Chapter 2: Macroeconomic Accounts
Gross domestic product: measure of productivity, mostly used for geo. areas (countries),
within a year. How much did we produce last year.
- Flow variable: based on a time period. NOT a stock variable (how much you have
at a specific time point)
- Measures all income earned within border, by residents and non-residents.
Three (3) ways to measure GDP: (All produce the same outcome)
1. Sum all finals sales in an area in a specific time period. DO NOT sum i ntermediate
sales, to avoid double-counting. Exports are seen as a final sale.
2. Sum the value added in each step of the production chain in an area.
a. Farmer added €0.50, baker added €2. Final GDP: €2.5.
b. Each step in the production adds value. Shouldn’t be counted twice.
3. Sum of incomes earned from economic activities: one person's spending must be
someone else’s income.
Important points for using GDP to measure performance of an economy
1. GDP increases with more real economic activity and with higher overall prices.
2. Currencies may be volatile and not good for comparing countries. Use Purchasing
Power Parity.
3. Use GDP/capita. Small countries may have a low GDP, but still be well off.
nominal GDP: GDP evaluated at current market prices.
- Increases as price increases, even though we don’t produce more.
real GDP: GDP adjusted for price changes.
- Increases only if the output increases.
GDP deflator: measure of the level of prices of final goods and services in an economy.
- Nominal GDP / real GDP.
- Inflation can be measured by the rate of increase of the GDP deflator
- Approximate: (nominal GDP growth rate) - (real GDP growth rate)
Consumer price index: Basket of goods, prices tracked and weighted. Used to measure
inflation.
GDP figures are collected through tax returns. Problems:
- Firms illegally avoiding taxes
- Underground economy
- Takes a while to process: numbers aren’t out quickly.
Comparing countries:
1. GDP =/= wealth
, a. UK is wealthier (buildings, paintings) than Abu Dhabi, even though their GDP
is lower
2. A lot of transactions aren’t recorded. (informal economy)
3. Comparing with the same currency doesn’t take lower local prices into account for
poorer countries. Therefore use Purchasing Power Parity.
2.3 Flows of Income and Expenditures
Circular Flow diagram:
Letters:
- Y: GDP, the income of households (as they are the owners of factors)
- C: Consumption spending
- I: Investment Spending
- S: Savings. Are deposited in the financial sector.
- G: Government Purchases. (Roads, railways)
- X: Exports
- Z: Imports
Formulas:
Y = C + I + G + X - Z (All demand for products and thus GDP)
Y = C + S + T (All income for households and thus GDP)
(S - I) + (T - G) = (X - Z)
Private income (Y-T), what is left of GDP after taxes and transfers are considered:
- Can use this PI to consume or to save.
Net tax (T): Taxes - transfers. (Basically what the government can spend)
- Government: collects taxes and gives (transfers) money to households and firms
- Government also purchases → takes in more tax than it transfers.
Net Exports: X - Z
Net Private Savings: S - I.
Absorption: (total domestic spending): C + I + G
More detail
,Gross National Income (GNI): what is produced by citizens of a country in a years time.
(even if they’re abroad)
Balance on primary international income: difference between GNI and GDP.
Balance on secondary international income: various forms of payment summed up.
Net domestic product: GDP minus depreciation.
2.4 Balance of Payments
Balance of payments: a balance with accounts that record all economic transactions
between a country and the world.
- Current Account (Net lending if positive, net borrowing if negative. )
- A: Goods and services: goods and services bought and sold.
- B: Income: (primary and secondary)
- Primary: incomes of non-residents
- Secondary: sending money home, gifts, transfers, foreign aid
- Capital Account: commercial purchases of buildings, rights to mine etc. Intangible
assets.
- Financial Account: (Net lending if positive, net borrowing if negative. )
- Direct investment: big investments in companies / real estate
- Portfolio Investment: small investments in companies
- Other Investment: loans by banks, currencies
- Reserve Asset Transactions: gold, special rights, reserve positions.
Net lending = Current Account = Financial Account
- Financial account has opposite sign of CA. B/c when we export more, we must lend
to foreign countries.
Errors and omissions: resulting from tax evasion, illegal trade, real errors. Causes
differences.
