Beruflich Dokumente
Kultur Dokumente
2011/2012
Essential reading:
Mankiw: Ch. 2 and 3
National Accounting
When we talk about national accounting we talk about measuring the total quantity of
goods and services produced in an economy in a given period of time.
In the previous lecture we have seen the series of real GDP per capita in the US. To
create that series we need to create data and therefore we need to define what is the
GDP and how to calculate it.
GDP (Gross Domestic Product): the value of final output produced during a given
period of time within the borders of a given country.
Within the boarders means that if a firm is located in UK but the ownership is in
France, the production of that firm located in UK will be counted in the GDP of UK
and not in the GDP of France.
There are three approaches to measuring GDP, and all give exactly the same measure
of GDP:
1) Product approach (or value-added);
2) Expenditure approach;
3) Income approach;
To see how all these approaches work we consider a simple example.
Consider a very simple economy where there is a coconut producer, a restaurant,
some consumers and a government.
The coconut producer: owns all the coconut trees, harvests the coconuts and in
current year produces 10 million coconuts which are sold for $2 each, yielding total
revenue of $20 million.
He pays $5 million to his workers, $0.5 million in interest on a loan to some
consumers and $1.5 million in taxes to the government.
The following table summarises those data:
Table 1
Coconut Producer
Total revenue
$20 million
Wages
$5 million
Interest on Loan
$0.5 million
Taxes
$1.5 million
Restaurant
Total revenue
$30 million
Wages
$4 million
Taxes
$3 million
Consumers: work for the producer of coconuts, the restaurant and the government
(notice that the owner of the restaurant and the producer of coconuts are consumers as
well). They earn $9 ($5+$4) million from the producer and the restaurant and $5.5
million from the government. They receive $0.5 million from interest on a loan to the
producer and $24 million of after tax profits. They consume directly 4 millions of
coconuts (10 millions minus the 6 millions sold to the restaurant).
Furthermore, they pay $1 million in taxes.
Table 3
Consumers
Wage Income
$14.5 million
Profits distributed
$24 million
Interest Income
$0.5 million
Taxes
$1 million
Government
Total revenue
$5.5 million
Wages
$5.5 million
cost of the inputs to production. In our case, the only input was labour, and the total
cost was $5.5 million. Therefore the value added for the government is $5.5 million.
Using the production approach (or value added), the value of the GDP in our
economy for the current year is:
GDP = 20 + 18 + 5.5 = $43.5 million
2) The expenditure approach
Here the GDP is defined as: the total spending on all final goods and services
produced in the economy in a given period of time.
Notice: the word final in the definition implies that WE DO NOT COUNT spending
on intermediate goods.
What is total expenditure?
Total Expenditure = C + I + G + NX
C is total expenditure in consumption
I is investment expenditure
G is government expenditure
NX is net exports (= Exports in goods and services Import in goods and services)
We include exports because they are produced within the country we are considering
and we subtract imports because goods produced abroad are included in C, I and G
and we dont want to include them in the calculation of GDP (remember within
borders). In some models we will see we shall consider the case of a closed
economy. By definition, a closed economy is an economy that does not have trade
with other countries, therefore, NX=0 in this case. We will do this because it is
simpler to analyse a closed economy than an open economy.
From our example, using the expenditure approach we have that I = 0 and NX = 0.
There is no investment in our example and no international trade.
The GDP is then given by: C + G
Total consumption is $38 million, $8 million on coconuts and $30 million at the
restaurant. Government expenditure is $5.5 million.
Therefore: GDP=C+I+G+NX=$43.5 million
3) The Income approach
In this case the GDP is defined as the sum of all income received by economic agents
contributing to production.
Income includes the profits of firms.
The income of the consumers is $14.5 million in wages. Then we need to add $0.5
million of income on the interest on a loan. Then we need to include the income given
by profits after tax of $24 million. Finally we need to include the taxes paid by the
producers since they are income for the government. We do not include the taxes paid
by consumers since they are receiving back those taxes as wages (this is just a transfer
and not a contribution to production).
