Macroeconomics - Appunti

Production and National Accounting

In our model, the concept of economic activity is measured as gross domestic product (GDP) of a country. It is defined in the following way:

1. GDP: Market value of the sum of final goods and services produced during a year in a country

The GDP of a country can be obtained by three methods, and, of course, the final result should be the same:

1. Total spending necessary to buy all final goods and services produced during a year in a given country
2. Total income payment to the factors of production for a year in a given country
3. Sum of the value added in the economy during a given period (a year)

Considerations about our definition of GDP:

• The definition of GDP as "market value" means that, while not stated otherwise, all goods and services are presented at market prices
• Consideration of final goods and services means you have to avoid double counting of goods and services. It includes the value of intermediate goods

or machinery deterioration.

NDP = GDP - Depreciation

Market Price Vs. Cost of Factors

GDP = GDP – Indirect Taxes (It) + Subsidies (Sb)cf-L GDP

IMITATIONS OF IN NOMINAL TERMS

The GDP is not useful to measure changes in aggregate production (output) over time, as it can change for two reasons:

1. Because different amount of goods and services have been produced
2. Because prices have varied

Nominal GDP

Real GDP

- the sum of the quantity of goods and services produced in a year

- the sum of the quantity of goods and services produced in a

- multiplied by their prices in that year (current prices p )

- year multiplied by their prices in a base year (p )t 0

Σ (p · q )

Σ (p · q )

i t,i t,i i 0,i 0,i

- 5 - 8 {chapter }

Difficulty to measure GDP

- Underground or shadow economy (not accounted in GDP)

- Underground economy generally refers to illegal economic activity. It is illegal because:

• The traded good or service is itself illegal (e.g. drugs, prostitution)
• A licit

congestion)If, alongside an increase in goods and services, there is also an increase in levels of pollution and congestion, we will see an increase in‣ GDP but that increase will not necessarily correspond to an increase in well-being.

- CrimeEqual to all other conditions, a country with a high crime rate will probably have a spending on public policy (and therefore a GDP)‣ higher than a country with a lower crime rate

- Consideration of free timeAn increase in production because people are working harder by giving up leisure time, does not necessarily rise in well-being (Gov.‣ promo China).

P RODUCTION AND PRICE INDEXES

GDP deflator- Nominal GDPt ∑(pt · qt)= × ×GDP deflatort 100 = 100Real GDPt ∑(p0 · qt)-- In the base year it is 100.

- It measures the level of prices of all new, domestically produced, final goods in time t with respect to the base year prices6 - 8 {chapter }

- It can be used to measure the percentage change in the value of the

prices on a year-on year basis (inflation)

GDP deflatort - GDP deflatort-1 P - Pt t-1≈ = π tPt-1GDP deflatort-1

Consumer Price Index (CPI)

The consumer price index is a statistical estimate of the level of prices of goods and services bought for consumption by households. The CPI is calculated by collecting the prices of a sample of representative items (basket of goods) over a specific period of time.

The GDP deflator differs from the CPI because it is not based on a fixed basket of goods and services. The GDP deflator "basket" changes from year to year depending on people's consumption and investment patterns. GDP deflator is not impacted by substitution bias, which is a weakness in the CPI that overstates inflation because it does not account for the substitution effect, when consumers choose to substitute one good for another after its price becomes cheaper than the good they normally buy.

Despite the GDP deflator being more flexible, the CPI is a

more accurate reflection of the changes in the cost of living.- Moreover, GDP Deflator only takes into account goods that are produced domestically. It does not consider imported goods and it reflects the prices of all the commodities, services included.

Cost of goods in the basket of reference in that year= ×CPI in a given year 100Cost of the basket in the base year- p2,tP1,t pn,tCPIt=[g1 + g2 + ... + gn ]P1,0 p2,0 pn,0-- Whereg is the average proportion of family spending in the good i in the base year (=‣ iyear 0)It is obtained through Household Budget Surveys•p is the price of good i in year j (j = t or 0 )‣ i,jn is the number of goods in the basket‣

Inflation-- Inflation is the rate at which the general level of prices for goods and services is rising.- Inflation can be computed according to different Price Indexes (PI). E.g., the GDP deflator and the consumer price index (CPI).With the CPI it is more volatile‣- Negative inflation, i.e., decreasing prices,

is called deflation. PI - PIt t-1π t= PIt-1-- In general inflation is computed as the percentage increment of the level of prices in one month with respect to the same month of theprevious year (annual inflation rate)- It can also be computed as the price increment in one month with respect to the previous one (monthly inflation rate).

Inflation, drawbacks and benefits-- Principle problem : If there is an increase in price and there is not an increase in wages lower purchasing power→- Drawbacks include :

1. Inflation makes transactions more difficult by making it costly to hold cash and checking account balances.when inflation is high : your money loose value•
2. Inflation is inconvenient because it forces businesses to change prices more often than they otherwise would.
3. Inflation interacts with capital gains taxes to decrease the return on capital, thus damaging investment and economic growth.
4. Inflation can create tax distortions. The simplest example is the

"bracket creep", a situation where inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power. If you earn something you pay a part in taxes.

Could reach different income levels just because of inflation: pay more taxes but you are not richer because you have less purchasing power.

5. Inflation can push an arbitrary redistribution of wealth. Unexpected inflation changes the costs and benefits of any fixed contract, especially those of long-term duration. The simplest example is the distribution between lenders and borrowers. In the case of a fixed-rate loan, the borrower benefits (and the lender suffers) from an unexpected increase in inflation, because the repayment has a lower value than expected.

Benefits include:

1. Inflation speeds up real price adjustment, since nominal declines in prices and wages are often (for whatever reason) very difficult. This helps

stabilise the economy and increase efficiency.

Inflation allows for price adjustments and wages adjustments usually the nominal reduction of prices and wages is difficult• →(rigidity)

If the wages with inflation increase : if then there is a deflation wages usually do not go down (difficult)• You usually see increases in prices not decreases• Tends to adjust prices and wages : if you want to reduce wages (reduce nominal wage is difficult to achieve), could keep the wages• the same, but prices will raise Purchasing power lower→2.

Inflation makes it less likely that interest rates will hit the "zero lower bound" and that the Central Bank will lose the ability to react to an economic slump via monetary policy. This is potentially a very serious problem, and it's implicated in many of the most dramatic slumps of recent years: Japan in the 90s, and Europe and the United States today.- Germany : case study 1921 - 1923

UNEMPLOYMENT- Starting from

The Total population

You can define the civilian population: which is the total minus the under 16 and above retirement age

A part of the civilian is the civilian labour force, which actively are working in the labour market can be:

• Employed (working)
• Unemployed (are searching for a job)

Definition III employed

Employment rate = civilian population - 8 - 8 {chapter }

Goods and financial markets macroeconomics:

THE COMPOSITION OF GDP

GDP = C + I + G + (X - IM) + Is

- Consumption (C)

Goods and services purchased by cons