Chapter 2. Aggregate Income and Production UMSL Max Gillman Max Gillman () 1 / 42
Facts: An Economy Aggregate Economy defined as collection of all individual markets. Can be particular country or entire world; national or global economy. Any well-defined economy can be analyzed in macroeconomics. Eg.: Economies of each of two countries: show supply and demand in combined market. International market can be a part of Macroeconomics or analyzed separately in sub-discipline known as international trade . Economy as aggregate of all industry within a country: national economy. Economy not engaged in any trade outside of its own economy: a closed economy. Economy engaging in trade with other economy: an open economy. If higher value of imports compared to value of exports: net importer. Max Gillman () 2 / 42
National Output National output: typical way to characterize country’s macroeconomy; defined as value of production of economy: both private & government sectors . Distinction between what is counted in national output; counted if a final good & service; not counted if intermediate good & service. "Goods" themselves are actual good consumed or services consumed. Part of cost of final goods & services is intermediate goods & services. Counting both intermediate and final would be double counting. Max Gillman () 3 / 42
GDP versus GNP US Bureau of Economic Analysis, of US Department of Commerce, keeps national income and product accounts. Called by acronym NIPA for National Income and Product Accounts. NIPA definitions of output include Gross Domestic Product, or GDP, GDP includes only value of goods & services produced within US. Gross National Product, or GNP: GDP + output by US residents or US companies located abroad. Macroeconomics prefers GDP. Max Gillman () 4 / 42
GDP consists of four main categories Four main kinds of expenditure within GDP Personal consumption expenditure on goods 1 durable goods, non-durable goods, and services; Services: Imputed housing rent (28%), health care (26%) . gross private domestic investment 2 defined as fixed investment plus inventories; for non-residential: structures, equipment, & intellectual property products; and residential: houses. exports minus imports: called "net exports", and 3 government : 4 consumption expenditure & gross investment at: State and Local & Federal levels; Federal: Defense and Non-Defense. Max Gillman () 5 / 42
Component’s Percent of GDP Eg. 2012 $16 trillion US dollars: total GDP. $11 trillion for personal consumption expenditure: about 69 % of GDP . $2 . 4 trillion for private gross domestic investment: about 15 % of GDP . Imports exceeded exports; net exports were negative. -$ 0 . 6 trillion US . or about 3 . 75 % in magnitude: 6 / 16 = 0 . 375 ; (times 100 gives percent). $3 . 1 trillion for Government or ( 3 . 1 ) / 16 ; about 19 % of GDP . State and Local more than half of Govt. Total of 69 + 15 − 3 . 75 + 19 � 100 (0.75 rounding error). Max Gillman () 6 / 42
Gross Domestic Product [Billions of dollars] Seasonally adjusted at annual rates Bureau of Economic Analysis Last Revised on: December 23, 2014 - Next Release Date January 30, 2015 2012 2013 2014 Line I II III IV I II III IV I II III 1 Gross domestic product 15956.5 16094.7 16268.9 16332.5 16502.4 16619.2 16872.3 17078.3 17044 17328.2 17599.8 2 Personal cons. Expend. 10959.7 11030.6 11119.8 11222.6 11351.1 11414.3 11518.7 11653.3 11728.5 11870.7 12002 3 Goods 3709.6 3717.2 3751.9 3788.8 3832.2 3821 3865.3 3886.1 3890.6 3964.5 4011.5 4 Durable goods 1177.3 1179.4 1195.4 1216.1 1237.8 1245.4 1252.4 1261.5 1262.3 1298.4 1320.2 5 Nondurable goods 2532.3 2537.8 2556.5 2572.8 2594.4 2575.6 2612.9 2624.6 2628.4 2666.1 2691.3 6 Services 7250.1 7313.3 7367.9 7433.8 7518.9 7593.2 7653.4 7767.2 7837.8 7906.2 7990.4 7 Gross private dom. Invest. 