Using this method: GDP = 14.5 + 0.5 + 24 + 4.5 = $43.5 million
Therefore, the GDP is equivalent to the total income in the economy. Let Y denoting
the total income of the economy, using the definition of the total expenditure we have:
Y = C + I + G + NX
The answer is NO, because unsold output adds to inventory, and thus counts as
inventory investment whether intentional or unplanned.
purchased its own inventory accumulation. We have just seen the inventory enters
in the definition of Investment and therefore they counted as expenditure.
To summarise: we have now seen that GDP measures
total income
total output
total expenditure
SP = YD C
Government saving is defined as:
SG = T G
If SG is positive, the government is running a surplus, while if its negative its
running a deficit.
The National Saving is then defined as:
S = S P + SG = Y D C + T G
1)
2)
Thus, national saving must be equal investment plus net exports plus net factor
payments from abroad.
The quantity NX + NFP is called Current Account (CA), it is a measure of the
balance of trade in goods and service with other countries.
Therefore, our income-expenditure identity can be written also as:
S = I + CA
In a closed economy, where NX = 0, and NFP = 0, the income-expenditure identity
implies: S = I
National saving must be equal to aggregate investment.
Real vs. nominal GDP
GDP is the value of all final goods and services produced.
nominal GDP measures these values using current prices.
real GDP measure these values using the prices of a base year.
Changes in nominal GDP can be due to:
changes in prices.
Changes in real GDP can only be due to changes in quantities, because real GDP is
constructed
using
2006
2007
2008
good A
$30
900
$31
1,000
$36
1,050
good B
$100
192
$102
200
$100
205
2006: $46,200
2007: $50,000
2008: $52,000 = $30 1050 + $100 205
Notice that Real GDP in 2007 and 2008 is lower than GDP in those years. This is
because the price effect (inflation) has been taken out by using a base year for the
prices (2006).
Notice that the choice of the base year matters for calculations.
For example, if we choose 2007 as the base year, the real GDP in 2007 is $51,400,
while in 2008 is $53,460.
Inflation Rate
The inflation rate is the percentage increase in the overall level of prices.
One measure of the price level is the GDP deflator, defined as:
Nominal GDP
Real GDP
GDP
Inflation
deflator
rate
2006
$46,200
$46,200
100.0
n.a.
2007
51,400
50,000
102.8
2.8%
2008
58,300
52,000
112.1
9.1%
Notice that the GDP deflator identifies an index that measures the overall price
LEVEL in a given year.
Inflation rate is the rate of change of that index from one year to the following.
GDP deflatort =
Q 1t
Q 2t
Q 3t
=
P1t +
P2t +
P3t
RGDPt
RGDPt
RGDPt
CPI in month t =
Et
P C + P2t C2 + P3t C3
= 1t 1
Eb
Eb
C
C
C
= 1 P1t + 2 P2t + 3 P3t
Eb
Eb
Eb
The CPI is a weighted average of prices.
The weight on each price reflects that goods relative importance in the CPIs basket.
Note that the weights remain fixed over time.
CPI vs. GDP Deflator
prices of capital goods
included in CPI
CPI: fixed
In the following figure we plot the CPI and the GDP deflator for the US economy
from 1950 to 2005.
10
15%
12%
9%
6%
3%
0%
-3%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
GDP deflator
CPI
Although the two series display a similar pattern, there are some relevant differences
in some years. Those differences are due to the elements we listed in the previous
page. In general the CPI index is the most common way to measure inflation. This is
because it is based on the consumption of households and therefore is a better
measure of the cost of living in an economy.
By its construction the CPI index may overstate the rate of inflation:
Introduction of new goods: The introduction of new goods makes consumers better
off but it does not reduce the CPI, because the CPI uses fixed weights.
Unmeasured changes in quality: Quality improvements increase the value of the
dollar, but are often not fully measured.
Unemployment Rate
Categories of the population (POP)
Labour Force (L): the amount of labour available for producing goods and
services; all employed plus unemployed persons
not in the labour force (NILF): not employed, not looking for work (for
example, full-time students)
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Number employed
146.1 million
Number unemployed =
6.9 million
Adult population
231.7 million
E.g.,
The U.S. capital stock was $26 trillion on January 1, 2006.
