Economics I
Macroeconomic Measurement
Macroeconomic Measurement (4h)
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The goal of first lecture consists in definition of macroeconomics as a scientific
discipline, in pointing out its consistency with microeconomic theory, in a reminder
of the main methods of economic science, in definition of the macro-economic
entities, fundamental macroeconomic variables and their links, in a treatise on the
state macroeconomic policy and representation of the complexity in
understanding the macroeconomic problems, if we are going to deal with
particular macroeconomic streams.
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The second lecture aims to analyze the issue of measuring the performance of the
economy as a whole, which is one of the basic prerequisites enabling the
description and analysis of the economy at the macroeconomic level. There will be
included the military spending (defense spending) in the framework of the
national accounts. The basic methods used for calculation of macroeconomic
output will be characterized during the lecture and the complexity of the product
measurement will be taken into account. In the end, the basic macroeconomic
identities will be presented and items that are not included in the calculation of
the gross domestic product (GDP) will be introduced.
Content
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introduction – defining the goals
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introduction to macroeconomics – macroeconomics as a discipline, its origin and
subject
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basic macroeconomic variables, operators, and the macroeconomic cycle
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objectives and tools in macroeconomics, the stabilization of the macroeconomic
situation
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main streams of macroeconomics
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military-economic context
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the need for, and the issue of the measurement of the performance of the
economy, the historical context
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methods of measuring the power of the economy – spending, income and
production method of the GDP measurement
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the net economic welfare, national wealth
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conclusion – summary, homework
Introduction to macroeconomics-macroeconomics
as a science, its origin and the subject
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the word „economics“ derived from the Greek words: „makros“ = large, „oikos“ =
house“ and „nomos“ = rule, law
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deals with the behavior of the economy as a whole
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examines the factors that determine the level of aggregate (summary) variables
e.g. GDP, unemployment, inflation, balance of payments, and examines the
interrelationships in the development of these variables
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positive vs. normative macroeconomics (CSPE vs. Keynesianism)
Relationship beetwen macroeconomics and
microeconomics
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the division of economics to microeconomics and macroeconomics – year 1933
(R. Frisch)
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their relationship (can not be separated):
– the macroeconomic framework the functioning of microeconomic processes
– the microeconomic foundations of macroeconomics
Methods of economics
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positive macroeconomics vs. normative macroeconomics
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generalization abstraction method
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analysis vs. synthesis
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induction vs. deduction
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comparison; optimization; balance method
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statistical and mathematical methods
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experiment - can not be used in economic practice
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fallacy of composition, post hoc fallacy, ceteris paribus
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the time factor - important to divide the short-term and long-term perspective
(e.g. long-term and short-term aggregate supply)
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graphical display - for better understanding of the relationship rather than a
complication
The basic problem areas of macroeconomics
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how to encourage the performance of the economy, what are the factors of
economic growth
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how to reduce unemployment, what are the causes of its origin
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how the inflation occurs, what are its causes and effects on the economy
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whether and to what extent the entry of the Government in the economy is
justified - macroeconomic policy of the state
Basic macroeconomic variables
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product (performance, output)
– marking: Y, Q, GDP
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employment, or the rate of unemployment
– marking: u (unemployment rate)
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general price level, price level
– marking: price indexes, P generally
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foreign trade, foreign capital flow - relationship of the economy to abroad:
– balance of payments of the country, current account balance as a share of GDP (b)
Economic operators
1. Households
• supply inputs, demand goods
and services
2. Firms
• supply goods and services,
demand inputs
3. State (the Government, CB)
• macroeconomic policy
4. Abroad
• export, import, capital flow
2-sectoral economy
sectors: households and firms
_________________________
3-sectoral (closed) economy
sectors: households, firms, state
_________________________
4-sectoral (open) economy
sectors: households, firms, state,
abroad
Macroeconomic cycle in a 2-sectoral economy
payments for goods and services
goods and services
The flow of goods and
services and the flow of
inputs: real and
financial flows.
