1102, ECON Macroeconomics 1: Week 1, Lecture 2
BASIC NATIONAL INCOME ACCOUNTING GROSS DOMESTIC PRODUCT (GDP): Is Total Market Value of All Goods and Services Produced in the Economy During a Period of Time (eg. 1 Quarter or 1 Year) An Incomplete Measure of Actual Total Output Only includes things for which Market Values are recorded Excludes - Production for Own Use (Cooking, Cleaning, Laundry, Gardening, etc.) - Barter Exchange (eg. Reciprocal Child Minding) - Voluntary Activities (Sporting Clubs, Charity Work, etc.) - Activities Conducted in Black Economy.
Total EXPENDITURE on Purchasing Output (GDP) Accrues as INCOME PAYMENTS (Wages, Rents, Profits, etc.) to the Factors of Production (Labour, Land, Capital, etc.) Employed to Produce that Output.
- 1 -
ECON 1102, Macroeconomics 1: Week 1, Lecture 2
(With Qualification Discussed Later) GDP Measures the Total NATIONAL INCOME Generated in the Market Sector of the Economy.
GDP in a Simple Economy Assume Closed Economy - No Transactions with Other Countries Purely Private Sector - No Taxes or Govt. Spending Only Final Goods Sold - No Sales of Intermediate Goods Two Kinds of Goods (or Services) CONSUMPTION GOODS - of Immediate Use only (eg. Glass of Beer, Todays Newspaper) INVESTMENT GOODS - provide a Flow of Production or Consumption Services over an extended period (eg. Truck, Espresso Coffee Machine).
- 2 -
ECON 1102, Macroeconomics 1: Week 1, Lecture 2
STRICTLY SPEAKING, many goods purchased by Households are Investment Goods (eg. Washing Machine, Carpets, TV Set, Motor Car, Computer, etc) BUT, because the value of the subsequent flow of consumption services provided cannot be measured, these Consumer Durables are treated in official statistics as if they are Wholly Consumed on Date of Purchase. EXCEPTION is Newly Constructed Housing Treated as Investment Spending and Imputed Rent of owner occupiers included in GDP. OUR SIMPLIFICATION: all goods & services purchased by HOUSEHOLDS are called Consumption Goods -- Only FIRMS purchase Investment Goods.
- 3 -
ECON 1102, Macroeconomics 1: Week 1, Lecture 2
Circular Flow of REAL (Physical) Goods and Services
Factor Services
FIRMS Employ Factors to Produce Goods & Services
HOUSEHOLDS Own All Factors and Supply Them to Firms in Exchange for Factor Incomes
Investment Goods Total Output of FINAL Goods & Services Consumption Goods
Matching these REAL Flows are Corresponding EXPENDITURE Flows: Payments for Goods and Services and Payments of Factor Incomes.
- 4 -
ECON 1102, Macroeconomics 1: Week 1, Lecture 2
AGGREGATE EXPENDITURE AND GDP Let: Y = Total Value of GDP C = Total Consumption Spending (of Households) I Total = Investment Spending (of Firms)
The Market Value of the Output Produced must equal the Market Value of the Expenditure to Purchase That Output
(in Any Period of Time)
Y C + I
WHY is this true?
By Accounting Definition.
Goods produced by a firm but not sold during the same period treated as being purchased by the firm itself - positive Inventory Investment counted as part of total Investment Spending. When firm sells goods from existing inventories (stocks) there is negative Inventory Investment counted as a (negative) contribution to total Investment Spending.
- 5 -
ECON 1102, Macroeconomics 1: Week 1, Lecture 2
EXAMPLES: Assume only Consumption Goods are produced so no Investment apart from Inventory Investment. Period 1 Initial Inventories $ 100 million
Value of New Production $1600 million (Y) Consumption Spending $1500 million (C) Inventory Investment + $ 100 million (I) Final Inventories Period 2 Initial Inventories $ 200 million $ 200 million
Value of New Production $1600 million (Y) Consumption Spending $1700 million (C) Inventory Investment - $ 100 million (I) Final Inventories In Both Periods $ 100 million Y C + I = $1600 million
First National Income Accounting Identity: Y C + I
- 6 -
ECON 1102, Macroeconomics 1: Week 1, Lecture 2
Second National Income Accounting Identity All expenditure on purchasing goods and services accrues as Income to Households (Wages, Rent, Profit, etc.). Households either Spend Income on Consumption (C) or they Save It (Saving is Defined to be the part of Income that is Not Consumed) Let Then S = Total Household Saving Y...