Chapter 2 Additional Book: Macroeconomic Accounts
Accounting identities -> how magnitudes we are interested in relate to each other, by construction.
Gross domestic product (GDP)/Aggregate output -> a location based measure of a countries
productive activity, corresponding to the value added generated by factors of production, both local
and foreign owned, within a country.
- System of National Account -> used to measure GDP.
- GDP is a flow variable -> an economic variable measured between two periods of time.
o Instead of a stock variable -> a magnitude measured at a given time
st
- 1 way to measure GDP: sum of all final sales of goods and services sold during a measurement
period.
o GDP: the sum of final sales within a geographic location during a period of time, usually a
year.
o Refers specifically to final sales -> referred to sales of goods and services to the
consumer or firm that will ultimately use them.
Instead of intermediate sales -> intermediate sales refer to the producers who use
and transform these goods or services as part of their own production of goods and
services >> excluded from GDP, GDP not to be confused with final sales/turnover ->
exports are always counted as final sales, because they leave the geographic border.
o Used goods are also excluded: because they already entered GDP in previous year.
o Inventories are included (“sold to the firm owners”).
nd
- 2 way: recognizes that each final sale of a good or service represents the ultimate step that
validates all the efforts that have one into producing/making it available to the buyer.
o GDP: the sum of value added occurring within a given geographic location during a
period of time.
o Value added -> increase in the market value of a product at a particular stage of
production, calculated by substracting the value of all inputs bought from other firms
from the value of the firms output.
Firms value added = difference between sales (turnover) and costs of raw materials,
unfinished goods, and imports from abroad.
Thus is capital + labor (!!) NOT JUST PROFIT. -> capital and labor create the value.
You deduct all the product you bought (already produced) from the revenues.
o If the firm produces intermediate goods, it sales are costs to its customers, who
themselves are producers this value should not be counted twice.
rd
- 3 way: GDP -> the sum of factor incomes earned from economic activities within a geographic
location during a period of time.
1. For comparison overtime, we want to distinguish two reasons why GDP an increase: (1)
more real economic activity, (2) higher prices for the same economic activity.
2. For comparisons across countries, we need to convert our GDP measures into common
currency. Quite complicated. Usually here is the concept of purchasing power parity.
3. Small countries tend to have small GDPs, and yet they may be well off. This is why we
often look at their GDP per capita -> dividing the GDP measures by the population.
o Factor incomes: wages (labor), rent (land), return (capital).
Real vs. nominal GDP
- Use prices to convert volumes into values
, - Nominal GDP -> total value added measured and current prices
o Nominal GDP = PaQa + PbQb (final sales).
o Problem: increase in nominal GDP can result from changes in price or output.
- Real GDP -> total value added measured and constant prices (using prices observed in a
reference year)
o Real GDPt = PoaQta + PobQtb
o Prices of a and b were in the base year P oa and Pob, real GDP in year t, when net final sales
of a and b are Qta and Qtb.
- Nominal represent values at current prices, real variables represent volumes at constant prices.
- Distinction between nominal and real GDP can be used as a measure of general price level, the
price of goods in terms of money.
o GDP deflator -> a price index for total value added of an economy
GDP deflator = nominal GDP/real GDP.
Can be thought of as an average of all prices of final goods in terms of money, where
each price is implicitly weighted by the proportion of the corresponding good in the
GDP.
o Inflation rate can be measured by the rate of inflation in the GDP deflator:
GDP deflator inflation = nominal GDP growth rate – real GDP growth rate.
o Alternative measure of inflation is based on an average of price with fixed weights ->
price index -> A basket of goods is selected and the amount of each good, or category of
goods, in the basket is used to weight the corresponding prices.
Price index closest to the GDP deflator is the producer price index (PPI) – with fixed
weights corresponding to a basket representative of national production.
Consumer price index (CPI) -> an index of prices of a basket of goods representative
of the consumption pattern of the “average consumer”, using fixed quantity weights
in some base year.
