national income and product accounting1 introduction and nipa accounting ba 282 macroeconomics class...

National Income and Product Accounting 1

Introductionand

NIPA Accounting

BA 282

Macroeconomics

Class Notes - Part 1


Syllabus

Information about the class is on the website:

http://public.kenan-flagler.unc.edu/faculty/browngr/macroweb/


What is Macroeconomics?

The biggest of “big pictures”

How the whole (global) economy works

Macroeconomics examines things like economic growth employment inflation


Goals for Students To learn about the major economic factors

What they are... How they are measured... What they mean (and why we care) ...

To begin developing intuition about how economic factors are integrated

To get up-to-date with economic current events


Why do we want this knowledge?

Answer: So we can make better business decisions!

To understand how macroeconomic conditions

affect individual companies

To understand the “business cycle” and

economic risk

To better understand financial markets and risk


Goals for Me

To provide key knowledge and understanding about how the macro economy affects you and your business.

To teach you efficiently To get you excited about macroeconomics To have you rate this course as “excellent”


Thinking Like an Economist

As scary as it sounds, thinking like an economist is important for business decisions

Let’s run through a common example that is important for our purposes:

Comparative advantage & gains from trade


Comparative Advantage & Gains from Trade (1)

Assume a simple economy with only two goods: Beer and Movies

Let’s also assume for simplicity that there are only two countries The US and Canada

Now suppose that both countries can produce each good but the US is “better” at making movies and Canada is better at making beer. It is pretty obvious that the countries would benefit from

trade. How and why?



Now let’s make the assumption that the US is better at making both beer and movies.

Specifically, lets assume each country has 10 “units” of labor and for each unit of labor they can produce the following:

Country Beer Movies

US 10 4

Canada 3 3



Suppose there is no international trade and each country finds it optimal to devote 7 units of its labor to producing beer (and therefore 3 units of labor to producing movies). Then each country produces and consumes the following:

Country Beer Movies

US 7*10=70 3*4=12

Canada 7*3=21 3*3=9



Now let’s allow the countries to specialize at producing one good and trade with each other. The US should make only beer and Canada should only make movies (why?). National production will be:

Country Beer Movies

US 100 0

Canada 0 30



One possibility is that the US trades 25 beers for 15 movies and national consumption is then:

Country Beer MoviesUS 75 15Canada 25 15

Recall that previouslyCountry Beer MoviesUS 70 12Canada 21 9

What has happened? Is this realistic?


Measuring Economic Activity To understand the economy we must measure the

economy There are many economic indicators

What are some you hear about frequently?

What we ultimately care most about are measures of overall economic activity

The broadest measure is

GNP = Gross National Product


Gross National Product (GNP) GNP is:

the value of all final goods and services produced and sold

a measure of a country’s economic output (size) the sum of four components:

Consumption (C) Investment (I) Government expenditures (G) Net Exports (Exports - Imports = EX - IM)

We will use this identity often:GNP = C + I + G + EX - IM


GNP vs. GDP In 1991 the US joined the rest of the world by using Gross

Domestic Product (GDP) as the measure of the economy GDP = GNP – Net Receipts of Factor Income Net Receipts of Factor Income =

income domestic residents earn on wealth held in other countries

– payments to foreign owners of domestic wealth So, GDP does not correct for domestic output produced by foreign

owned capital Example:

The earnings of an Irish computer factory that is owned by Dell (US) are counted in Ireland’s GDP and in US’s GNP.

Does not matter much in practice for US, for 2001:Q1 Income receipts (378.9B) - Income payments (389.4B) = -10.5B


GNP/GDP Component Detail C = Private Consumption Expenditures

Durable goods Nondurable goods Services

I = Gross Private Domestic Investment Fixed Investment

Nonresidential structures Nonresidential equipment and software Residential

Change in Private Inventories EX-IM = Net Exports

Goods Services

G = Government Consumption Expenditures and Gross Investment Federal nondefense Federal defense State and local


US GDP ($ billions, nominal)