HOUSEHOLDS
FIRMS
inputs
payments for inputs services
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Macroeconomic policy
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macroeconomics – the base for macroeconomic policy and other economic
disciplines
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macroeconomic policy of the state began to take shape as a stabilizing policy (anticyclical) - 30s of the 20th century, efforts to reduce the fluctuations of the business
cycle by affecting aggregate demand
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macroeconomic stability today
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the term "stability"
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–
economic development is desired, the pursuit of achieving desirable levels (dynamics)
macroeconomic variables
–
there is an attempt to capture the quantitative stability (instability) in the economy
(e.g. an indicator of economic hardship)
relationship between economy and the state:
– liberalism ("laissez-faire") vs. interventionism
Main macroeconomic streams (schools)
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CSPE - Classical School of Political Economy, the first macroeconomic school of
economics (focused on production, consumption, exchange and distribution)
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Keynesianism - many varieties (stream of the new Keynesian macroeconomic
theory complemented by microeconomic foundations)
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new conservative economics (monetarism, rational expectations school
(monetarism II, new classical macroeconomics), supply-side economics, real
business cycle theory, public choice theory)
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Economics today: the requirement of necessity and the microeconomic and
macroeconomic balance approach to examining the economy
Macroeconomic measurement – historical
context
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early interest in the measurement of economic performance: 17th cent. - Sir
William Petty (1623 - 1687) - detailed survey of the lands and wealth of Ireland
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a need to measure the performance of the economy grew after the Great
Depression (1929 - 1933) and in the time before and during the Second World War
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system for the measurement of economic output elaborated Russian-Am.
economist Simon Kuznetz (1901 - 1985) and the British economist Richard Stone
(1913- 1991), both received the Nobel Prize in Economics, R. Stone for the specific
benefits of the system of national accounts, created the foundations for
macroeconomic analysis
Macroeconomic measurement
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the output of the economy is the flow variable (unlike state variables), measured
over a specific time period, there is a problem how to sum all final production
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GDP (gross domestic product) vs. GNP (gross national product)
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net income from assets abroad (net property income from abroad): NPI (Net
Property Income), NPI = GNP - GDP
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PRODUCT /domestic product (DP) is defined as the market value of all final
production for a certain period of time – this is market value of production in
currency units, not counting into it purely cash transactions – e.g. securities
trading, not counting transfers of existing assets and intermediate goods
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INCOME /national income (NI): household income – payments for inputs services
Macroeconomic cycle in a 2-sectoral economy
payments for goods and services
goods and services
The output flowing
towards final products
market.
product
Flow of goods and
services and flow of
inputs: real (physical)
and financial flow.
HOUSEHOLDS
income
Flow of payments
for inputs services.
FIRMS
inputs
payments for inputs services
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domestic vs. national
gross vs. net
PRODUCT
real vs. nominal
actual vs. potential
real vs. nominal variable
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INCOME
National (NI)
Personal (PI)
Disposable (DI, YD)
C = Consumption
S = Savings
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Methods of macroeconomic measurement
1st Measurement by expenditures
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GDP is the market value of final sold production – expenditures of all economic
agents (households, firms, the Government and abroad)
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GDP = C + IB + G + NX
C = household consumption expenditures
IB = gross private domestic investment (IB = IN + IR)
G = government expenditure on the purchase of goods and services
NX = net exports (exports - imports)
Methods of macroeconomic measurement
2nd Measurement by incomes
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a sum of all household incomes for services in their possession = national income
(NI)
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national income:
• wages before taxes (gross wages)
• rents (incomes for landowners)
• corporate profits before taxes (gross profits)
• net interests for households
• profits for self-employed people
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income < product
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the income does not include the following circumstances:
• indirect taxes
• capital amortization
• others: firm subsidies, net property income
Personal and disposable income
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•
•
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PI – Personal Income takes into account the following:
• firms pay taxes on their profits
• a portion of corporate profits is not distributed
• there are payments into social security and health insurance
• households receive income in the form of transfer payments from the
state (e.g. social benefits)
• other sectors except households receive or pay interest
personal Income = national Income - corporate taxes - undistributed profits payments into social security and health insurance + transfer payments + net
interest
personal income minus personal income tax = disposable income of households
(Disposable Income, DI, YD)
disposable income is divided into consumption and savings:
DI (YD) = C + S
DI (YD) = Y – TA – t.Y + TR
TA = autonomous taxes; t.Y = income taxes, TR = transfer payments
Methods of macroeconomic measurement
3rd Measurement by value added
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GDP as the sum of the values ​added at each stage of production
value added at each stage of production is a real contribution to the total output,
value added is equal to the market value of the product minus the cost of
intermediate goods
Value-added in various stage of production
Production stage
The value of
transaction/per
unit
Value-added/ Intermediates/per
per unit
unit
1st The farmer grows and sells wheat to a
miller.
