Chapter 2. Aggregate Income and Production UMSL Max Gillman Max - - PowerPoint PPT Presentation

Chapter 2. Aggregate Income and Production

UMSL Max Gillman

Max Gillman () 1 / 42

Facts: An Economy

Aggregate Economy defined as collection of all individual markets. Can be particular country or entire world; national or global economy. Any well-defined economy can be analyzed in macroeconomics. Eg.: Economies of each of two countries: show supply and demand in combined market. International market can be a part of Macroeconomics or analyzed separately in sub-discipline known as international trade. Economy as aggregate of all industry within a country: national economy. Economy not engaged in any trade outside of its own economy: a closed economy. Economy engaging in trade with other economy: an open economy. If higher value of imports compared to value of exports: net importer.

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National Output

National output: typical way to characterize country’s macroeconomy; defined as value of production of economy: both private & government sectors. Distinction between what is counted in national output; counted if a final good & service; not counted if intermediate good & service. "Goods" themselves are actual good consumed or services consumed. Part of cost of final goods & services is intermediate goods & services. Counting both intermediate and final would be double counting.

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GDP versus GNP

US Bureau of Economic Analysis, of US Department of Commerce, keeps national income and product accounts. Called by acronym NIPA for National Income and Product Accounts. NIPA definitions of output include Gross Domestic Product, or GDP, GDP includes only value of goods & services produced within US. Gross National Product, or GNP: GDP +

• utput by US residents or US companies located abroad.

Macroeconomics prefers GDP.

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GDP consists of four main categories

Four main kinds of expenditure within GDP

1

Personal consumption expenditure on goods

durable goods, non-durable goods, and services; Services: Imputed housing rent (28%), health care (26%).

2

gross private domestic investment

defined as fixed investment plus inventories; for non-residential: structures, equipment, & intellectual property products; and residential: houses.

3

exports minus imports: called "net exports", and

4

government :

consumption expenditure & gross investment at: State and Local & Federal levels; Federal: Defense and Non-Defense.

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Component’s Percent of GDP

• Eg. 2012 $16 trillion US dollars: total GDP.

$11 trillion for personal consumption expenditure:

about 69% of GDP.

$2.4 trillion for private gross domestic investment:

about 15% of GDP.

Imports exceeded exports; net exports were negative.

• $0.6 trillion US .
• r about 3.75% in magnitude: 6/16 = 0.375;

(times 100 gives percent).

$3.1 trillion for Government

• r (3.1) /16; about 19% of GDP.

State and Local more than half of Govt.

Total of 69 + 15 − 3.75 + 19 100 (0.75 rounding error).

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1 Gross domestic product 15956.5 16094.7 16268.9 16332.5 16502.4 16619.2 16872.3 17078.3 17044 17328.2 17599.8 2 Personal cons. Expend. 10959.7 11030.6 11119.8 11222.6 11351.1 11414.3 11518.7 11653.3 11728.5 11870.7 12002 3 Goods 3709.6 3717.2 3751.9 3788.8 3832.2 3821 3865.3 3886.1 3890.6 3964.5 4011.5 4 Durable goods 1177.3 1179.4 1195.4 1216.1 1237.8 1245.4 1252.4 1261.5 1262.3 1298.4 1320.2 5 Nondurable goods 2532.3 2537.8 2556.5 2572.8 2594.4 2575.6 2612.9 2624.6 2628.4 2666.1 2691.3 6 Services 7250.1 7313.3 7367.9 7433.8 7518.9 7593.2 7653.4 7767.2 7837.8 7906.2 7990.4 7 Gross private dom. Invest. 2445.4 2489.3 2500.4 2481.5 2543.3 2594.6 2708.9 2745.2 2714.4 2843.6 2905.1 8 Fixed investment 2364.3 2397.1 2424.7 2471 2499.1 2543.8 2598.1 2654.6 2674.3 2743.4 2810.6 9 Nonresidential 1942 1968.8 1978.3 1998.7 2010.3 2026.9 2060.2 2118.7 2134.6 2191.2 2244.3 10 Structures 437 452.5 452.2 445.9 435.4 448.5 463 481.7 487.9 504.4 513.3 11 Equipment 894.9 897.1 901.4 922.8 933.1 937 948.8 980 979.5 1008.6 1038.2 12 Intellectual property prod. 610.1 619.2 624.7 630 641.8 641.4 648.4 657 667.2 678.2 692.7 13 Residential 422.3 428.3 446.4 472.3 488.9 516.9 538 535.9 539.7 552.2 566.4 14 Change in private inventories 81.1 92.2 75.7 10.4 44.2 50.8 110.7 90.5 40.1 100.3 94.5 15 Net exports of gds +serv.

