesTotalAon Expenses
QpQp
Qpg,
pp
gpp
gP BBAA
AAA
B0
BtB
A0
AtA
t
Weights
The GDP Deflactor
The GDP deflactor is 100 in the base year.
The variation rate of the GDP deflactor is the inflation rate:
( )P P
Pt t
t
1
1
The GDP deflactor in the year t is the quotient between Nominal GDP and Real GDP in the year t:
t
tt GDP real
GDP nominalP
The Consumer Price Index (CPI)
The GDP deflactor is an average price for all goods and
services that are produced in a country.
The CPI is an average price for all goods and services that are consumed by families in a country. It measures the cost of living.
The CPI measures the cost of a basket of goods that typically a representative family consumes in one period of time.
Construction of the CPI
We know that…
Relative Prices Monthly survey in establishments. Weights Encuesta Continua de Presupuestos
Familiares (ECPF). Weights must change from time to time to adapt the
index to changes in family consumption habits.
expenses TotalAon expensesFamily
g,pp
gpp
gCPI AB0
BtB
A0
AtA
t
Calculating the CPI in Spain
The inflation rate in Spain
Spain
The GDP growth rate
The GDP growth rate is:
1
1)(
t
tt
YYY
According to the Federal Reserve System: Two consecutive quarters of positive GDP growth is
an expansion. Two consecutive quarters of negative GDP growth is a
recession.
Economic Growth
GDP per cápita is:
It indicates the standard of living in a country:
t
tt Pop
YGDPpccapitaperGDP
)ln()ln(ln
)ln()ln(ln
ttt
ttt
PopYGDPpc
PopYGDPpc
A country may present a low GDPpc (and therefore, a low standard of living) but a large rate of GDP growth China
The Evolution of Macroeconomics
Foundation– Hume, Locke, Cantillon
The clasics and neoclasics– Smith, Ricardo, Marx– Marshall, Fisher, Wicksell
The Quantitative Theory of MoneyThe quantity of money determines the level of prices
David Hume, 1711-1776
– National Accounts (W. Mitchell)– The Great Depresion
Deflation, stagnation of production, unemployment
– Failure of classic macroeconomics
Unemployment queue in Germany, 1930
The Evolution of Macroeconomics
John Maynard Keynes– “The general theory of
employment, interest and money” (1936)
– Rigidities in prices and salaries
– Government action– Principle of the
efective demand
John Maynard Keynes, 1883-1946
The Evolution of Macroeconomics
The neoclassical synthesis (1940-1970)– The IS-LM model– Samuelson and Tobin– Microeconomic
foundation of macroeconomics Consumption function,
investment function, money demand, etc
– Macroeconomic models
Paul Samuelson, 1915-2009
The Evolution of Macroeconomics
Monetarism (1960-1970)– Inflation (años 60)
Stagflation (70’s)– Fiscal policy is
ineffective– Return to the
quantitative theory of money
Milton Friedman, 1912-2006
The Evolution of Macroeconomics
The new classical macroeconomics (1970- ...)– Inclusion of expectations– Hipothesis of rational
expectations (Robert Lucas) Individuals learn and
anticipate Policy is ineffective
– Real Business Cycles (Edward Prescott) Relevance of tecnological
progress
Robert Lucas, 1937
The Evolution of Macroeconomics
The New Keynesianism– Expectations are
important but limited
– There are ridigities in markets Wages… Menu costs, ....
Joseph Stiglitz, 1943
The Evolution of Macroeconomics