nhi 106 Lecture_2

Measurements and Macroeconomics

Instructor Information

  • Instructor: Miguel H. Ferreira

  • Institution: Queen Mary University of London

  • Course: Macroeconomics

Course Structure

  • Topics Covered This Week:

    • Measurements

    • GDP

    • Inflation and GDP Deflator

    • (Un)employment

    • Equilibrium in Goods Market

    • Aggregate Supply

    • Aggregate Demand

    • Labour Demand

    • Labour Supply

Reading List

  • Textbook:

    • Mankiw: Chapters 2, 3.1-3.2

    • Jones: Chapters 2, 4.1-4.3, 7.1-7.5

Measurements

Measuring the Economy

  • Gross Domestic Product (GDP) Definitions:

    1. Total Market Value: Total market value of domestically-produced final goods and services over a given period.

    2. Total Expenditure: Total expenditure on domestically-produced final goods and services over a given period.

    3. Total Income: Total income earned by domestically-located factors of production over a given period.

Measures of GDP

  • Different Measures:

    • Production Measure: The number of goods produced in the economy.

    • Expenditure Measure: The total purchases in the economy.

    • Income Measure: All income earned in the economy.

    • All three approaches yield identical measures of GDP.

    • Economists use the terms "output" and "income" interchangeably.

Circular Flow Model

  • Not detailed in the transcript but generally refers to the flow of money, goods, and services in an economy.

Income Approach

  • Involves paying factors of production:

    • Labour: Humans contributing to production.

    • Examples: workers in various sectors.

    • Capital: Non-human inputs.

    • Examples: machines, tools, etc.

  • Total Income Calculation:

    • Total income = Labour income + Capital income

    • Components:

    1. Labour Income: Wages paid to employees.

    2. Capital Income: Rental payments, dividends, interest.

Labour Share of GDP

  • Distribution of GDP:

    • Share for Labour: approximately rac{2}{3}

    • Share for Capital: approximately rac{1}{3}

Expenditure Approach

  • GDP Calculation:

    • Commonly measured as: Y = C + I + G + NX

    • Where:

      • C = Consumption

      • I = Investment

      • G = Government spending

      • NX = Net exports (Exports - Imports)

Components of Expenditure

Consumption

  • Definition: The value of all goods and services purchased by households.

  • Subcategories:

    • Durable Goods: Last a long time (e.g. cars, appliances).

    • Non-durable Goods: Short lifespan (e.g. food, clothing).

    • Services: Work done for consumers (e.g. cleaning, consulting).

Investment

  • Definitions:

    1. Spending on capital that aids production.

    2. Spending on goods for future use.

    • Types of Investment:

      • Business Fixed Investment: Spending by firms on equipment and buildings.

      • Residential Fixed Investment: Spending on housing units.

      • Inventory Investment: Change in value of inventory held by firms.

Government Spending

  • Components:

    • Includes all spending on goods and services.

    • Excludes transfer payments (e.g. unemployment benefits).

Net Exports (NX)

  • Calculation:

    • NX = EX - IM

    • Where:

      • EX = Total exports

      • IM = Total imports

    • Note: The focus will be on a closed economy; net exports will be ignored.

Composition of GDP

  • Not elaborated but typically includes breakdowns of the GDP into its components like consumption, investment, government spending, and net exports.

Production Approach

  • Value Added Concept:

    • Sum the value added at each stage of production.

  • Example of Value Addition:

    • A flour mill sells flour for £0.50, a baker uses it to make bread selling for £1.

    • GDP Calculation: - Value added = Output - Intermediate goods used.

    • In this example, GDP is £1, while value added is calculated as £1 (final output) - £0.50 (cost of flour) = £0.50 (added value).

Measurement Issues for GDP

  • Used Goods: Do not count towards GDP as they were counted previously.

  • Unsold Goods: Treated as inventories.

  • Depreciation of Inventories: When sold later, they are treated as used goods.

    • Imputation for Home Production: Not captured directly in GDP numbers.

  • Public Services: Imputed based on workers' wages.

Nominal vs. Real GDP

Definitions

  • Nominal GDP: Calculated at current market prices; Nominal ext{ }GDP = extstyle orall i Pi Qi

  • Real GDP: Adjusted for changes in price levels; calculated using a fixed price index.

    • Two types of Real GDP:

    1. Purchasing Power Parity (PPP) GDP: Uses a fixed price across countries.

    2. Real GDP Calculation: Uses previous year prices; Real ext{ }GDP = extstyle orall i Pt Qi

GDP Deflator

  • Formula: GDP ext{ Deflator} = rac{Nominal ext{ }GDP}{Real ext{ }GDP}

  • Includes: Comprehensive goods, including private and government spending but may not reflect actual cost-of-living changes effectively.

Consumer Price Index (CPI) and Other Indices

  • Formula: CPI = rac{ extstyle orall i Pi Ci}{ extstyle orall t Pi Ci}

  • Methodology: Uses fixed representative consumption baskets leading to potential overstatement of cost-of-living increases (doesn’t account for quality or substitution effects).

Unemployment

Population Segmentation

  • Total Population (P): P = N + NLF

    • Where:

    • N = Labour Force (L + U)

    • NLF = Not in the Labour Force (e.g., students, retirees)

    • L = Employed individuals

    • U = Unemployed individuals

  • Unemployment Rate Calculation: u = rac{U}{N}

  • Participation Rate Calculation: l = rac{N}{P}

Economic Implications

  • Low unemployment is typically favorable but can indicate reduced labour force participation.

GDP, Prices, and Employment Interconnection

  • Interdependencies:

    1. Output (GDP) is produced by employed individuals: connects to aggregate supply.

    2. Employment generates income, which constitutes GDP through spending: links to aggregate demand.

    3. Wages determined by labour supply and demand: influences prices equilibrium.

    4. Prices set by aggregate demand and supply for goods: influences employment and GDP.

Equilibrium in Goods and Labour Market

Long vs Short-run Perspectives

  • Long-run Economics: Governed by Neoclassical Theory (Supply Side), assuming fixed aggregate supply of inputs and flexibility in prices and wages; inflation does not affect output or employment.

  • Short-run Economics: Based on Keynesian Theory (Demand Side), asserting that prices are