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Macroeconomics – Theory & Data

In this summary of macroeconomics, we will covering economic theory and data, to facilitate student learning key concepts are in BOLD. In this article, measures of the economy are explored along with what the statistics can say about the economy. “[Gross domestic product] (GDP) is the market value of all final goods and services produced within an economy in a given period of time.” (Mankiw, 2010) GDP measures income or total expenditure, though can be argued to not be the best measure of the economy, to read more on how GDP distorts our view of the economy read the Mises Daily article by Christopher Casey“To understand the meaning of GDP more fully, we turn to national income accounting, the accounting system used to measure GDP and many related statistics.” (Mankiw, 2010) Exceptions to GDP, used are not included as it represents only an asset being exchange where no new income has been added. Unsold inventories are neither counted in GDP if total expenditure or income do not change. GDP only includes the sale of final goods and services and not intermediate goods. “The value added of a firm equals the value of the firm’s output less the value of the intermediate goods that the firm purchases.” (Mankiw, 2010) Services and goods without market prices are counted in GDP by what it costs to produce them, though underground goods and services are not counted in GDP. “If GDP is to include the value of these goods and services, we must use an estimate of their value [called] imputed value.” (Mankiw, 2010)

Gross national product is used as an annual measure by economists of the total incomes earned from nationals who are citizens, not earned by residents domestically as the gross domestic product does. Further reading on the gross national product here, Source: (Morgenstern, 2009). Where GDP measures domestic incomes the Gross National Product (GNP) measures nationals incomes. Gross National Product minus Gross Domestic Product equals factor payments from abroad minus factor payments to abroad.

To obtain gross national product (GNP), we add receipts of factor income (wages, profits, and rent) from the rest of the world and subtract payments of factor income to the rest of the world: GNP = GDP + Factor Payments from Aboard – Factor Payments to Aboard. (Mankiw, 2010)

“Economists call the value of goods and services measured at current prices nominal GDP.” (Mankiw,  2010) Nominal GDP multiplies current prices by current quantities. Changes in nominal GDP stem from changes in both prices and quantities. This would distort GDP if only a rise in prices increased GDP, where no extra goods or services have been produced. “For this purpose, economists use real GDP, which is the value of goods and services measured using a constant set of prices.” (Mankiw, 2010) Real GDP multiplies current quantities by base prices. Changes in real GDP stem from changes in quantities only. After you have learned how to calculate the nominal and real GDP you can calculate the GDP deflator. “The GDP deflator, also called the implicit price deflator for GDP, is the ratio of nominal GDP to real GDP: GDP Deflator = Nominal GDP [divided by] Real GDP [times 100.]” (Mankiw, 2010) The change in GDP deflators over the term (chain-weighted real GDP updates base year annually) is the inflation rate. Two tricks of arithmetic “[1] the percentage change of a product of two variables is approximately the sum of the percentage changes in each of the variables, [ and 2 the]  percentage change of a ratio is approximately the percentage change in the numerator minus the percentage change in the denominator.” (Mankiw, 2015)

“[The national income accounts sections GDP as summing (consumption, investment, government purchases, and net exports), the] equation is an identity-an equation that must hold because of the way the variables are defined [called] the national income accounts identity.” (Mankiw, 2010) Note that in economics consumption can mean the use of goods and services, where consumption expenditure would mean the purchase of goods and service though we will just use Mankiw quote to simplify the meaning for now. Consumption consists of the goods and services bought by households.” (Mankiw, 2010) Disposable income is income minus taxes and the marginal propensity to consume is the change in consumption to a change in disposable income. Note there are three categories of goods for consumption, these include services, durable and nondurable goods. Spending on investment goods (ratio of valuing future to present goods – not final goods) is negatively correlated to the real interest rate. Investment consists of goods bought for future use.” (Mankiw, 2010) Government purchases use money of the taxpayers or newly created money to exchange for goods and services, spending and taxes are assumed exogenous (see my other article on the two variables). “Government purchases are the goods and services bought by federal, state, and local governments.” (Mankiw, 2010) We will not cover trade deficits or surpluses here, though will note when exports exceed imports trade is in surplus, when imports exceed exports trade is in deficit. “[Net exports] are the value of goods and services sold to other countries (exports) minus the value of goods and services that foreigners sell us (imports).” (Mankiw, 2010) In a closed economy we would not include net exports.

“The most commonly used measure of the level of prices is the consumer price index (CPI).” (Mankiw, 2010) The CPI is calculated by the Bureau of Labor Statistics for the United States. CPI measuring prices of purchased goods and services is different from the GDP deflator measuring prices of produced goods and services. GDP Deflator is the ratio of nominal to real GDP. “Economists call a price index with a fixed basket of goods Laspeyres index and a price index with a changing basket of goods a Paasche index.” (Mankiw, 2010) Where a Laspeyres index (CPI) tends to overestimate the price change, and a Paasche index (GDP deflator) tends to understate the price change. To measure the average there is an index called the Fisher index.

The Bureau of Labor Statistics for the United States also calculates the unemployment rate. “The labour force is defined as the sum of the employed and unemployed, and the unemployment rate is defined as the percentage of the labor force that is unemployed.” (Mankiw, 2010) The equation is the # of employed plus # of unemployed, to get the total # of the labour force. “A related statistic is the labor-force participation rate, the percentage of the adult population that is in the labor force: Labor-Force Participation Rate = Labor Force [divided by] Adult Population [times] 100.” (Mankiw, 2010) Alternatively, the unemployment rate is # of unemployed divided by the labour force times 100. Though important to note that there is an infinite amount of work to be done and when the news reports a number of new jobs have been created by this political scheme, it is incorrect in the respect that it just diverts workers and resources from other work.

“A stock is a quantity measured at a given point in time, whereas a flow is a quantity measured per unit of time.” (Mankiw, 2010) GDP as it is calculated annually can be a flow where a stock would be government debt as current outstanding debt. “If it takes a long time to affect capacity, then current period investment is not a large enough change in capital stock to account for changes in level or growth rates of real GDP in a business cycle.” (Keeler, James, & Craig, 2010) The capital stock is the total available at the end of a year. “A distinctive characteristic of Austrian Business Cycle theory is that the composition of the capital stock changes systematically through the business cycle.” (Keeler et al., 2010) Capital stocks can also be heterogeneous and affected by interest rate changes or business cycles. “Alternatively, the capital stock is heterogeneous in specialized types of capital, and equipment, software and structures are designed for a narrow range of functions, and we may expect their productivity to decrease as they are employed for alternative uses.” (Keeler et al., 2010)

Reference List (American Psychological Association)

Mankiw, G. (2010). Macroeconomics. (International 3rd ed.). New York, United States of America: Worth Publishers.

Keeler, James P., and J. Dean Craig. “Cyclical Capital Stock.” The Quarterly Journal of Austrian Economics 13, No. 1 (Spring 2010): 16–47.

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