Course Title: Measurement and Structure of the National Economy
Institution: Washington University in St. Louis
Instructor: Miguel Faria-e-Castro, Federal Reserve Bank of St. Louis
Date: January 2025
Key Concepts in Measurement:
National income accounting
Gross Domestic Product (GDP)
Saving and wealth
Real GDP, price indexes, and inflation
Real and nominal interest rates
Definition: An accounting framework to measure current economic activity.
Importance: Provides comparable GDP measures across different countries.
Example: Allows comparison between Canada and Senegal.
U.S. System: Known as NIPA (National Income and Product Accounts).
Administration: Maintained by the Bureau of Economic Analysis (BEA).
Historical Context: Developed around World War II to systematically measure industrial production capacity.
Product Approach: Measures total final output produced in a period.
Income Approach: Measures total income received by production factors.
Expenditure Approach: Measures overall expenditure by agents purchasing goods and services.
Fundamental Equation: Production = Income = Expenditure.
Economy with Two Companies:
OrangeInc: Produces oranges.
JuiceCorp: Produces orange juice using oranges from OrangeInc.
Financial Overview:
OrangeInc:
Wages: $15,000
Taxes: $5,000
Revenue: $35,000
JuiceCorp:
Wages: $10,000
Taxes: $2,000
Revenue: $40,000
Cost of oranges: $25,000
Value Added: Total value produced is revenue minus the cost of inputs.
Calculation:
Total Value = Revenue (OrangeInc + JuiceCorp) - Cost of Inputs (JuiceCorp)
Total Value = $35,000 + $40,000 - $25,000 = $50,000
Avoids double counting intermediate goods.
Involves summing incomes generated:
Example Calculation:
Wages OrangeInc: $15,000, Profits: $20,000
Wages JuiceCorp: $10,000, Profits: $5,000
Total Income = $50,000
Measures final expenditure by users:
Total Expenditure = Sales to public by OrangeInc + Sales to public by JuiceCorp
Total = $10,000 + $40,000 = $50,000
Avoids double counting by focusing on final sales.
Key Concept: All production is purchased, hence Production = Expenditure = Income = $50,000.
Establishes equivalence between production, income generated, and expenditure incurred.
Definition: Market value of final goods and services newly produced within a nation during a specified period.
Characteristics:
Market Value: Reflects selling price in the market.
New Production: Counts only goods and services produced in the current period.
Final Goods: Excludes intermediate goods to avoid duplication.
GDP (Gross Domestic Product): Measures production within a country's borders.
GNP (Gross National Product): Measures production by domestic factors, regardless of location.
Key Distinction: GDP = GNP - Net Factor Payments (NFP) from abroad.
Example of NFP: Earnings of foreign workers in the domestic economy and vice versa.
Formula: Y = C + I + G + NX
Y = GDP
C = Private Consumption
I = Investment
G = Government Purchases
NX = Net Exports (Exports - Imports)
Personal Consumption Expenditures (C): $11,930 Billion (68.5% of GDP)
Gross Private Domestic Investment (I): $2,852 Billion (16.4% of GDP)
Government Purchases (G): $3,175 Billion (18.2% of GDP)
Categories include durable and nondurable goods and services.
Durable goods (e.g., cars, furniture) represent major investments.
Nondurable goods (e.g., food, clothing) are essential for daily use.
Types:
Changes in inventories, new capital goods.
Includes business fixed investments and residential investments.
Definition: Spending on newly produced goods and services, not including transfer payments.
Typically a smaller fraction of overall spending but crucial for public services.
Components:
Employee Compensation
Proprietor’s Income
Rental Income
Corporate Profits
Net Interest
Taxes on Production and Imports
Business Current Transfer Payments
Total Income should equal total GDP.
Addressing discrepancies in national accounting and capital depreciation.
Adjust GNP based on factors like net foreign payments.
National Wealth: Value of a nation’s assets minus liabilities.
National Saving: Sum of private saving and government saving.
Formula: S = Spvt + Sgovt
Private Saving: Savings available to private households after consumption.
Government Saving: Difference between government income and spending.
Fund investments, cover government deficits, and facilitate foreign loans.
Establishes relationships between private saving and overall investment through the current account balance.
Nominal Variables: Measured in current dollars, can mislead due to price changes.
Real Variables: Measure quantities while fixing prices, enables accurate economic assessments.
Purpose: Measure changes in price levels over time, essential for assessing inflation and real GDP.
Types of Price Indexes: GDP Deflator, Consumer Price Index (CPI), and Personal Consumption Expenditure price index (PCE).
Definition: Growth rate of a price index, crucial for understanding economic health and purchasing power.
Methods to calculate the inflation: annualized vs year-over-year.
General Definition: Compensation to lenders from borrowers expressed as a percentage.
Interest rates vary based on loan maturity and market conditions.
Nominal vs. Real Interest Rates:
Nominal: Traditional measure; real takes inflation into account.
Expected real interest: Important in decision-making regarding loans and investments.