• 614.8
• 588.5
• 541.7
• 528.2
• 528
• 532
• 509.9
• 462.9
• 538
• 549.2
• 516.5

16 Exports 2162.4 2192.5 2203.2 2218.5 2219.4 2236.4 2268.4 2324.6 2284.7 2344.3 2366.5 17 Goods 1510.1 1530.7 1538.5 1529.2 1528.4 1543.2 1565.7 1614 1575.3 1623.3 1645 18 Services 652.3 661.8 664.7 689.3 691 693.2 702.7 710.7 709.5 721.1 721.4 19 Imports 2777.1 2781.1 2745 2746.7 2747.4 2768.4 2778.3 2787.5 2822.7 2893.5 2883 20 Goods 2327.2 2326.2 2287.7 2283.1 2288.6 2302.2 2308.6 2309.7 2341.5 2405.6 2393.7 21 Services 449.9 454.9 457.3 463.6 458.8 466.3 469.7 477.8 481.2 487.9 489.3 22 Govt cons.expend.+ invest 3166.2 3163.3 3190.5 3156.6 3135.9 3142.4 3154.7 3142.7 3139.1 3163.1 3209.3 23 Federal 1291.4 1290 1314.3 1269.9 1241.9 1234.1 1233.9 1216.2 1208.1 1210.5 1241.3 24 National defense 818.6 817.1 840.9 795.4 775.1 772.2 774.9 757.5 749.9 754.6 784 25 Nondefense 472.8 472.9 473.4 474.4 466.8 461.9 459 458.7 458.2 455.9 457.3 26 State and local 1874.8 1873.3 1876.2 1886.8 1894 1908.3 1920.7 1926.5 1931 1952.6 1968 IV I II III II III IV I II III

Gross Domestic Product

[Billions of dollars] Seasonally adjusted at annual rates

Bureau of Economic Analysis Last Revised on: December 23, 2014 - Next Release Date January 30, 2015 Line 2012 2013 2014 I

Table 2.13. Gross Domestic Product by Category of Expenditure,

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Quality and Index Number Problem

Quality is not accounted for in national output & income accounting. Value of output in NIPA simply market value of final goods & services. Any increase in quality due to technological advance not accounted for. Since tech drives down costs, while increasing quality of good. NIPA just measures market prices, not whether good is now of higher quality. Real GDP & GNP can be converted into index numbers: show how much value of output changes, not quality. Result: typically called the "index number problem"

• f not reflecting quality change in any systematic way.

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Human Capital, Knowledge and Quality

• Eg. Cars. Price may rise of fall, as quality jumps up every year.

Could account for quality if could account for: knowledge embodiment within goods and services, Akin to accounting for increase in our knowledge base,

• r what we call our human capital as embodied in Output.

Knowledge goes from "software into hardware" within goods. Steve Jobs, 1980, presentation on Apple computer: "Yesterday’s software is today’s hardware": brilliant point. He also compares computers to automobiles. Counting all of our human capital: greatly increase value of GDP; and increase real GDP Growth Rate. Quality-constant basis of goods is not accounted for in NIPA; would solve index number problem. Ellen McGrattan and Ed Prescott work on this issue.

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National Income and it Components

NIPA computes Gross Domestic Income, or GDI, our focus. defined total income earned within an economy. Components are: 1) wages and salaries called "compensation of employees." 2) Entrepreneur & corporate profit termed "net operating surplus". 3) Replacing capital that is already in place.

Companies need to maintain their capital stock so part of national income attributed to maintenance of depreciating capital. Called "capital consumption adjustment."

4) Government "earns" tax revenue net of subsidy expenditure. Total national income GDI equals total output produced GDP.

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GDI Four Categories by Recipient

Sum of income earned:

1

by labor: Compensation of employees;

2

by firms: Net operating surplus;

3

by private and government sectors: Consumption of fixed capital;

4

by governments: Taxes on production and imports less subsidies.

