Economics I Macroeconomic Measurement

Macroeconomic Measurement (4h) The goal of first lecture consists in definition of macroeconomics as a scientific discipline, in pointing out its consistency with microeconomic theory, in a reminder of the main methods of economic science, in definition of the macro-economic entities, fundamental macroeconomic variables and their links, in a treatise on the state macroeconomic policy and representation of the complexity in understanding the macroeconomic problems, if we are going to deal with particular macroeconomic streams. The second lecture aims to analyze the issue of measuring the performance of the economy as a whole, which is one of the basic prerequisites enabling the description and analysis of the economy at the macroeconomic level. There will be included the military spending (defense spending) in the framework of the national accounts. The basic methods used for calculation of macroeconomic output will be characterized during the lecture and the complexity of the product measurement will be taken into account. In the end, the basic macroeconomic identities will be presented and items that are not included in the calculation of the gross domestic product (GDP) will be introduced.

Content introduction – defining the goals introduction to macroeconomics – macroeconomics as a discipline, its origin and subject basic macroeconomic variables, operators, and the macroeconomic cycle objectives and tools in macroeconomics, the stabilization of the macroeconomic situation main streams of macroeconomics military-economic context the need for, and the issue of the measurement of the performance of the economy, the historical context methods of measuring the power of the economy – spending, income and production method of the GDP measurement the net economic welfare, national wealth conclusion – summary, homework

Introduction to macroeconomics-macroeconomics as a science, its origin and the subject the word „economics“ derived from the Greek words: „makros“ = large, „oikos“ = house“ and „nomos“ = rule, law deals with the behavior of the economy as a whole examines the factors that determine the level of aggregate (summary) variables e.g. GDP, unemployment, inflation, balance of payments, and examines the interrelationships in the development of these variables positive vs. normative macroeconomics (CSPE vs. Keynesianism)

Relationship beetwen macroeconomics and microeconomics the division of economics to microeconomics and macroeconomics – year 1933 (R. Frisch) their relationship (can not be separated): – the macroeconomic framework the functioning of microeconomic processes – the microeconomic foundations of macroeconomics

Methods of economics positive macroeconomics vs. normative macroeconomics generalization abstraction method analysis vs. synthesis induction vs. deduction comparison; optimization; balance method statistical and mathematical methods experiment - can not be used in economic practice fallacy of composition, post hoc fallacy, ceteris paribus the time factor - important to divide the short-term and long-term perspective (e.g. long-term and short-term aggregate supply) graphical display - for better understanding of the relationship rather than a complication

The basic problem areas of macroeconomics how to encourage the performance of the economy, what are the factors of economic growth how to reduce unemployment, what are the causes of its origin how the inflation occurs, what are its causes and effects on the economy whether and to what extent the entry of the Government in the economy is justified - macroeconomic policy of the state

Basic macroeconomic variables product (performance, output) – marking: Y, Q, GDP employment, or the rate of unemployment – marking: u (unemployment rate) general price level, price level – marking: price indexes, P generally foreign trade, foreign capital flow - relationship of the economy to abroad: – balance of payments of the country, current account balance as a share of GDP (b)

Economic operators 1. Households supply inputs, demand goods and services 2. Firms supply goods and services, demand inputs 3. State (the Government, CB) macroeconomic policy 4. Abroad export, import, capital flow 2-sectoral economy sectors: households and firms _________________________ 3-sectoral (closed) economy sectors: households, firms, state _________________________ 4-sectoral (open) economy sectors: households, firms, state, abroad

Macroeconomic cycle in a 2-sectoral economy HOUSEHOLDS FIRMS goods and services inputs payments for inputs services payments for goods and services The flow of goods and services and the flow of inputs: real and financial flows. 10

Macroeconomic policy macroeconomics – the base for macroeconomic policy and other economic disciplines macroeconomic policy of the state began to take shape as a stabilizing policy (anti- cyclical) - 30s of the 20th century, efforts to reduce the fluctuations of the business cycle by affecting aggregate demand macroeconomic stability today the term "stability" – economic development is desired, the pursuit of achieving desirable levels (dynamics) macroeconomic variables – there is an attempt to capture the quantitative stability (instability) in the economy (e.g. an indicator of economic hardship) relationship between economy and the state: – liberalism ("laissez-faire") vs. interventionism

Main macroeconomic streams (schools) CSPE - Classical School of Political Economy, the first macroeconomic school of economics (focused on production, consumption, exchange and distribution) Keynesianism - many varieties (stream of the new Keynesian macroeconomic theory complemented by microeconomic foundations) new conservative economics (monetarism, rational expectations school (monetarism II, new classical macroeconomics), supply-side economics, real business cycle theory, public choice theory) Economics today: the requirement of necessity and the microeconomic and macroeconomic balance approach to examining the economy

Macroeconomic measurement – historical context early interest in the measurement of economic performance: 17th cent. - Sir William Petty ( ) - detailed survey of the lands and wealth of Ireland a need to measure the performance of the economy grew after the Great Depression ( ) and in the time before and during the Second World War system for the measurement of economic output elaborated Russian-Am. economist Simon Kuznetz ( ) and the British economist Richard Stone ( ), both received the Nobel Prize in Economics, R. Stone for the specific benefits of the system of national accounts, created the foundations for macroeconomic analysis