2445.4 2489.3 2500.4 2481.5 2543.3 2594.6 2708.9 2745.2 2714.4 2843.6 2905.1 8 Fixed investment 2364.3 2397.1 2424.7 2471 2499.1 2543.8 2598.1 2654.6 2674.3 2743.4 2810.6 9 Nonresidential 1942 1968.8 1978.3 1998.7 2010.3 2026.9 2060.2 2118.7 2134.6 2191.2 2244.3 10 Structures 437 452.5 452.2 445.9 435.4 448.5 463 481.7 487.9 504.4 513.3 11 Equipment 894.9 897.1 901.4 922.8 933.1 937 948.8 980 979.5 1008.6 1038.2 12 Intellectual property prod. 610.1 619.2 624.7 630 641.8 641.4 648.4 657 667.2 678.2 692.7 13 Residential 422.3 428.3 446.4 472.3 488.9 516.9 538 535.9 539.7 552.2 566.4 14 Change in private inventories 81.1 92.2 75.7 10.4 44.2 50.8 110.7 90.5 40.1 100.3 94.5 15 Net exports of gds +serv. -614.8 -588.5 -541.7 -528.2 -528 -532 -509.9 -462.9 -538 -549.2 -516.5 16 Exports 2162.4 2192.5 2203.2 2218.5 2219.4 2236.4 2268.4 2324.6 2284.7 2344.3 2366.5 17 Goods 1510.1 1530.7 1538.5 1529.2 1528.4 1543.2 1565.7 1614 1575.3 1623.3 1645 18 Services 652.3 661.8 664.7 689.3 691 693.2 702.7 710.7 709.5 721.1 721.4 19 Imports 2777.1 2781.1 2745 2746.7 2747.4 2768.4 2778.3 2787.5 2822.7 2893.5 2883 20 Goods 2327.2 2326.2 2287.7 2283.1 2288.6 2302.2 2308.6 2309.7 2341.5 2405.6 2393.7 21 Services 449.9 454.9 457.3 463.6 458.8 466.3 469.7 477.8 481.2 487.9 489.3 22 Govt cons.expend.+ invest 3166.2 3163.3 3190.5 3156.6 3135.9 3142.4 3154.7 3142.7 3139.1 3163.1 3209.3 23 Federal 1291.4 1290 1314.3 1269.9 1241.9 1234.1 1233.9 1216.2 1208.1 1210.5 1241.3 24 National defense 818.6 817.1 840.9 795.4 775.1 772.2 774.9 757.5 749.9 754.6 784 25 Nondefense 472.8 472.9 473.4 474.4 466.8 461.9 459 458.7 458.2 455.9 457.3 26 State and local 1874.8 1873.3 1876.2 1886.8 1894 1908.3 1920.7 1926.5 1931 1952.6 1968 Table 2.13. Gross Domestic Product by Category of Expenditure, Max Gillman () 7 / 42
Quality and Index Number Problem Quality is not accounted for in national output & income accounting. Value of output in NIPA simply market value of final goods & services. Any increase in quality due to technological advance not accounted for. Since tech drives down costs, while increasing quality of good. NIPA just measures market prices, not whether good is now of higher quality. Real GDP & GNP can be converted into index numbers: show how much value of output changes, not quality. Result: typically called the "index number problem" of not reflecting quality change in any systematic way. Max Gillman () 8 / 42
Human Capital, Knowledge and Quality Eg. Cars. Price may rise of fall, as quality jumps up every year. Could account for quality if could account for: knowledge embodiment within goods and services, Akin to accounting for increase in our knowledge base, or what we call our human capital as embodied in Output. Knowledge goes from "software into hardware" within goods. Steve Jobs, 1980, presentation on Apple computer: "Yesterday’s software is today’s hardware": brilliant point. He also compares computers to automobiles. Counting all of our human capital: greatly increase value of GDP; and increase real GDP Growth Rate. Quality-constant basis of goods is not accounted for in NIPA; would solve index number problem. Ellen McGrattan and Ed Prescott work on this issue. Max Gillman () 9 / 42
National Income and it Components NIPA computes Gross Domestic Income, or GDI, our focus. defined total income earned within an economy. Components are: 1) wages and salaries called "compensation of employees." 2) Entrepreneur & corporate profit termed "net operating surplus". 3) Replacing capital that is already in place. Companies need to maintain their capital stock so part of national income attributed to maintenance of depreciating capital. Called "capital consumption adjustment." 4) Government "earns" tax revenue net of subsidy expenditure. Total national income GDI equals total output produced GDP. Max Gillman () 10 / 42
GDI Four Categories by Recipient Sum of income earned: by labor: Compensation of employees; 1 by firms: Net operating surplus; 2 by private and government sectors: Consumption of fixed capital; 3 by governments: Taxes on production and imports less subsidies. 4 Max Gillman () 11 / 42
Percent Contribution to GDI by Category NIPA Table shows current dollar GDI for 2012:1 to 2014:3. GDI and GDP are equal except for "statistical discrepancy". In 2012: 52 % : Compensation of employees at about 8 . 5 / 16 . 2 of GDI; 25 % : Net operating surplus at about 4 . 1 / 16 . 2 of GDI; 16 % : Fixed capital consumption at about 2 . 5 / 16 of GDI; 7 % : Net Government Tax Revenue at about 1 . 1 / 16 of GDI. Total of 99 %, which would be 100 % without approximations. Max Gillman () 12 / 42
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