1950 Percent 2000 PercentGross domestic product 294.3 100.0% 9872.9 100.0%Personal consumption expenditures 192.7 65.5% 6728.4 68.2% Durable goods 30.7 10.4% 819.6 8.3% Nondurable goods 98.2 33.4% 1989.6 20.2% Services 63.7 21.6% 3919.2 39.7%Gross private domestic investment 54.1 18.4% 1767.5 17.9% Fixed investment 48.3 16.4% 1718.1 17.4% Nonresidential 27.8 9.4% 1293.1 13.1% Structures 10 3.4% 313.6 3.2% Equipment and software 17.8 6.0% 979.5 9.9% Residential 20.5 7.0% 425.1 4.3% Change in private inventories 5.8 2.0% 49.4 0.5%Net exports of goods and services 0.7 0.2% -364.0 -3.7% Exports 12.3 4.2% 1102.9 11.2% Goods 10.2 3.5% 785.6 8.0% Services 2.1 0.7% 317.3 3.2% Imports 11.6 3.9% 1466.9 14.9% Goods 9.1 3.1% 1244.9 12.6% Services 2.5 0.8% 221.9 2.2%Government 46.9 15.9% 1741.0 17.6% Federal 26 8.8% 590.2 6.0% National defense 19.6 6.7% 375.4 3.8% Nondefense 6.4 2.2% 214.8 2.2% State and local 20.9 7.1% 1150.8 11.7%


What Counts in GNP/GDP? (and Where?)

Which of the following are included in GNP or GDP You buy a box of Garden Burgers at the grocery store A farmer sells soybeans to the local silo A car dealer sells a 1998 Ford Escort to a college student A car dealer sells a new panel van to a florist Compaq manufactures a computer to build up inventory You sell your house to a couple that just moved from FL The Federal government builds a new bridge Texas state government pays unemployment benefits to

former Enron employees GM imports steel for use in a new car


What Counts in GNP/GDP? Let’s track parts of a hypothetical product through

its production and see how it enters into the NIPA accounts GM imports 800 lbs. of steel from Korea for use in

manufacturing a Chevy Malibu at a cost of $1,300

GM manufactures the Malibu and sells it to a dealer in Dallas for $12,700

The dealer sells the new Malibu to a rodeo queen for $16,800


Real vs. Nominal So far we have not adjusted for inflation Why would we need to do this?

Compare 8% growth in GDP in the US where inflation is about 3% with Venezuela where inflation is about 25%

Unadjusted GDP is called Nominal GDP and Inflation adjusted GDP is called Real GDP

There are two common ways of adjusting for inflation: Base year comparison Chain-weight comparison


GDP Deflator GDP Deflator is an index (standardized to

2000=100) that changes nominal GDP to real GDP

Real GDP = Nominal GDP / (GDP Deflator/100)

The percent change in the GDP Deflator is a measure of inflation

The GDP Deflator is the broadest measure of inflation for an economy


What is a Recession? National Bureau of Economic Research (NBER)

determines official dates for the “business cycle” A committee of top economists called the “Business

Cycle Dating Committee” makes the call: “A recession is a significant decline in activity spread

across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. A recession begins just after the economy reaches a peak of output and employment and ends as the economy reaches its trough.”

For details on the current situation see:http://www.nber.org/cycles/recessions.html

http://www.nber.org/cycles/recessions.html

http://www.nber.org/cycles/recessions.html


Real US GDP Growth(1929-2003, annual, purple indicates year with NBER recession)

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%19

29

1934

1939

1944

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999


Real US GDP Growth(1988-present, quarterly, purple indicates quarter with NBER recession)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1988

:Q1

1989

:Q1

1990

:Q1

1991

:Q1

1992

:Q1

1993

:Q1

1994

:Q1

1995

:Q1

1996

:Q1

1997

:Q1

1998

:Q1

1999

:Q1

2000

:Q1

2001

:Q1

2002

:Q1

2003

:Q1

2004

:Q1


Contributions to Real GDP %Change

2001 2002 2003 2004-I Gross domestic product 0.5 2.2 3.1 3.9 Personal consumption expenditures 1.7 2.4 2.2 2.6 Durable goods 0.4 0.6 0.6 -0.3 Nondurable goods 0.4 0.6 0.8 1.4 Services 1.0 1.2 0.9 1.6