A flow is a quantity measured per unit of time.
Flow
a persons annual saving
n of new college graduates this year
the govt budget deficit
functional distribution of income. In this case we want to know how the aggregate
income is divided among the factors of production, meaning, workers, owners of
capital (capitalists) and owners of land etc. etc. Here we consider the issue of the
functional distribution of income. Our main question is: what determines the
economys total output/income and how total income is distributed among the factors
of production?
In defining the GDP from an accounting point of view we have seen what an
economy produces. It produces consumption goods, investment goods ect. etc.
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Now we ask: how we produce those goods. The economys output of goods and
services depends on the quantity of inputs (or factors of production) and the ability to
turn inputs into output. In economics the way inputs are transformed into outputs is
defined by a production function. Here we will consider only two inputs, labour and
capital. So our problem is to find how aggregate income is divided between workers
and capitalists.
Define with Y the total output produced (real output) and with K and L the amount of
inputs available in the economy. K is for the level of Capital and L for Labour.
A production function is defined as:
Y = F ( K , L)
The inputs K and L are transformed into Y through the function F. The production
function reflects the available technology for turning capital and labour into output.
On of the main properties of a production function is related to the concept of Returns
to Scale. When we talk about changing the scale we talk about the effects on output of
changing ALL the inputs of production (therefore, we may assume we are in the longrun). Mathematically, the idea of returns to scale is related to the idea of homogeneity
of a function. A function f(X) is homogeneous of degree k if its true that:
f ( rX ) = r k f ( X )
where r is a constant.
Now we can provide a definition for the returns to scale of a production function:
a) Constant returns to scale: if we increase all the inputs of production by an
amount r, the total output will increase by the same amount r. In terms of
homogeneity, constant returns to scale are equivalent to say that the
production function is homogeneous of degree 1;
b) Decreasing returns to scale: if we increase all the inputs by r, the total output
increases by an amount less than r;
c) Increasing returns to scale: if we increase all the inputs by r, the total output
increases by an amount larger than r;
Example: the Cobb-Douglas production function
Y = F ( K , L ) = K L
= r ( + ) F ( K , L )
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f
f
f
+ x2
+ ...+ x n
x1
x2
xn
The Eulers theorem tells us that we can rewrite a homogenous function in terms of its
partial-derivatives.
Why is this important for us?
The partial derivatives of the production function we are considering have a nice
economic interpretation:
F ( K , L )
= Marginal productivity of Capital (MPK)
K
F ( K , L )
= Marginal productivity of Labour (MPL)
L
MPK =
r
W
and MPL =
P
P
where r is the cost of renting capital, W is the nominal wage and P is the aggregate
price level. Therefore, r/P is the REAL cost of capital and W/P is the REAL wage.
Those two conditions simply say that in competitive markets the inputs of production
are paid at their marginal productivity. Now we can see how total income is
distributed among the inputs of production (workers and capitalists). Assume that the
production function defining the total output is homogenous of degree 1 (= constant
returns to scale). By the Eulers theorem we can write the production function as
(remember that here k = 1):
F ( K , L) = K
F
F
+L
= K MPK + L MPL
K
L
Multiply each side of the above equation by the aggregate price level P.
Then P F ( K , L) is the VALUE of total production (the GDP of our economy),
while we must notice that MPK P = r and P MPL = W .
Using those facts we can rewrite the above equation as:
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PY = K r + L W
3)
Equation 3) says that the total income in the economy is equal to the sum of factors
payments. This result is called the Exhaustion Product Theorem.
Therefore, if there are:
a) Constant returns to scale;
b) Competitive markets;
Total output is divided between the payments to capital and the payments to labour,
depending on their marginal productivities.
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Mathematical Appendix
1) Discrete percentage changes
Consider a variable Y for which you have values for different period of times (t).
