Measuring the Economy Flashcards
What is Macroeconomics
- Refers to large or aggregate level phenomena
- Studies the economy as a whole recognising the the economy as an interconnected, complex and adaptive systems
What is agent-based macroeconomics?
Computer simulations of many workers, firms, households
Why is macroeconomics
One important connection is that one person’s expenditure is another person’s income
- Eg. if a person that has an income of 100 saves 10, they are spending 90.
However if everyone chooses to save more than total expenditure in the economy will fall and it must also be the case that income will fall - it might even fall so much that the overall amount saved decreases (The Paradox of Thrift)
What is GDP
GDP is the measure of all final goods and services which are produced within a period of time, evaluated at market prices
Measuring Output
Suppose that in a given year we produce 100 potatoes and 6 bags of oven chips. Given unit prices of ¿0.25 and ¿3, respectively, we could calculate GDP as
100 · 0.25 + 6 · 3 = £43
However, if we are using the potatoes to make the oven chips then although both things have been produced within the year, at the end we don’t have them all, i.e. the potatoes are used
up as an intermediate input to the production of another good.
Suppose that 40 potatoes are sold in supermarkets and 60 are used to make the 6 bags of oven chips (which are also then sold in supermarkets). Then the final goods produced have a value of 40 · 0.25 + 6 · 3 = £28
An equivalent means of performing the previous calculation would have been to calculate the value of the farmer’s production (100 · 0.25 = ¿25) then calculate the value of production at the second stage (6 · 3 = ¿18) minus the cost of intermediate inputs at the second stage (60 · 0.25 = ¿15), giving a total
value added of 25 + 18 − 15 = ¿28.
Expenditure
Calculating the monetary value of firms’ final sales is equivalent to calculating the monetary value of expenditure on final goods and services (with one complication)
What does this approach do?
What is consumption?
What is an investment?
What are exports?
What are government purchases?
Conventionally, this approach decomposes expenditure according to which sector of the economy is making the expenditure.
Spending by households is counted as consumption, spending by firms is counted as investment, spending on domestically-produced goods by those overseas is counted as
exports and spending by government is counted as government purchase
The above supposes that everything which is produced is sold in the same time period, but this might not necessarily be the case.
What can investments from firms consist of and what do we also include?
Therefore…?
Investment by firms consists of purchases of land, machinery, facilities etc. to be used for future production and sales. We also include in this category so-called inventory investment,
whereby a firm spends on current production but does not sell the output until a future period. Therefore any unsold goods are included as part of investment (as if the firm had sold
them to itself).
When measuring consumption expenditure, we must consider that some households will purchase goods and services from abroad, in addition to domestically-produced goods and
services. Therefore we must subtract from total consumption spending any spending on imports. Consequently, we can measure total spending on domestic final goods and services as
Y = C + I + G + X − M
Measurement - Income
Therefore, in principle…?
What can we decompose income into?
Everything which is spent by one party is received by another party. Therefore, in principle, the incomes associated with domestic output will be equal to the expenditure on domestic output.
We can decompose income into wages (all wages and salaries plus benefits such as pension contributions), profits, rents and government taxes and transfers.
Nominal GDP
What is wrong with measuring output in nominal terms?
We have measured output in nominal (monetary, at current market prices) terms. For some purposes this measure is not very informative: typically, when we think about economic
growth we are interested in whether an economy produces more `things’ over time, rather than whether the monetary value itself increases.
Real GDP - I
If (in some contexts) we are interested in quantities of `things’ rather than their monetary value, why not just count the quantities of goods and services? It is not obvious how to add up quantities of different goods into a common unit and in different years we might produce different types of goods and services, exacerbating this problem.
How do we calculate Real GDP?
We can calculate Real GDP ≡ nominal GDP/P
where P is some measure of prices in the economy overall.