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Percent Contribution to GDI by Category

NIPA Table shows current dollar GDI for 2012:1 to 2014:3. GDI and GDP are equal except for "statistical discrepancy". In 2012: 52% : Compensation of employees at about 8.5/16.2 of GDI; 25% : Net operating surplus at about 4.1/16.2 of GDI; 16% : Fixed capital consumption at about 2.5/16 of GDI; 7% : Net Government Tax Revenue at about 1.1/16 of GDI. Total of 99%, which would be 100% without approximations.

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1 Gross domestic income 16175.6 16276.3 16403.5 16633.8 16752.7 16909.3 17060 17197.8 17221.5 17481.7 17743. 2 Compensation of employees, paid 8531.1 8552.8 8585.2 8790.6 8742.8 8835.4 8880.5 8955.9 9104.7 9168.7 9247. 3 Wages and salaries 6869.1 6886.1 6911.4 7095.6 7042.5 7120 7154.3 7217.5 7348.3 7400.9 7467. 4 To persons 6854.8 6871 6896.3 7080.8 7027.4 7104.2 7138.6 7201.7 7333 7384.9 7451. 5 To the rest of the world 14.3 15.2 15 14.7 15 15.7 15.7 15.8 15.4 16.1 16 6 Supplements to wages and salaries 1662.1 1666.6 1673.9 1695.1 1700.3 1715.4 1726.2 1738.3 1756.4 1767.8 1780. 7 Taxes on production and imports 1129.5 1132 1127.7 1138.9 1154.8 1152.2 1167.1 1175.7 1184.5 1197.9 1212. 8 Less: Subsidies 1 57.9 58 56.8 59.4 60 61.1 60.6 58.9 57.7 57.5 57.4 9 Net operating surplus 4073.2 4127.8 4206.5 4205.4 4329.7 4370.1 4432.7 4454.7 4291.2 4450.3 4590. 10 Private enterprises 4097.1 4152.3 4231.9 4232.7 4357.5 4399.8 4462.8 4485.7 4322.2 4483.9 4626. 11 Net interest + misc payments, dom.industry 665.6 639.1 677.2 649.1 686.3 646.2 663.1 682.8 684.5 632.3 650. 12 Business current transfer payments (net) 119.2 110.8 102 94.6 115.1 122.3 118.4 126.6 119.2 123 182. 13 Proprietors' income w/ inventory + capit.cons 1226.4 1256.1 1266.1 1292.3 1327.8 1330 1345.9 1342.7 1351 1381 1386. 14 Rental income of persons w/ capit.cons. 516.6 526.5 537.1 551.7 575 590.8 604.2 613.3 622.9 635.4 646. 15 Corporate profits w/ inventory +capit.cons. 1569.3 1619.8 1649.6 1645.1 1653.3 1710.5 1731.1 1720.3 1544.6 1712.2 1760. 16 Taxes on corporate income 451.3 473.5 440.6 453.8 474.9 459.2 467.5 495.4 562.3 608 602. 17 Profits after tax w/ inventory +capit.cons. 1118.1 1146.3 1209 1191.3 1178.4 1251.3 1263.6 1224.9 982.3 1104.3 1157. 18 Net dividends 598 605.5 641.6 876.1 697.5 936.5 816.6 856.1 740.4 714.2 709. 19 Undistributed profit w/ invent. +capit.cons. 520.1 540.8 567.4 315.2 480.9 314.8 446.9 368.8 241.9 390.1 447. 20 Current surplus of government enterprises 1

• 23.9
• 24.5
• 25.4
• 27.3
• 27.8
• 29.6
• 30.1
• 31
• 31.1
• 33.6
• 36.3

21 Consumption of fixed capital 2499.7 2521.7 2540.9 2558.4 2585.4 2612.7 2640.2 2670.5 2698.7 2722.3 2750. 22 Private 2008.2 2026.6 2042.9 2059.2 2083.9 2108.2 2132.5 2158.7 2183.5 2203.8 2228. 23 Government 491.5 495.1 498 499.2 501.5 504.5 507.8 511.8 515.2 518.5 521. Addendum: 24 Statistical discrepancy

• 219.1
• 181.7
• 134.6
• 301.3
• 250.3
• 290.2
• 187.6
• 119.5
• 177.5
• 153.5
• 143.