Denote with Yt the value of Y in period t (so Yt+1 denotes the value of Y in period t+1
and so on).
a) The discrete percentage change (or the growth rate) in the value of Y between
period t and period t+1 is given by:
Y Y
g = t +1 t 100 or
Yt
Y
g = t +1 1 100
Yt
Y
100
Yt
lim
dY
that is called
Y
f ( X , Y )
f ( X , Y )
dX +
dY
X
Y
The total differential tells me: what is the change in the function ( df ( X , Y ) ) given
small changes in the variables X and Y ( dX , dY ).
The term
f ( X , Y )
indicates the partial derivative of the function with respect the
X
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f ( X , Y )
f ( X , Y )
= Y and
=X
X
Y
Using the fact that f ( X , Y ) = XY , we can rewrite the above expression as:
d ( XY ) = YdX + XdY
The expression
A1)
d ( XY )
dY
dX
and
is the instantaneous growth rate of (XY), while
X
XY
Y
GDP Deflator
Therefore:
Percentage change in Nominal GDP 2 + 3 5%.
c) For any variables X and Y:
Example. Suppose that population has increased by 1% between 2005 and 2006,
while real GDP has increased by 2% during the same period. What is the percentage
change of the real GDP per capita?
We know that:
Real GDP per capita = (real GDP)/Population
Therefore:
Percentage change in real GDP per capita 2 1 1%.
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2) Index Numbers
In statistics index numbers are used to describe the behaviour over time of some
interesting variables. In particular, they are useful when we are interested in the
growth rates of those variables over a certain period of time. They are also useful to
compare series of numbers of different size. We normally use index numbers with a
fixed base. For example, consider the following series for GDP in UK from 1997 to
2002 (values are in million of pounds).
Year
GDP
1997
864710
1998
891684
1999
916639
2000
951256
2001
971565
2002
988338
First, we need to decide the base period we want to use. For example, use the first
year of the GDP series as the base year. The index number for the GDP is then given
by:
Year
GDP Index
1997
100
1998
103.11
1999
106
2000
110
2001
112.35
2002
114.29
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Notice that the index number is a pure number (it does not depend on any unit of
measure). Furthermore, the index number does not have any meaning by itself. The
fact that the GDP index in 1998 is 103.11 does not mean anything.
What it is meaningful is that now we can easily compare the behaviour of the series
with respect the base year.
Using the GDP index we can say that in 1998 the GDP was 3.11% higher than in
1997. Or we can say that the GDP in 2002 is 14.3% higher than in 1997, and so on.
Notice that the index number series in the previous table does not tell you the year-toyear growth rate of the variable. We can calculate the year-to-year growth in the GDP
using the original series or using the index number series.
For example, from 1999 to 2000, the GDP has increased by:
GDP2000 - GDP1999
951265 916639
100 =
100 = 3.77%
GDP1999
916639
or using the GDP index series
110 106
100 = 3.77%
106
The most important index numbers used in economics are probably the price indexes.
There are two main ways to calculate a price index:
1) Laspeyers Index:
Consider a set I of good and services, that is I={1,2,i,n}
Denote with:
p i , t the price of good i in period t.
PL ,t =
(p
(p
i ,t
qi , 0 )
q )
100
i ,0 i ,0
The numerator is the cost of the bundle of I goods and services in period 0 evaluated
at prices at t. The denominator is the cost of the bundle in period 0 (the base year).
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Example: suppose you have a basket of goods containing 20 pizzas and 10 compact
discs in year 2002. The prices of a pizza and a compact disc are given by the
following table:
pizza
CDs
2002 $10
$15
2003 $11
$15
2004 $12
$16
2005 $13
$15
10 20 + 15 10
100 = 100
10 20 + 15 10
In 2003:
PL,2003 =
11 20 + 15 10
100 = 105.7
10 20 + 15 10
and so on.
The Consumer price index is an example of a Laspeyres index.
The Laspeyers index of our basket of goods is summarised in the following table,
where we reported also the year-to-year inflation.
Year
Index
Inflation rate
2002
100.0
n.a.
2003
105.7
5.7%
2004
114.3
8.1%
2005
117.1
2.5%
2) Paasche Index
Differently from the Laspeyers index, here the basket of goods is changing over time.
The formula is:
PP ,t =
(p
(p
i ,t
q i ,t )
q )
100
i , 0 i ,t
20