Consumption by MikeJenny

VIEWS: 3 PAGES: 49

									The Measurement and Structure
     of the National Economy




                                1
  National Income Accounting
• Purpose: measure the performance of the
  economy for purposes of public policy
• Originated:
  – Efforts to measure economic performance
  – Response of the US government in WWII to
    assess the industrial potential of the economy
    to fight the war



                                                     2
     Gross Domestic Product
• GDP is the most important measure of
  economic output
• GDP is defined as the total value of all
  final goods and services produced by the
  domestic economy in one year




                                             3
            Interpreting GDP
• GDP measures flow of income, not the stock of wealth
• GDP does not measure the hidden economy (non
  market transactions)
• GDP is expressed in terms of the local currency. Hence,
  changes in the exchange rate may alter the value of
  GDP expressed in another country’s currency.
• GDP does not address changes in the composition of
  output
• GDP does not address environmental values




                                                            4
  Other Measures of Economic
            Output
• GNP=total value of all goods and services
  produced by the nation’s citizens
• GNP = GDP + NFP
• NFP = net factor payments from abroad= factor
  payments received from abroad less factor
  payments paid to foreigners
• Net national product (NNP) = GNP -
  depreciation
• National Income (NI) = NNP - indirect taxes +
  business transfer payments (gifts, etc)

                                                  5
• Personal Income (PI) = NI
  - contributions to social insurance (FICA)
  - corporate profits minus dividends
  + personal interest income from the
    government and consumers
  + government transfer payments (e.g.,
    unemployment insurance, relief, benefits to
    veterans)
• Disposable Income (Yd) = NI - personal
  taxes

                                                  6
             GNP versus GDP
• GDP = total value of all final goods and services
  produced by the domestic economy in a given year
• GNP = total value of all final goods and services
  produced by domestic factors of production (nation’s
  citizens and capital) in a given year
• GDP = GNP – NFP
• NFP = net factor payments from abroad = income
  earned abroad by domestic factors minus the income
  earned domestically by foreign factors of production
• GDP = Y
• GNP = Y + NFP

                                                         7
         Definitions of GDP

Product approach:
  – Uses the value added concept, the value
    created at each stage of production
  – Value added = value of product minus
    value of inputs
Income approach:
  GDP = Wages + Profits + Rents + Interest +
   Indirect Business Taxes
Expenditure Approach:
  GDP = PcC + PII + PGG + (PXX - PimIM)
                                               8
   Why the three approaches are
            equivalent
• Total production=total income=total
  expenditures
• Different ways of viewing the same
  phenomenon




                                        9
          Product approach
• Value added: an illustration




                                 10
Contribution of One Loaf of Bread to Consumption
       Expenditures and Income Created




                                                   11
        Expenditure approach:
•   GDP = C + I + G + (X-IM)
•   C = consumption expenditures
•   I = Investment expenditures
•   G = government expenditures
•   X-IM= NX (net exports)




                                   12
       Types of Expenditures
• Consumption:         • Government
  – durable goods      • Net Exports
  – nondurable goods     – exports
  – services             – imports
• Investment
  – inventories
  – producer goods
  – new construction



                                       13
 Consumption as a Percentage
           of GDP
90%


80%


70%


60%


50%


40%


30%


20%


10%


0%
      1930   35   40   45   50   55   60   65   70   75   80   85   90

                                                                         14
                                   2000
                                          4000
                                                         6000
                                                                                          8000
                                                                                                 10000
                                                                                                         12000




                               0
                        1959
                       1960.
                       1961.
                       1962.
                       1963.
                       1964.
                       1965.
                       1966.
                       1967.
                       1968.
                       1969.
                       1970.
                       1971.
                       1972.
                       1973.
                       1974.
                       1975.
                                                                                                                 Sum of Personal consumption expenditures




                       1976.
                       1977.
                       1978.
                       1979.
                       1980.
                       1981.
                       1982.
                       1983.
                       1984.
                       1985.