IV I II III

Legend / Footnotes:

• 1. Prior to 1959, subsidies (line 8) and the current surplus of government enterprises (line 20) are not shown separately; subsidies are presented net of the current surplus

II III IV I II III

Gross Domestic Income by Type of Income

[Billions of dollars] Seasonally adjusted at annual rates

Bureau of Economic Analysis Last Revised on: December 23, 2014 - Next Release Date January 30, 2015 Line 2012 2013 2014 I

Table 2.15. Gross Domestic Income by Category of Receipts, Quarterly

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Equality of GDP & GDI, Circular Flow

GDP and GDI are almost exactly equal. The definitions of GDP and GDI are such that they add up to the same amount, using the statistical discrepancy. NIPA states that it works to decrease statistical discrepancy. Equality of measures of national output & national income provides basis for concept of flow of output from consumers to producers in exchange for output. While income flows between firms & households in terms of factor payments. Circular flow between output & income within economy.

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Value Added Accounting of Output

GDP also constructed by industry using value-added to national output by each industry. NIPA Table value added by industry for US in 2012-2014. 20.1% of GDP: Largest industry is financial intermediary industry called Finance, Insurance, Real Estate and Leasing. 12% of GDP: Manufacturing 12% of GDP: Professional & Business Services. 13% of GDP: Government.

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1 Gross domestic product 100 100 100 100 100 100 100 100 2 Private industries 86.3 86.4 86.5 86.5 86.6 86.7 86.9 87 3 Agriculture, forestry, fishing, and hunting 1.2 1.2 1.2 1.2 1.4 1.4 1.4 1.3 4 Mining 2.6 2.5 2.5 2.5 2.5 2.6 2.7 2.6 5 Utilities 1.6 1.6 1.7 1.6 1.7 1.7 1.6 1.6 6 Construction 3.6 3.6 3.6 3.6 3.7 3.7 3.7 3.7 7 Manufacturing 12.4 12.4 12.4 12.2 12.2 12 12 12.2 8 Durable goods 6.5 6.6 6.5 6.5 6.5 6.5 6.5 6.5 9 Nondurable goods 5.9 5.8 5.9 5.7 5.7 5.5 5.5 5.7 10 Wholesale trade 6 6 6 6 5.9 5.9 6 6 11 Retail trade 5.8 5.8 5.8 5.8 5.8 5.8 5.8 5.8 12 Transportation and warehousing 2.9 2.9 2.9 2.8 2.9 2.9 2.8 2.9 13 Information 4.6 4.7 4.6 4.5 4.6 4.6 4.6 4.7 14 Finance, insurance, real estate, rental, and leasing 19.6 19.9 20 20.2 20 20.2 20.2 20.2 15 Finance and insurance 6.6 6.9 7.1 7.2 7.1 7.2 7.2 7.3 16 Real estate and rental and leasing 12.9 12.9 13 12.9 13 12.9 13 13 17 Professional and business services 11.9 11.8 11.8 12 11.7 11.8 11.9 11.8 18 Professional, scientific, and technical services 7 7 6.9 7 6.8 6.9 6.9 6.9 19 Management of companies and enterprises 1.9 1.8 1.9 2 1.9 1.9 1.9 1.9 20 Administrative and waste management services 3 3 3 3 3 3 3 3 21 Educational services, health care, and social assistance 8.3 8.2 8.2 8.3 8.3 8.3 8.2 8.2 22 Educational services 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 23 Health care and social assistance 7.1 7.1 7.1 7.2 7.2 7.2 7.1 7.1 24 Arts, entertainment, recreation, accommodation, and food 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 25 Arts, entertainment, and recreation 1 1 1 1 1 1 1 1 26 Accommodation and food services 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 27 Other services, except government 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 28 Government 13.7 13.6 13.5 13.5 13.4 13.3 13.1 13 29 Federal 4.5 4.5 4.4 4.4 4.3 4.2 4.1 4.1 30 State and local 9.2 9.1 9.1 9.1 9.1 9.1 9 8.9 31 Addenda: 32 Private goods-producing industries [1] 19.9 19.7 19.7 19.5 19.8 19.7 19.8 19.8 33 Private services-producing industries [2] 66.4 66.7 66.8 67 66.8 67 67.1 67.2 I and III IV I II III IV I II

Value Added by Industry as a Percentage of Gross Domestic Product

[Percent]

Bureau of Economic Analysis Release Date: November 13, 2014 Line 2012 2013

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Nominal Versus Real; Inflation & Price Indices

NIPA presented in current dollars. Economists speak in terms of "nominal" or "real" values. Nominal value is current dollar value; using any currency unit. Real value takes into account value of currency unit itself changes in value over time, usually downwards. National currency believed worth less after a year if a positive inflation rate over that year. Inflation defined as rate of change of aggregate price level. Understood as average rise in all prices in economy. Inflation measured by a price index. Most well-known is Consumer Price Index, or CPI. Reduction in currency value’s "purchasing power" if inflation. Real adjusts Nominal Values for inflation.