Gross private domestic investment -1.5 -0.2 0.6 1.4 Fixed investment -0.5 -0.6 0.7 0.8 Nonresidential -0.6 -0.8 0.3 0.5 Structures -0.1 -0.6 -0.1 -0.2 Equipment and software -0.5 -0.2 0.4 0.7 Residential 0.0 0.2 0.4 0.2 Change in private inventories -0.9 0.4 0.0 0.7

Net exports of goods and services -0.2 -0.7 -0.4 -0.7 Exports -0.6 -0.2 0.2 0.7 Imports 0.4 -0.5 -0.6 -1.4

Government 0.5 0.7 0.6 0.5 Federal 0.2 0.5 0.6 0.6 National defense 0.2 0.4 0.4 0.6 Nondefense 0.1 0.1 0.1 0.0 State and local 0.3 0.2 0.1 0.0


This Time Was Different(contributions to GDP growth)

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

1999

:Q1

1999

:Q2

1999

:Q3

1999

:Q4

2000

:Q1

2000

:Q2

2000

:Q3

2000

:Q4

2001

:Q1

2001

:Q2

2001

:Q3

2001

:Q4

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

C (incl Residential)

I (excl Residential)


Global GDP in USD - 2002Rank Country GDP GDP/Capita

1 United States 10,446 36,2192 Japan 3,992 31,4103 Germany 1,990 24,1244 United Kingdom 1,557 26,4395 France 1,423 23,9556 China (Ex. Hong Kong) 1,237 9527 Italy 1,188 20,5178 Canada 728 23,4779 Spain 655 15,90110 Mexico 642 6,358

Total 32,024 5,250EU - 15 8,629 22,804OECD (30 Rich Countries) 26,351 23,040Rest of World 5,674 1,145

(calculated using market exchange rates)


Problems with Product Accounting

NIPA accounting can be misleading and difficult in practice

Problems include: Black market Household production Fixed capital replacement (e.g., from a disaster) Certain government services (e.g., national security) Externalities (e.g., environmental impact) Quality / technology adjustment (e.g., automobiles)


Social Welfare We have talked about how to measure the

economy but not how to directly measure the well-being of consumers How might the two differ?

We could use a “social welfare function”

Examples Add up the “utility level” of all consumers (classical

utilitarian or Benthamite) Minimum of all consumers (Rawlsian)


National Income We have defined GDP in terms of production of

goods and services

We can also think about GDP in terms of national income (Y). Why?

Economists often assume Y=GDP but there is a slightly different precise definition of national income


National Income

GNP

less: Consumption of Fixed Capital (Depreciation)

= Net National Product

less: Indirect Business Tax

less: Business Transfer Payments

less: Statistical Discrepancy

plus: Subsidies less current surplus of government

= National Income

To keep things simple we will always assume GDP=GNP=National Income (unless otherwise stated).


National Income

Or looking at it the other way: Y2001 Percent

National Income 9,707.8 100%Compensation of Employees 6,203.0 63.9%

Proprietors' Income 846.9 8.7%

Rental Income 164.2 1.7%

Corporate Profits 1,069.9 11.0%

Net Interest Income 583.2 6.0%

Taxes on Imports and Production 788.7 8.1%

Net Subsidies & Other 52.0 0.5%

(billions USD - percentages do not add to 100% because of rounding errors)


Inflation Measures Price indexes are used to measure inflation The three most common price indexes are

GDP deflator Consumer price index (CPI)

Prices of finished or retail goods and services Index set to 100 for base year(s), currently 1982-1984 average

Producer price index (PPI) Measures the cost of a given basket of crude goods (raw

materials), intermediate goods, or finished goods (3 indices) Constructed from prices at the level of the first significant

commercial transaction


CPI Percent Change(From 12 Months Prior, All Urban Consumers)

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%19

50

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000


Recent CPI and CPI ex. Food & Energy(Percent Change from 12 Months Prior)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%19

88

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

CPI- All Items

CPI Excluding Food and Energy


Components of PPI(Index Levels, Monthly)

80

90

100

110

120

130

140

150

160

170

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Finished Intermediate Crude


Comparing GDP deflator, CPI, & PPI GDP deflator measures a much wider group of

goods than does the CPI or PPI

CPI & PPI measure a fixed basket of goods, GDP deflator measures things produced in a given year

Inflation over last 20 years as measured byGDP Deflator 3.3%CPI 4.1%PPI 2.3%

What explains these differences?