     Year or quarter
                       1986.
                       1987.
                                                                                                                                                            Total




                       1988.
                       1989.
                       1990.
                       1991.
                       1992.
                       1993.
                       1994.
                                                                                                                                                                    Drop Page Fields Here




                       1995.
                       1996.
                       1997.
                       1998.
                       1999.
                       2000.
                       2001.
                       2002.
                       2003.
                       2004.
                       2005.
                       2006.
                                                                                                                                                                                                 (Billions of Dollars)




                       2007.
                       2008.
                                                 Total
                                                                Drop Series Fields Here
                                                                                                                                                                                            Nominal Consumption over Time




15
                               0%
                                    10%
                                          20%
                                                30%
                                                              40%
                                                                                              50%
                                                                                                    60%
                                                                                                          70%
                                                                                                                80%
                        1959
                       1960.
                       1961.
                       1962.




                                                                                                                      Sum of C/Y
                       1963.
                       1964.
                       1965.
                       1966.
                       1967.
                       1968.
                       1969.
                       1970.
                       1971.
                       1972.
                       1973.
                       1974.
                       1975.
                       1976.
                       1977.
                       1978.
                       1979.
                       1980.
                       1981.
                       1982.
                       1983.
                       1984.
                       1985.




     Year or quarter
                       1986.
                       1987.
                                                                                                                                   Total




                       1988.
                       1989.
                       1990.
                       1991.
                                                                                                                                                                   C/Y




                       1992.
                       1993.
                       1994.
                       1995.
                                                                                                                                           Drop Page Fields Here




                       1996.
                       1997.
                       1998.
                       1999.
                       2000.
                       2001.
                       2002.
                       2003.
                       2004.
                       2005.
                       2006.
                       2007.
                       2008.
                                                      Total
                                                                    Drop Series Fields Here




16
C/Y




      17
Consumer Debt (red measured on left axis)
and Consumption (blue) as a Percentage of
                 GDP




                                        18
Changes in Types of Goods
       Produced




                            19
 Investment as a Percentage of
             GDP
20%



15%


10%



5%


0%
      1930   35   40   45   50   55   60   65   70   75   80   85   90   95


                                                                              20
I/Y




      21
G/Y




      22
         Trade Balance (Net Exports)
                 1930-1995
14%
12%
10%
8%
6%
4%
2%
0%
  1930   35   40   45   50   55      60     65      70     75   80   85   90    95
                                       Years

                                  Imports        Exports
                                                                               23
X/Y and IM/Y




               24
NX/Y




       25
           Income approach
• GDP =
• National income
   Employee compensation
   Proprietor’s income
   Corporate profits
   Rental income
   Net interest
• Indirect business Taxes
• Depreciation
• Net Factor Payments
                             26
             Types of Income
•   Compensation
•   Corporate Profits
•   Proprietor Profits
•   Interest
•   Rents




                               27
 Employee Compensation as a
 Percentage of National Income

  1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
  0
      30   35   40   45   50   55   60   65   70   75   80   85   90    95
                                    Years
                                                                       28
                           0.00%
                                   10.00%
                                            20.00%
                                                     30.00%
                                                              40.00%
                                                                                                 50.00%
                                                                                                          60.00%
                                                                                                                   70.00%
                                                                                                                            80.00%
                   1959.
                   1960.
                   1961.
                   1962.
                   1963.
                   1964.
                   1965.
                   1966.
                   1967.
                   1968.
                   1969.
                   1970.
                   1971.
                   1972.
                   1973.
                   1974.
                                                                                                                                     Sum of Compensation/National Income



                   1975.
                   1976.
                   1977.
                   1978.
                   1979.
                   1980.
                   1981.
                   1982.
                   1983.
                   1984.
                   1985.