0.30 CZK
0.30 CZK
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2nd The miller grinds and sells flour to a
baker.
0.65 CZK
0.35 CZK
0.30 CZK
3rd The baker bakes and sells pretzels to a
bakery owner.
1.30 CZK
0.65 CZK
0.65 CZK
4th The Bakery owner sells pretzels to
consumers.
2.00 CZK
0.70 CZK
1.30 CZK
Total
4.25 CZK
2.00 CZK
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Comparison of methods for measuring economic
performance
Expenditure
method
C
I
G
NX
Income method
wages before taxes, rents, corporate profits
before taxes, net interest for households and
profits for self-employed people = national
income (NI)
+ capital amortization
+ indirect taxes
+ net property income
- firms subsidies
GDP (market prices)
Production method
a sum of values added
(in sectors: primary,
secondary, tertiary)
What the GDP does not include
GDP does not include following items:
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non-market goods
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the quality of goods and services
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the value of leisure time
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environmental damage (pollution)
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underground (grey-shadow) economy
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the health of the population
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NEW: Net Economic Welfare – contents these items
Internet sources
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Czech Statistical Office. Statistics. Macroeconomic data. Available at: WWW:
http://www.czso.cz.
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Ministry of Finance of the Czech Republic. Macroeconomic prediction. Economic
output. Available at: WWW: http://www.mfcr.cz.
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Stockholm International Peace Research Institute. Yearbook. Military Expenditures.
Available at: WWW: http://www.sipri.org.
Literature
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MANKIW, G. N. Principles of Macroeconomics. 4 ed. South-Western: Thomson,
2007. 583 s. ISBN 978-0-324-23695-8.
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FRANK, R. H., BERNANKE, B. S. Principles of Macroeconomics. 3rd Edition. McGrawHill/Irwin: NY, 2007. ISBN 978-0-07-319397-7. 561 p.
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MANKIW, G. N. Principles of Macroeconomics. 4 th ed. USA: Thomson SouthWestern, 2007. 583 p. ISBN 978-0-324-23695-8.
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McCONNELL, C. R., BRUE, S. L. Economics: Principles, Problems, and Policies. 17th
ed. NY: McGraw/Irwin. 716 p. ISBN 978-0-07-312663-0.
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SAMUELSON, P. A., NORDHAUS, W. D. Economics. 15th ed. McGraw-Hill, 1995.
Homework
Exercise “Introduction to Macroeconomics”
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In the daily press (economic section), in economic journals or in the economic
news on the internet, locate the two current macro-economic articles (valid for the
Czech Republic or even of the world). Explain what are classified into macroeconomic section (and thereby distinguish them from microeconomic news), and
prepare a short digest of the content of both articles into the exercise.
Exercise “Macroeconomic Measurement”
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Locate the statistics of gross domestic product on the Web site of the Czech
Statistical Office of the Czech Republic (htttp://www.czso.cz) – menu statistics,
cross-sectorial statistics – macroeconomic data. Focus on the development of the
nominal and the real product time series from the beginning to the present.
Record the increases and declines in gross domestic product in current and in
constant prices. Interpret the development of real growth of quantity of the
product (year on year). What is the latest trend in the development of this
magnitude?
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On the Web site of the Ministry of Finance of the Czech Republic
(http://www.mfcr.cz), the menu for the public sector, Macroeconomic forecasts,
predictions – part of tables and charts (C. 1 Economic performance), locate the pdf
file containing the system of national accounts and the decomposition of the
nominal and real GDP in the Czech Republic on an individual folder by using the
expenditure approach. Interpret the development of these components in the
framework of the defined time series (in the context of the past period and the
prediction of the Ministry of Finance). Use the graphical processing.