Employment and Wages Another important measure of the economy is

employment and labor income (wages + benefits)

The most common measure of the number of jobs in the US is called “nonfarm payroll employment”

Also frequently reported is the “unemployment rate”

number of people seeking jobs =

number of people in the labor force


Non-Farm Payrolls (1,000s)

127,000

128,000

129,000

130,000

131,000

132,000

133,000

Jan-

99M

ay-9

9S

ep-9

9Ja

n-00

May

-00

Sep

-00

Jan-

01M

ay-0

1S

ep-0

1Ja

n-02

May

-02

Sep

-02

Jan-

03M

ay-0

3S

ep-0

3Ja

n-04

May

-04


Unemployment Rate(Percent)

0

2

4

6

8

10

12

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004


Recent Employment and Labor Force(Labor Force and Employment in 1,000s, Unemployment Rate in Percent)

132,000

134,000

136,000

138,000

140,000

142,000

144,000

146,000

148,000Ju

l-00

Oct

-00

Jan-

01A

pr-0

1Ju

l-01

Oct

-01

Jan-

02A

pr-0

2Ju

l-02

Oct

-02

Jan-

03A

pr-0

3Ju

l-03

Oct

-03

Jan-

04A

pr-0

4

3.8

4.2

4.6

5.0

5.4

5.8

6.2

6.6Labor Force Employment Unemployment Rate (right scale)


Adjusted Unemployment Rate

3

4

5

6

7

8

9

10Ja

n-01

Apr

-01

Jul-0

1O

ct-0

1Ja

n-02

Apr

-02

Jul-0

2O

ct-0

2Ja

n-03

Apr

-03

Jul-0

3O

ct-0

3Ja

n-04

Apr

-04

Unemp-Reported

Unemp-Using Population Growth


What’s Going On?

129,500

130,000

130,500

131,000

131,500

132,000

132,500

133,000

133,500

134,000M

ar-0

1Ju

n-01

Sep

-01

Dec

-01

Mar

-02

Jun-

02S

ep-0

2D

ec-0

2M

ar-0

3Ju

n-03

Sep

-03

Dec

-03

Mar

-04

May

-04

134,000

135,000

136,000

137,000

138,000

139,000

140,000

Payroll Survey (left scale)

Household Survey (right scale)


Current Account Current Account (CA) is defined as the difference

between Exports (EX) and Imports (IM)

CA = EX - IM CA < 0 is defined as current account deficit CA > 0 is defined as current account surplus CA is also called net foreign investment. Why?

How does CA relate to Foreign indebtedness? Intertemporal consumption patterns?


US Exports, Imports, & CA Deficit(Quarterly, Percent of GDP, 1996 Dollars)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%19

50

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Imports Exports CA


Current Account and Net Foreign Wealth


Current Account and National Savings

National Savings (S) is defined as the portion of national income not devoted to consumption or government expenditures. So,

S = Y - C - G

S = (C + I + G +EX - IM) - C - G

S = I + EX – IM = I + CA


Balance of Payments Three types of transactions are recorded in the

balance of payments Current Account Transactions: transactions that involve

the export or import of goods or services Such as exporting computers or consulting services

Financial Account Transactions: transactions that involve the purchase or sale of an asset Such as money, stocks, bonds, factories, government debt, land,

or collectibles. Capital Account Transactions: everything else

acquisition or disposal of nonproduced, nonfinancial, and some intangible assets (debt forgiveness, transfer of trademarks, etc)


US Balance of Payments (2000)Credits Debits

Exports 1,414.9 Merchandise 773.3 Investment Income Received 296.2 Other Services 345.4 Imports -1,797.1 Merchandise -1,222.8 Investment Income Paid -215.2 Other Services -359.1 Net Unilateral Transfers -53.2Current Account Balance -435.4

Capital Account 0.7

US Assets Held Abroad -553.3 Official Reserve Assets -0.3 Other Assets -553.0 Foreign Assets Held in US 952.4 Official Reserve Assets 35.9 Other Assets 916.5Financial Account Balance 399.1

Statistical Discrepancy 35.6

national income and product accounting1 introduction and nipa accounting ba 282 macroeconomics class...

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