 Year or quarter
                   1986.
                   1987.
                   1988.
                   1989.
                   1990.
                   1991.
                   1992.
                   1993.
                   1994.
                                                                                                                                                                           Drop Page Fields Here




                   1995.
                   1996.
                   1997.
                   1998.
                   1999.
                   2000.
                   2001.
                   2002.
                   2003.
                   2004.
                   2005.
                                                                                                                                                                                                         National Income




                   2006.
                   2007.
                   2008:
                                                                       Drop Series Fields Here
                                                                                                                                                                                                   Compensation as a Percentage of




29
                               56.00%
                                        58.00%
                                                 60.00%
                                                          62.00%
                                                                                             64.00%
                                                                                                      66.00%
                                                                                                               68.00%
                                                                                                                        70.00%
                       1959.
                       1960.
                       1961.
                       1962.
                       1963.
                       1964.
                       1965.
                       1966.
                       1967.
                       1968.
                       1969.
                       1970.
                       1971.
                       1972.
                       1973.
                       1974.
                                                                                                                                 Sum of Compensation/National Income




                       1975.
                       1976.
                       1977.
                       1978.
                       1979.
                       1980.
                       1981.
                       1982.
                       1983.
                       1984.
                       1985.




     Year or quarter
                       1986.
                       1987.
                       1988.
                       1989.
                       1990.
                       1991.
                       1992.
                       1993.
                       1994.
                                                                                                                                                                       Drop Page Fields Here




                       1995.
                       1996.
                       1997.
                       1998.
                       1999.
                       2000.
                       2001.
                       2002.
                       2003.
                                                                                                                                                                                                     National Income




                       2004.
                       2005.
                       2006.
                       2007.
                       2008:
                                                                   Drop Series Fields Here
                                                                                                                                                                                               Compensation as a Percentage of




30
                           0.00%
                                   5.00%
                                           10.00%
                                                    15.00%
                                                             20.00%
                                                                      25.00%
                   1959.
                   1960.
                   1961.
                   1962.
                   1963.
                   1964.
                   1965.
                   1966.
                   1967.
                   1968.
                   1969.
                   1970.
                   1971.
                   1972.
                   1973.
                                                                                                                      Data




                   1974.
                   1975.
                   1976.
                   1977.
                   1978.
                   1979.
                   1980.
                   1981.
                   1982.
                   1983.
                   1984.




 Year or quarter
                   1985.
                                                                               Sum of Proprietor Profits/National Y




                   1986.
                   1987.
                   1988.
                                                                                                                             Drop Page Fields Here




                   1989.
                   1990.
                   1991.
                   1992.
                   1993.
                                                                               Sum of Corp Pr/Nat Y




                   1994.
                   1995.
                   1996.
                   1997.
                   1998.
                   1999.
                   2000.
                   2001.
                   2002.
                   2003.
                   2004.
                   2005.
                   2006.
                   2007.
                   2008:
                                                                                                                                     Corporate and Proprietor Profits
                                                                                                                                     as a Percent of National Income




31
Profits/GDP




              32
          Flows and Stocks
• Investment and the Capital Stock:
  K = K-1 + I
  Capital stock = capital stock last year +
    investment
• Saving and Wealth
  W = W-1 + S




                                               33
         Measures of Saving
• Private Saving:
  Spvt = (Y + NFP – T + TR + INT) - C
• Government Saving:
  SGovt = T - TR – INT - G
• National Saving:
  S = Spvt + SGovt = Y + NFP - C – G
  S = I + NX + NFP
  S = I + CA
                                        34
      Uses of Private Saving:
Spvt = S – SG
     = CA + I – SG




                                35
      Net International Investment
           Position of the US
                                                        Drop Page Fields Here
                                                                        T otal




                      Sum of Net International Investment Position
                $0



 -$500,000,000,000



-$1,000,000,000,000

                                                                                                             Drop Series Fields Here
-$1,500,000,000,000
                                                                                                               T otal


-$2,000,000,000,000



-$2,500,000,000,000



-$3,000,000,000,000
                         2000         2001         2002          2003            2004   2005   2006   2007


                                                                     Year



                                                                                                                                       36
• Current Account and net International
  Investment Position
  – net international investment position (NIIP)
    measures the net stock of outstanding
    loans between a country and the rest of the
    world
  NIIP = NIIP-1 + CA
• Public Debt and the Deficit
  Dg = Dg-1 + DEF