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CPI: Nominal to Real

CPI is thought to measure inflation as caused by monetary causes.

Caveat: CPI could fall if Asset Values crash; could be relative price fall in goods cost relative to labor cost. Generally ingore this, but can be important during Crisis period.

CPI computed from cost of given basket of goods,

& seeing how basket of goods is priced year after year. Idea is Cost of basket will only change if a monetary influence. So ignore quality issues & relative price issues in general.

Index keyed to some base year, eg.2009; CPI=100 in 2009. Real value of any item found from its nominal value over time

& deflating by dividing by CPI index; factoring out price increases due to inflation.

Get constant dollar terms,

if divide some Nominal by CPI with base 2009, & multiply whole series by 100, so that in 2009, are dividing by 100/100, or 1, so get current dollar value in 2009.

Dividing one index of nominal value, by any price index,

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Consumer Price Index and its Measured Inflation Rate

CPI by itself gives historical picture of US inflation rate. CPI, Monthly, 1913-2014, for All Urban Consumers and All Items,

goes back to 1913:1, ending in 2014:11. From 10 in Jan. 1913 to 33 in Mar. 1967, a 3 1

3 fold increase in 54 years.

Then 33 to 236 in Nov. 2014, a 7 fold increase in 47 years.

Monetary history: 1971-73 Bretton Woods gold standard

for international monetary arrangements after WWII: ended. Bretton Woods put US and Others on gold standard. With collapse, during Vietnam War,

• nly unbacked money, called fiat:

these are Fed Bank Notes; call currency.

Evidence shows growth rate in supply of money

causes growth rate in price level, which is inflation rate.

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Figure: Consumer Price Index, Monthly, 1913-2014, All Urban Consumers, All Items.

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Compute Inflation Rate from CPI

Say CPI is 100 in 1984, 105 in 1985. Annual rate of inflation is (105-100)/100 which equals 0.05. Put inflation rate in percentage terms by multiplying by 100. This gives (0.05)*100, or 5%. History: high inflation during Wars.

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Figure: Percentage Change in the Consumer Price Index, All Urban Consumers, All Items, 1913-2014.

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Comparison of GDP Deflator and CPI

Another common price index for US called GDP Deflator. Gives similar measure of the US inflation rate. Usually slightly less inflation than CPI.

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Figure: Comparison of Inflation Rate Computed Using GDP Deflator (Red) and CPI index (Blue), US 1930-2014, annual basis.

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Theory: Output Production Function; Its Change over Time

Real aggregate output denoted by y.

Notation y assumes composite output good that we simply call output. Such as a basket of all of goods & services. Whatever number is y, indicates quantity of composite basket.

If y grows over time in terms of quantity, then economic growth. If y fluctuates over time, then business cycles. If y is unchanged over time, might say economy is stagnant. Output is function of its inputs, called production function. Inputs called factor inputs; typically labor & capital.

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Factor Inputs into Production

Labor: aggregate quantity of labor hours employed in given period.

could be eg. hours a day, in a week, or per year.

Capital: think of this physical capital rather than financial capital;

plants, equipment, land, & any investment used in production.

Physical capital depreciates when it wears out or becomes obsolete.

Financial capital does not depreciate.

Financial capital can be a type of capital used in production

for financial intermediation sector. Along with labor & physical capital. a rather special case.

Can replace labor by human capital content attached to labor.

is extended production function used in Growth & Cycle Theory. Aggregate output y produced by two forms of capital: human & physical capital.

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Functional Form for Production Function

Symbolically y = f (l, k) ,

l is quantity of labor used k is quantity of capital used.

Can add time subscripts yt = f (lt, kt) :

• utput at some time t, where t could be eg. year 2015;

labor lt and capital kt input at time t.

Labor and Capital are complements in that

using more of one input, holding other constant, yields more output; raises marginal product of input held constant.

Each input has diminishing marginal product as increase it.

Output goes up, but by less with each additional unit of input.

Use "Cobb-Douglas" production function: most common one;

can graph Output, in two dimensions, holding one factor fixed, and letting other factor vary.

