Transcript The Measurement of Income, Prices and Unemployment

Chapter 2
The
Measurement of
Income, Prices,
and
Unemployment
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The Circular Flow of Income and
Expenditure
• The circular flow of income and expenditure model
is a simple representation of the macro economy
• In the following graphs, convince yourself that:
– The value of output produced by firms equals the value
of expenditures by participants in the economy
– The value of output produced by firms equals the total
income generated in the economy
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Figure 2-1 The Circular Flow of Income and
Consumption Expenditures
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Defining GDP
• GDP (Y) is the value of all final goods and
services that are currently produced and
sold (but not resold) through the market
during the current time period
– The GDP of a country is often referred to as the
country’s output and/or income
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Keeping Track of GDP and other U.S.
Data
• The National Income and Product Accounts (NIPA) is
the official U.S. government accounting of all the U.S. flows
of income and expenditures.
• The “Big Three” agencies for U.S. economic data
– The Bureau of Economic Analysis (BEA)
– The Bureau of Labor Statistics (BLS)
– The Federal Reserve Board (Fed)
• Other sources of data
– The Bureau of the Census
– International data: OECD, the World Bank, and the IMF
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Types of Investment (I)
• Inventory Investment is the change in the
stock of raw materials, parts, and finished
products held by businesses.
– Any goods that are unsold automatically are counted as
part of unplanned inventory investment.
• Fixed Investment includes all final goods
(mainly structures and equipment) purchased
by businesses not intended for resale.
– Houses and condominiums owned by households are
also counted as fixed investment.
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Relation of Investment and Saving
• Personal Saving (S) is that part of personal income that is
not consumed or paid out in taxes
– Also referred to as Private Saving
– Algebraically: S = (Y-T) - C (where T = Net Taxes)
• Funds from savings are channeled to firms in two basis
ways:
– Households buy bonds and stocks issued by firms
– Households deposit savings in banks and other financial
institutions that in turn lend money to firms
• Firms use the money channeled from savings to buy
investment goods
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Figure 2-2 Introduction of Saving and
Investment to the Circular Flow Diagram
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Net Exports and Net Foreign
Investment
•
Exports are goods produced within one country
and shipped to another
•
Imports are goods consumed within one country
but produced in another country
•
Net Exports (NX) are equal to the excess of
exports over imports
•
Net Foreign Investment (NFI) is equal to U.S.
purchases of foreign financial assets minus foreign
purchases of U.S. financial assets
– Interesting connection: NX = NFI
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The Government Sector
•
•
Government Purchases (G) is the value of
goods and services purchased by the government
at the federal, state and local levels
Transfer Payments (F) are payments from the
government to households that do not require the
recipient to provide a service in return
– Examples: Social Security, Medicare, and Food Stamps
•
•
•
•
Government Spending = G + F
The Government pays for its spending by collecting
Taxes (R) or by borrowing and/or printing money
Net Taxes (T) = R – F
Budget Surplus = T – G
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Figure 2-3 Introduction of Taxation, Government Spending,
and the Foreign Sector to the Circular Flow Diagram
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Deriving the “Magic” Equation
(1)
• The income accounting identity states that an economy’s
income must equal its expenditures:
Y ≡ E  Y = C + I + G + NX
• Now, use the fact that household income must equal (2)
household outlays (and recall that T = R - F):
Y+F=C+S+R Y=C+S+T
• Equating (1) and (2) yields the “Magic Equation”
C + S + T = C + I + G + NX
 S + T = I + G + NX
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Interpreting the “Magic Equation”
Recall the “Magic Equation:” S + T = I + G + NX
• Leakages (S + T) describe the portion of total
income that is not available for consumption
• Injections (I + G + NX) is a term for
nonconsumption expenditures
• The “Magic Equation” shows how leakages and
injections are connected by definition!
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Table 2-1 Households Get
What Remains After All the Leakages
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“Magic Equation” Application: Twin
Deficits
Recall the “Magic Equation”: S + T = I + G + NX (1)
• Rearranging (1) yields  T - G = (I + NX) – S
– If T - G < 0  possibly NX < 0
– This suggests that a budget deficit and trade deficit
might be observed at the same time!
– Note that the “magic equation” only suggests the
possible connections that may be observed in these
variables.
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Nominal GDP, Real GDP, and the
GDP Deflator
•
Nominal GDP is the value of gross domestic product
in current (actual) prices.
•
Real GDP is the measure of gross domestic product
using prices of an arbitrarily chosen base year.
•
The GDP deflator is a price index that measures the
aggregate economy’s price level.
– Algebraically: GDP Def = Nominal GDP / Real GDP * 100
– The percentage change in the GDP deflator gives a measure of the
economy’s inflation rate.
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Figure 2-4 Nominal GDP, Real GDP, and
the Implicit GDP Deflator, 1900–2007
Source: Appendix Table A-1.
See explanation in Appendix
C-4
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Figure 2-5 Employment from the Household and
Payroll Survey, 1990–2007
Source: Bureau of Labor Statistics
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Appendix Table: Calculation of Fixed-weight and Chainweighted Real GDP and GDP Deflators in an Imaginary
Economy Producing Only Oranges and Apples
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Chapter Equations
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Chapter Equations
GNP  GDP  Factor Payments from Rest of World
Factor Payments to Rest of World
(2.1)
E  C  I  G  NX
Y CS RF
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(2.2)
(2.3)
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Chapter Equations
Y  C  S T
(2.4)
C  S  T  C  I  G  NX
C
C
S T 
(subtracting C from both sides)
I  G  NX
T  G  ( I  NX )  S
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(2.5)
(2.6)
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