Macroeconomic measurement the output of the economy is the flow variable (unlike state variables), measured over a specific time period, there is a problem how to sum all final production GDP (gross domestic product) vs. GNP (gross national product) net income from assets abroad (net property income from abroad): NPI (Net Property Income), NPI = GNP - GDP PRODUCT /domestic product (DP) is defined as the market value of all final production for a certain period of time – this is market value of production in currency units, not counting into it purely cash transactions – e.g. securities trading, not counting transfers of existing assets and intermediate goods INCOME /national income (NI): household income – payments for inputs services

Macroeconomic cycle in a 2-sectoral economy HOUSEHOLDS FIRMS goods and services inputs payments for inputs services payments for goods and services Flow of goods and services and flow of inputs: real (physical) and financial flow. 15 The output flowing towards final products market. Flow of payments for inputs services. product income

16 PRODUCT real vs. nominal real vs. nominal variable actual vs. potential domestic vs. national gross vs. net

17 INCOME National (NI) Personal (PI) Disposable (DI, YD) C = Consumption S = Savings

Methods of macroeconomic measurement 1st Measurement by expenditures GDP is the market value of final sold production – expenditures of all economic agents (households, firms, the Government and abroad) GDP = C + I B + G + NX C = household consumption expenditures I B = gross private domestic investment (I B = I N + I R ) G = government expenditure on the purchase of goods and services NX = net exports (exports - imports)

Methods of macroeconomic measurement 2nd Measurement by incomes a sum of all household incomes for services in their possession = national income (NI) national income: wages before taxes (gross wages) rents (incomes for landowners) corporate profits before taxes (gross profits) net interests for households profits for self-employed people income < product the income does not include the following circumstances: indirect taxes capital amortization others: firm subsidies, net property income

Personal and disposable income PI – Personal Income takes into account the following: firms pay taxes on their profits a portion of corporate profits is not distributed there are payments into social security and health insurance households receive income in the form of transfer payments from the state (e.g. social benefits) other sectors except households receive or pay interest personal Income = national Income - corporate taxes - undistributed profits - payments into social security and health insurance + transfer payments + net interest personal income minus personal income tax = disposable income of households (Disposable Income, DI, YD) disposable income is divided into consumption and savings: DI (YD) = C + S DI (YD) = Y – TA – t.Y + TR TA = autonomous taxes; t.Y = income taxes, TR = transfer payments

Methods of macroeconomic measurement 3rd Measurement by value added GDP as the sum of the values ​​added at each stage of production value added at each stage of production is a real contribution to the total output, value added is equal to the market value of the product minus the cost of intermediate goods

Value-added in various stage of production Production stage The value of transaction/per unit Value-added/ per unit Intermediates/per unit 1st The farmer grows and sells wheat to a miller CZK - 2nd The miller grinds and sells flour to a baker CZK0.35 CZK0.30 CZK 3rd The baker bakes and sells pretzels to a bakery owner CZK0.65 CZK 4th The Bakery owner sells pretzels to consumers CZK0.70 CZK 1.30 CZK Total4.25 CZK2.00 CZK-

Comparison of methods for measuring economic performance GDP (market prices) NX G I + capital amortization + indirect taxes + net property income - firms subsidies a sum of values added (in sectors: primary, secondary, tertiary) wages before taxes, rents, corporate profits before taxes, net interest for households and profits for self-employed people = national income (NI) C Production methodIncome method Expenditure method

What the GDP does not include GDP does not include following items: non-market goods the quality of goods and services the value of leisure time environmental damage (pollution) underground (grey-shadow) economy the health of the population NEW: Net Economic Welfare – contents these items

Internet sources Czech Statistical Office. Statistics. Macroeconomic data. Available at: WWW: Ministry of Finance of the Czech Republic. Macroeconomic prediction. Economic output. Available at: WWW: Stockholm International Peace Research Institute. Yearbook. Military Expenditures. Available at: WWW:

Literature MANKIW, G. N. Principles of Macroeconomics. 4 ed. South-Western: Thomson, s. ISBN FRANK, R. H., BERNANKE, B. S. Principles of Macroeconomics. 3rd Edition. McGraw- Hill/Irwin: NY, ISBN p. MANKIW, G. N. Principles of Macroeconomics. 4 th ed. USA: Thomson South- Western, p. ISBN McCONNELL, C. R., BRUE, S. L. Economics: Principles, Problems, and Policies. 17th ed. NY: McGraw/Irwin. 716 p. ISBN SAMUELSON, P. A., NORDHAUS, W. D. Economics. 15th ed. McGraw-Hill, 1995.

Homework Exercise “Introduction to Macroeconomics” In the daily press (economic section), in economic journals or in the economic news on the internet, locate the two current macro-economic articles (valid for the Czech Republic or even of the world). Explain what are classified into macro- economic section (and thereby distinguish them from microeconomic news), and prepare a short digest of the content of both articles into the exercise.

Exercise “Macroeconomic Measurement” Locate the statistics of gross domestic product on the Web site of the Czech Statistical Office of the Czech Republic (htttp:// – menu statistics, cross-sectorial statistics – macroeconomic data. Focus on the development of the nominal and the real product time series from the beginning to the present. Record the increases and declines in gross domestic product in current and in constant prices. Interpret the development of real growth of quantity of the product (year on year). What is the latest trend in the development of this magnitude? On the Web site of the Ministry of Finance of the Czech Republic ( the menu for the public sector, Macroeconomic forecasts, predictions – part of tables and charts (C. 1 Economic performance), locate the pdf file containing the system of national accounts and the decomposition of the nominal and real GDP in the Czech Republic on an individual folder by using the expenditure approach. Interpret the development of these components in the framework of the defined time series (in the context of the past period and the prediction of the Ministry of Finance). Use the graphical processing.