Macroeconomics Prof. Juan Gabriel Rodríguez

1. MacroeconomicsProf. Juan Gabriel Rodríguez Chapter 1 National Accounts

2. Question How can we measure aggregate economic activity? National income and product accounts are essential for the understanding of macroeconomic functioning in society…

3. 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.

4. 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?...

5. GDP per Capita and Life Expectancy

6. BASIC DEFINITIONS GROSS DOMESTIC PRODUCT (GDP) INFLATION RATE UNEMPLOYMENT RATE TRADE DEFICIT BUDGET DEFICIT

7. GROSS DOMESTIC PRODUCT SOME ISSUES SUM OF APPLES AND ORANGES: value (not quantity) NOMINAL AND REAL FIGURES DOUBLE COUNTING: Intermediate goods… 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) RATE OF GROWTH - Expansions - Recessions FLOW - A GIVEN PERIOD

8. 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

9. APPLES AND ORANGES… Net National Product (NNP) = GNP – consumption of fixed capital (depreciation) National Income = Net National Product – Statistical discrepancies • 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

10. 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

11. 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.

12. Double Counting Aggregate output can be measured by the value of final goods produced in the economy. Revenues=200 Wages=70 Profit=30 Revenues=100 Intermediate Costs=100 Wages=80 Profit=20 Final good (Car company) Intermediate good (Steel company)

13. Double Counting Revenues=200 Aggregate output can be measured by summing the value added of all goods in the economy. VA2 Wages=70 Profit=30 Revenues=100 Intermediate Costs=100 Wages=80 Profit=20 VA1 Car company Steel company VA=Revenues –intermediate costs

14. Double Counting Revenues=200 Aggregate output can be measured by summing the incomes in the economy (wages, profits, …, interests, taxes,…). Wages=70 Profit=30 Intermediate Costs=100 Wages=80 Profit=20 Final good Intermediate good

15. 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.

16. FINAL GOODS FINAL SERVICES GDP - METHOD OF OUTPUT • CONSUMPTION • INVESTMENT • GOVERNMENT SPENDING • IMPORTS / EXPORTS

17. Example • Car purchases … • Families  Consumption • Firms  Investment • State  Public Expenditure • Foreign Sector  Exports Revenues=200 Wages=70 Profit=30 Intermediate Costs =100 Car company

18. 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

19. 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

20. Is important the inclusion of inventory investments? Output: consumption (600) + investment (120), that is, 720. But considering sales….Output=670 !! Output = Consumption (550) + Fixed Investment (120) + Inventory Investment (50) = 720

21. 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,….

22. LABOR INCOME CAPITAL INCOME INTEREST PROFIT INDIRECT TAXES GDP - METHOD OF INCOMES • CONSUMPTION • SAVINGS • GOVERNMENT INCOME • TAXES • TRANSFERS

23. BASIC IDENTITIES Y = C + I + G +X - IM Y = YD + T = C + S + T T = Direct + Indirect - Subsidies - Transfers Gross Investment = Net Investment + Depreciation Gross Variable - Depreciation = Net Variable

24. BASIC IDENTITIES DEMAND INCOME PRODUCTION PRIVATE SECTOR PUBLIC SECTOR EXTERNAL SECTOR

25. BASIC IDENTITIES Debt Identity Investment-Saving Identity • G<T: budget surplus. • G>T: budgetdeficit. • IM<X: Trade surplus. • IM>X: Trade deficit.

26. INTERNATIONAL ACCOUNTS

27. The Balance of Payments

28. Sell products and services The Market of Goods Production (= GDP) Firms (sellers) Pay salaries, interests, rents and profits The circular flow of income Model Spend money to buy goods and services Income (= GDP) Spending (= GDP) Families (buyers) Monetary Flow Real Flow The Market of Factors Supply labor, land and capital

29. PARTICIPATION RATE Noninstitutional Civilian Population (excluding those under 16, in the armed forces or behind bars) NO Labor Force (neither working nor looking for work) = Labor force + Labor force = Participation rate Noninstitutional Civilian Population

30. UNEMPLOYMENT RATE Labor force (L) = Employed (N) + Unemployed (U) Unemployed (U) = Unemployment rate Labor force (L) Labor force < Population Low participation rate is often linked to high unemployment. Discouraged workers in Recessions!

31. 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.

32. The unemployment rate in Spain Economic growth phase (15 years) Oil Crisis Incorporation of Spain to the EU Openness of Spain to competence Housing Bubble

33. The participation rate in Spain

34. 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.

35. THE INFLATION RATE Weights • A price index (P) is a measure of weighted prices for a set of goods that considers a base year. • One good: • Two goods:

36. The GDP Deflactor The GDP deflactor is 100 in the base year. The variation rate of the GDP deflactor is the inflation rate: The GDP deflactor in the year t is the quotient between Nominal GDP and Real GDP in the year t:

37. 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.

38. 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.

39. Calculating the CPI in Spain

40. The inflation rate in Spain Spain

41. The GDP growth rate The GDP growth rate is: • 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.

42. Economic Growth GDPper cápita is: • It indicates the standard of living in a country: • A country may present a low GDPpc (and therefore, a low standard of living) but a large rate of GDP growth  China

43. The Evolution of Macroeconomics Foundation Hume, Locke, Cantillon The clasics and neoclasics Smith, Ricardo, Marx Marshall, Fisher, Wicksell David Hume, 1711-1776 The Quantitative Theory of Money The quantity of money determines the level of prices

44. National Accounts (W. Mitchell) The Great Depresion Deflation, stagnation of production, unemployment Failure of classic macroeconomics The Evolution of Macroeconomics Unemployment queue in Germany, 1930

45. John Maynard Keynes “The general theory of employment, interest and money” (1936) Rigidities in prices and salaries Government action Principle of the efective demand The Evolution of Macroeconomics John Maynard Keynes, 1883-1946

46. 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 The Evolution of Macroeconomics Paul Samuelson, 1915-2009

47. Monetarism (1960-1970) Inflation (años 60) Stagflation (70’s) Fiscal policy is ineffective Return to the quantitative theory of money The Evolution of Macroeconomics Milton Friedman, 1912-2006

48. 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 The Evolution of Macroeconomics Robert Lucas, 1937

49. The New Keynesianism Expectations are important but limited There are ridigities in markets Wages… Menu costs, .... The Evolution of Macroeconomics Joseph Stiglitz, 1943