- E&O = FA - CA
CA + KA = NOFA + ΔR (Current A + Capital A equal Non-Official Financial A + Official
Interventions)
- ΔR is the central bank intervening. If above 0, they’re buying foreign currency, if
below 0, they’re selling domestic currency.
- If CA + KA > NOFA → people are net lending. T o restore equilibrium (as to not
increase the value of their currency), the CB should buy foreign currency)
CA + FA + EO -dFX = 0
, Chapter 3: Fundamentals of Economic
Growth
3.2
Economies grow on average at a rate of 2% a year. Some years more, some less.
- Why is this?
production function: describes how real GDP in an economy depends on available inputs.
- Important inputs: Capital (K) and Labor (L)
- L = Nh (# people working * hours they work)
- Y = F(K,L) (Cobb-Douglas function)
- Adheres to diminishing marginal productivity (holding K constant, increasing L
results in a less than proportionate increase in production)
- Shows constant returns to scale: d oubling both K and L doubles Y.
- property: output-labour ratio (Y/L) depends only on capital-labour ratio
(K/L) → Y/L = f(K/L)
output-labour ratio (Y/L): measures average labour productivity.
capital-labour ratio (K/L): measures Capital intensity of production.
stylized facts:empirical regularities found in data.
Kaldor’s 5 stylized Facts of Economic Growth:
1. Both output/capita and capital intensity keep increasing: K grows faster than L.
→ labour productivity keeps increasing → standard of living keeps increasing
2. Capital-output ratio exhibits no trend over time: because both capital and output
grow over time at roughly the same pace, their ratio (Y/K) doesn’t change a lot.
3. Hourly wages keep rising: (Y/L and K/L) keep increasing → workers more
productive → earn more
4. Rate of profit is trendless: (K/Y) is trendless → over time, same # equipment
produces same amount of output → profits are also trendless
5. Relative income shares of GDP paid to labour and capital are trendless:
incomes from labour and capital increase at the same rate → labour and capital
share or GDP in long run is the same.
steady state: a state in which there are no business cycles, just steady growth. Key
variables are constant.
Gross domestic product: measure of productivity, mostly used for geo. areas (countries),
within a year. How much did we produce last year.
- Flow variable: based on a time period. NOT a stock variable (how much you have
at a specific time point)
- Measures all income earned within border, by residents and non-residents.
Three (3) ways to measure GDP: (All produce the same outcome)
1. Sum all finals sales in an area in a specific time period. DO NOT sum i ntermediate
sales, to avoid double-counting. Exports are seen as a final sale.
2. Sum the value added in each step of the production chain in an area.
a. Farmer added €0.50, baker added €2. Final GDP: €2.5.
b. Each step in the production adds value. Shouldn’t be counted twice.
3. Sum of incomes earned from economic activities: one person's spending must be
someone else’s income.
Important points for using GDP to measure performance of an economy
1. GDP increases with more real economic activity and with higher overall prices.
2. Currencies may be volatile and not good for comparing countries. Use Purchasing
Power Parity.
3. Use GDP/capita. Small countries may have a low GDP, but still be well off.
nominal GDP: GDP evaluated at current market prices.
- Increases as price increases, even though we don’t produce more.
real GDP: GDP adjusted for price changes.
- Increases only if the output increases.
GDP deflator: measure of the level of prices of final goods and services in an economy.
- Nominal GDP / real GDP.
- Inflation can be measured by the rate of increase of the GDP deflator
- Approximate: (nominal GDP growth rate) - (real GDP growth rate)
Consumer price index: Basket of goods, prices tracked and weighted. Used to measure
inflation.
GDP figures are collected through tax returns. Problems:
- Firms illegally avoiding taxes
- Underground economy
- Takes a while to process: numbers aren’t out quickly.
Comparing countries:
1. GDP =/= wealth
, a. UK is wealthier (buildings, paintings) than Abu Dhabi, even though their GDP
is lower
2. A lot of transactions aren’t recorded. (informal economy)
3. Comparing with the same currency doesn’t take lower local prices into account for
poorer countries. Therefore use Purchasing Power Parity.
