National Income Accounts
Endogenous are determined (explained) within the
macroeconomy, they cannot be directly
influenced (e.g., national output, employment,
inflation).
Exogenous variables are independently
determined outside the model and are treated as
given (e.g., changes in the growth of
government spending, exogenous shocks,…).
See Table 2.1.
1. Gross Domestic Product (GDP): total
(market) value of a country’s output.
GDP is the value of all final goods and
services produced.
Nominal GDP measures these values
using current prices.
Real GDP measure these values using the
prices of a base year.
2. Inflation: % rate of change of a price index
•
•
Consumer price index
GDP deflator
• GDP deflator = Nominal GDP/Real GDP
See Table 2.3.
– The Fed prefers the personal consumption expenditure
(PCE) index
• CPI = (Σpiqo)/Σ(poqo)
See Table 2.4
• CPI is used to
– track changes in the cost of living
– allow comparisons of dollar amounts over time
– adjust many contracts for inflation (“COLAs”)
Example
2006
2007
2008
P
Q
P
Q
P
Q
$30
900
$31
1,000
$36
1,050
good B $100
192
$102
200
$100
205
good A
• nominal GDP
2006: $46,200 = $30  900 + $100  192
2007: $51,400
2008: $58,300
• real GDP
2006 Ps
2006: $46,200
2007: $50,000
2008: $52,000 = $30  1050 + $100  205
U.S. Nominal and Real GDP,
(billions)
1960-2009
Real GDP
(in 2000 dollars)
Nominal GDP
Source: http://bea.gov
The composition of the CPI’s “basket”
Source: Bureau of Labor Statistics, http://www.bls.gov/cpi/
Source: Bureau of Labor Statistics, http://www.bls.gov/cpi/
Factors that can cause overstatement of
inflation:
1.
2.
3.
4.
Substitution bias
New product bias
Quality bias
Outlet substitution
The expenditure components of GDP
• consumption, C
• investment, I
• government spending, G
• net exports, NX
An important identity:
Y = C + I + G + NX
value of
total output
aggregate
expenditure
Consumption (C)
definition: The value of all
goods and services bought
by households. Includes:
– durable goods
last a long time
e.g., cars, home
appliances
– nondurable goods
last a short time
e.g., food, clothing
– services
intangible items
purchased by
consumers
e.g., dry cleaning,
air travel
U.S. consumption, 2011
$ billions
Consumption
% of GDP
10,726
71.1
Durables
1,163
7.7
Nondurables
2,484
16.5
Services
7,079
46.9
Investment (I)
• Spending on capital, a physical asset used
in future production
• Includes:
– Business fixed investment
Spending on plant and equipment
– Residential fixed investment
Spending by consumers and landlords on
housing units
– Inventory investment
The change in the value of all firms’
inventories
U.S. Investment, 2011
$ billions
Investment
Business fixed
Residential
Inventory
% of GDP
1,916
12.7
1,532
10.2
338
2.2
46
0.3
Investment vs. Capital
Note: Investment is spending on new
capital.
Example (assumes no depreciation):
– 1/1/2012:
Economy has $10 trillion worth of capital
– during 2012:
Investment = $2 trillion
– 1/1/2013:
Economy will have $12 trillion worth of capital
Government spending (G)
• G includes all government spending on
goods and services.
• G excludes transfer payments
(e.g., unemployment insurance payments),
because they do not represent spending
on goods and services.
U.S. Government Spending,
2011
$ billions
% of GDP
Govt spending
3,031
20.1
- Federal
1,233
8.2
Non-defense
408
2.7
Defense
825
5.5
1,798
11.9
- State & local
Net exports (NX)
• NX = exports – imports
– exports: the value of g&s sold to other
countries
– imports: the value of g&s purchased from
other countries
• Hence, NX equals net spending from
abroad on our g&s
U.S. Net Exports, 2011
$ billions
Net exports of g & s
Exports
Goods
Services
Imports
Goods
Services
% of GDP
–579
–3.8
2,086
13.8
1,473
9.8
612
4.1
2,664
17.7
2,238
14.8
426
2.8
Net Exports: NX = EX – IM
• def: the value of total exports (EX) minus the
value of total imports (IM)
20%
NX
16%
exports
imports
12%
8%
4%
0%
-4%
-8%
1950
1960
1970
1980
1990
2000
2010
Paradigm shifts
•
•
•
•
•
The US in the Great depression of the 1930s
Stagflation of the 1970s
Subprime crisis
Japan since the early 1990s
Western Europe since 2008
‘Using macroeconomic models is not like building
a bridge’ because of anticipation and changing
expectations.
See Table 2.2.