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1 2 3 4 5 0.0 0.2 0.4 0.6 0.8

Labor l Output y

Example Production Function of Output y using Labor l and Capital k.

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1 2 3 4 5 0.0 0.5 1.0 1.5

Capital k Output y

Example Production Function of Output y using Labor l and Capital k.

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Factor Input Demand Schedules

From Production function & Utility Function, get Labor & capital markets: factor input markets. Demand for factors comes from firm side. Supply of labor comes from consumer side. Savings often intermediated into investment by financial intermediaries.

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Representative Agent Economy

Representative agent economy: single production function

acting as Representative firm in economy that supplys output. & as Representative consumer with a utility function over output. Single agent combines both consumer & firm functions.

Representative agent economy: "Robinson Crusoe" economy after novel.

single occupant of island producing & consuming all output. Representative firm when Robinson Crusoe producing; representative consumer when Robinson Crusoe consuming.

Representative agent economy: unique equilibrium on firm side & consumer side. Useful, simple, workhorse, model of entire economy.

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Equality of Real Output and Income

Consumer buys firm’s output using real income earned. Firm uses real sales income to buy the inputs: labor & capital. Binding budget constraint: real income all spent on real output. Consumer uses real income for both consumption & savings. Savings is invested into capital by firms. Savings enables consumer to increase future income stream. Disposable income: left after paying taxes & saving;

spent on current consumption.

Consumption + Investment + Government + Net Exports = GDP, and GDP Output equals GDI Income.

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GDP Notationally

Consumption denoted by C, nvestment by I, government spending by G, net exports by NX. And P is price of real output y. C + I + G + NX = Py, Define nominal output Y as Py = Y . So C + I + G + NX = Y . GDP=GDI, so also have nominal income equaling Y Note: wl : wages (for wage and salary compensation), plus δk : depreciation (fixed capital consumption) plus (r − δ) k : after-depreciation return on capital (net operating surplus) Gives GDI: wl + (r − δ) k + δk + τ = wl + rk + τ = GDI.

labor income + capital income + taxes = GDI.

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Government Budget in NIPA

Balanced government budget if Govt Spending = Govt Revenue. Then G and taxes are equal. Government deficit if G > Tax Revenue. Then government must borrow by issuing & selling more debt.

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Circular Flow of Economy

Equivalence between output & income underlies circular flow. Two main sets of markets: Output, or product, market & input market. Input & output markets create "circular flow" of real income & goods. Government & financial institutions are intermediaries.

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Figure: Circular Flow of Aggregate Economy

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Application: Real vs Nominal US GDP Growth

Figure: Percentage Change in US Real GDP, 1929-2013.

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Figure: Percentage Change in US Nominal GDP, 1929-2013.

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Summary

Facts, theory & application of national income & product accounts. Official NIPA; and nominal versus real variables. Price indices used to measure inflation, or convert to real. Consumer price index (CPI) most well-known price index. Inflation rate measured as rate of change in price index. Production function for output introduced: Inputs of labor & capital. Income flows back to factor inputs. Income equals output in both accounting terms and economic analysis. Government also has budget for expenditure; part of NIPA. Circular flow of economy: government, consumer & firm;

expenditures to firms from households equal to income received for factor payments. Intermediaries include financial institutions.

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Appendix: Sourcing US Data from FRED

Federal Reserve (Bank of St. Louis) Economic Data. Found at website http://research.stlouisfed.org/fred2/. Type Fred into Google: first result is FRED. Also graphed data series selected automatically. Can edit, re-graph, add data, combine series. And "export", or download Graphs and data series. Historical source "Fraser" (https://fraser.stlouisfed.org/).

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Questions

1

What is the national output of an economy?

2

How is economic growth measured typically?

3

What is the difference between GDP and GDI?

4

How do industries add value to the production of goods and services?

5

Explain the difference between nominal and real values.

6

What is an example of an index that can be used to calculate inflation and how is inflation calculated from the index?

7

What is a production function?

8

What are factors of production that are used as inputs in the production process?

9

How are factor input demand schedules related to the marginal product of the factor?

10 How does a representative agent economy represent an entire

aggregate economy?

11 Provide a symbolic representation for how the components of GDP

add up to total GDP.

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• 12. What happens in order to make a government deficit equal to zero?
• 13. Describe the circular flow within a model economy.
• 14. What is an online source for data series of the US economy?
• 15. What does US experience indicate was the difference between real and

nominal GDP growth during the last century?

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