2.3 Flows of Income and Expenditures
Circular Flow diagram:
Letters:
- Y: GDP, the income of households (as they are the owners of factors)
- C: Consumption spending
- I: Investment Spending
- S: Savings. Are deposited in the financial sector.
- G: Government Purchases. (Roads, railways)
- X: Exports
- Z: Imports
Formulas:
Y = C + I + G + X - Z (All demand for products and thus GDP)
Y = C + S + T (All income for households and thus GDP)
(S - I) + (T - G) = (X - Z)
Private income (Y-T), what is left of GDP after taxes and transfers are considered:
- Can use this PI to consume or to save.
Net tax (T): Taxes - transfers. (Basically what the government can spend)
- Government: collects taxes and gives (transfers) money to households and firms
- Government also purchases → takes in more tax than it transfers.
Net Exports: X - Z
Net Private Savings: S - I.
Absorption: (total domestic spending): C + I + G
More detail
,Gross National Income (GNI): what is produced by citizens of a country in a years time.
(even if they’re abroad)
Balance on primary international income: difference between GNI and GDP.
Balance on secondary international income: various forms of payment summed up.
Net domestic product: GDP minus depreciation.
2.4 Balance of Payments
Balance of payments: a balance with accounts that record all economic transactions
between a country and the world.
- Current Account (Net lending if positive, net borrowing if negative. )
- A: Goods and services: goods and services bought and sold.
- B: Income: (primary and secondary)
- Primary: incomes of non-residents
- Secondary: sending money home, gifts, transfers, foreign aid
- Capital Account: commercial purchases of buildings, rights to mine etc. Intangible
assets.
- Financial Account: (Net lending if positive, net borrowing if negative. )
- Direct investment: big investments in companies / real estate
- Portfolio Investment: small investments in companies
- Other Investment: loans by banks, currencies
- Reserve Asset Transactions: gold, special rights, reserve positions.
Net lending = Current Account = Financial Account
- Financial account has opposite sign of CA. B/c when we export more, we must lend
to foreign countries.
Errors and omissions: resulting from tax evasion, illegal trade, real errors. Causes
differences.
- E&O = FA - CA
CA + KA = NOFA + ΔR (Current A + Capital A equal Non-Official Financial A + Official
Interventions)
- ΔR is the central bank intervening. If above 0, they’re buying foreign currency, if
below 0, they’re selling domestic currency.
- If CA + KA > NOFA → people are net lending. T o restore equilibrium (as to not
increase the value of their currency), the CB should buy foreign currency)
CA + FA + EO -dFX = 0
, Chapter 3: Fundamentals of Economic
Growth
3.2
Economies grow on average at a rate of 2% a year. Some years more, some less.
- Why is this?
production function: describes how real GDP in an economy depends on available inputs.
- Important inputs: Capital (K) and Labor (L)
- L = Nh (# people working * hours they work)
- Y = F(K,L) (Cobb-Douglas function)
- Adheres to diminishing marginal productivity (holding K constant, increasing L
results in a less than proportionate increase in production)
- Shows constant returns to scale: d oubling both K and L doubles Y.
- property: output-labour ratio (Y/L) depends only on capital-labour ratio
(K/L) → Y/L = f(K/L)
output-labour ratio (Y/L): measures average labour productivity.
capital-labour ratio (K/L): measures Capital intensity of production.
stylized facts:empirical regularities found in data.
Kaldor’s 5 stylized Facts of Economic Growth:
1. Both output/capita and capital intensity keep increasing: K grows faster than L.
→ labour productivity keeps increasing → standard of living keeps increasing
2. Capital-output ratio exhibits no trend over time: because both capital and output
grow over time at roughly the same pace, their ratio (Y/K) doesn’t change a lot.
3. Hourly wages keep rising: (Y/L and K/L) keep increasing → workers more
productive → earn more
4. Rate of profit is trendless: (K/Y) is trendless → over time, same # equipment
produces same amount of output → profits are also trendless
5. Relative income shares of GDP paid to labour and capital are trendless:
incomes from labour and capital increase at the same rate → labour and capital
share or GDP in long run is the same.
steady state: a state in which there are no business cycles, just steady growth. Key
variables are constant.