                                                   37
GDP over time




                38
                      Nominal and Real GDP

                      8,000.0
                                                                      Nominal GDP
                      7,000.0
                                                                      Real GDP

                      6,000.0


                      5,000.0
Billions of Dollars




                      4,000.0


                      3,000.0


                      2,000.0


                      1,000.0


                          0.0
                                1959

                                       1961

                                              1963

                                                     1965

                                                            1967

                                                                   1969

                                                                          1971

                                                                                 1973

                                                                                        1975

                                                                                               1977

                                                                                                      1979

                                                                                                             1981

                                                                                                                    1983

                                                                                                                           1985

                                                                                                                                  1987

                                                                                                                                         1989

                                                                                                                                                1991

                                                                                                                                                       1993

                                                                                                                                                              1995
                                                                                                                                                                     39
  Converting Real to Nominal
             GDP
• Nominal GDP: expressed in current dollars
• Real GDP: GDP produced in one year
  expressed in some base year prices
• Real GDP= nominal GDP/implicit GDP
  deflator
• Nominal GDP=PcYc
• Implicit GDP deflator=Pc/Pb
  – where c stands for the current year, b the base
    year
  – Pb is always set to 100                           40
    Constructing Price Indices
• Nominal value of consumption:
  – PcC = P1C1 + P2C2 + P3C3 + . . . + PNCN
• CPI reflects an Average Price constructed
  by using weights
  – PcCt = wt1(P1t/P10) + wt2(P2t/P20) + wt3(P3t/P30)
    + . . . + wN(PNt/PN0)
  – where the weights sum to one, and the prices
    on the denominator represent the base year
    for that commodity
                                                    41
Calculating GDP and the GDP
           Deflator




                              42
Physical outputs          1987      1998
           Apples           40        48
           Bananas          50        80
Prices
           Apples          1.6         2
           Bananas           1       1.5
Nominal Expenditures (P87*Q87) (P98*Q98)
           Apples
           Bananas
Nomial GDP                   0         0
Price Indices        (P87/P87) (P98/P87)
           Apples
           Bananas
Real Expenditures    (P87*Q87) (P87*Q98)
           Apples
           Bananas
Real GDP
GDP Deflator

                                           43
Physical outputs       1987    1998
           Apples        40      48
           Bananas       50      80
Prices
           Apples       1.6       2
           Bananas        1     1.5
Nominal Expenditures
           Apples       64       96
           Bananas      50      120
Price Indices
           Apples        1     1.25
           Bananas       1      1.5
Real Expenditures
           Apples       64     76.8
           Bananas      50       80
Nomial GDP             114      216
Real GDP               114    156.8
GDP Deflator             1 1.377551
                                      44
     Intertemporal aspects of
     Macroeconomics: interest
           rates and PVs
• Interest rate: opportunity cost of allocating
  income towards consumption
• Economic agents allocate income
  intertemporally, that is, between different
  times
• The decision to increase consumption in
  the present means reducing consumption
  in the future
                                              45
             Interest rates:
• Real interest rate = nominal interest rates
  – expected inflation rate




                                                46
        Role of Expectations
• Different macro theories differ in how they
  model expectations
  – Classical economists assumed certainty
  – Keynes: argued the future is uncertain
  – Static expectations: assumption the future is
    like the recent past
     • Y+1e = Y



                                                    47
     Modeling Expectations
Adaptive expectations: people change their
 expectations depending on the extent they
 are wrong
=extent to which our error regarding the
 expected value of a variable affects our future
 expectations
Y+1e = Ye + (Y-Ye)
Expected GDP next year = expected GDP this
 year + * the difference between actual and
 expected GDP
                                               48
   • Y+1e = (1- )Ye + Y
   • When  = 0, Y+1e = Ye expectations are
     unchanging
   • When  = 1, Y+1e = Y expected income next year
     equals actual income this year (static expectations)
– Rational expectations: idea that individuals
  use all available information to formulate their
  expectations



                                                       49

								
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