Closely linked to the consumption deflator -> the ratio of nominal and real
aggregate consumption expenditures by household.
o CPI and PPI is an example of a fixed weight or Laspeyres index.
o Consumption deflator, based on actual share of goods in the corresponding years
consumption is called a variable weight or Paasche index.
o CPI and consumption deflator include goods and services produced abroad, while PPI and
GDP deflator do not.
o Wholesale price index (WPI) measures average price of goods at the wholesale stage.
- Gross national income (GNI) -> ownership based; total value added produced by nationals,
independently of whether they are residents or nonresidents; harder to measure than GDP.
GDP Growth
- Equals: (Yt – Yt-1)/Yt-1
- Periods of positive GDP growth are called expansions.
- Periods of negative GDP growth are called recessions.
- Periods of GDP staying same (barely any growth) stagnation.
Measuring and interpreting GDP
- Tax authorities -> firms report sales (1st definition of GDP), individuals report incomes (3 rd
definition of GDP), value added taxes (VAT) that are collected by intermediate/final sellers who
then rent their value added when they pay the tax (2 nd definition of GDP).
, - Domestic work is excluded.
- Underground economy -> economic activities from which income earned is not reported an
therefore is untaxed.
o Avoid taxes, selling whiteout receipt.
o Problem: unreported taxes, data from tax return are processed with delay
- GDP is a measure of income, not wealth.
o GDP is a measure of income, while wealth is the stock of assets accumulated over longer
periods of time.
- Hedonic pricing : how to deal with changes in quality of existing goods?
Flows of incomes and expenditures
Circular flow diagram
- Circular flow -> the fact that each finale sale of a goods or service represents income to factors
of production employed to produce it, similarly, income to factors of production is either spend
all saves, while savings are used to finance final purchases of goods by others.
o Shows how GDP arises as final sales, and how it is paid out to households, the owners of
the factors of production, it shows how firms comma households, government interact to
make GDP possible.
- Net taxes (T) -> difference between taxes and transfers; the government tax income from
households and firms after transfers have been subtracted.
- Private income (Y-T) -> Income to the private sector which remains after taxes have been
removed from, and transfer have been added to national income.
- From private income to absorption plus net exports – GDP.
- Consumption -> goods and services produced and sold to households for the satisfaction of
wants.
- Aggregate savings of the private sector (S)
- Financial sector include banks etc. whose function is to collect savings and channel them to
firms seeking to invest, to purchase productive equipment – activity called financial
intermediation -> the channeling of savings of households by banks and other financial
institutions too those willing to undertake physical investment.
- In the aggregate and private sector uses its savings (- income that it does not consume) to
finance acquisition of new productive equipment by firms.
- Stock of existing productive equipment, including structures, referred to as physical capital (a
factor of production consisting of durable inputs such as machines, buildings, computer
hardware/software, and physical inventories). Why al the patches of new equipment is called
investment (the acquisition of productive equipment for later use in production).
- Net private saving -> excess of private saving over investment (S-I); can be positive or negative.
- Fans and households spend their income to consume (C) and to invest (I).
- Private sector expenditures on goods and services (C+I) the government adds its own demand
(G).
- Total national spending on goods and services (absorption) –> (G+I+C) sum of private and
public spending on all goods and services.
o Part of absorption includes purchase of imported goods and services (Z).
o Country exports (X)
o Net exports = (X-Z); when positive: increased demand for domestic production above that
originating with domestic residents, when negative: demand for domestic production is
less than total domestic demand.
, - GDP (Y) is broken down into four main categories:
o (1) Final sales of consumption of goods and services (C)
o (2) Final sales of investment goods and additions to investment stocks (I)
o (3) Final sales to the government (G)
o (4) Sales to the rest of the world (X), imports (Z) must be subtracted
o Y=C+I+G+X–Z
- Flow diagram also shows that GDP can be viewed as net income by factors of production
- Three possibilities:
o (1) They pay taxes net of transfers (T)
o (2) They save (S)
o (3) They consume (C)
o Y=C+S+T
