National Income Accounts

Endogenous are determined (explained) within the macroeconomy, they cannot be directly influenced (e.g., national output, employment, inflation). Exogenous variables are independently determined outside the model and are treated as given (e.g., changes in the growth of government spending, exogenous shocks,…). See Table 2.1.

1.Gross Domestic Product (GDP): total (market) value of a country’s output. GDP is the value of all final goods and services produced. Nominal GDP measures these values using current prices. Real GDP measure these values using the prices of a base year. 2. Inflation: % rate of change of a price index Consumer price index GDP deflator

GDP deflator = Nominal GDP/Real GDP See Table 2.3. –The Fed prefers the personal consumption expenditure (PCE) index CPI = (Σp i q o )/Σ(p o q o ) See Table 2.4 CPI is used to –track changes in the cost of living –allow comparisons of dollar amounts over time –adjust many contracts for inflation (“COLAs”)

Example PQPQPQ good A$30900$311,000$361,050 good B$100192$102200$100205

nominal GDP 2006: $46,200 = $30  $100  : $51, : $58,300 real GDP 2006 Ps 2006: $46, : $50, : $52,000 = $30  $100  205

U.S. Nominal and Real GDP, (billions) Nominal GDP Real GDP (in 2000 dollars) Source:

The composition of the CPI’s “basket ” Source: Bureau of Labor Statistics,

Factors that can cause overstatement of inflation: 1.Substitution bias 2.New product bias 3.Quality bias 4.Outlet substitution

The expenditure components of GDP consumption, C investment, I government spending, G net exports, NX An important identity: Y = C + I + G + NX aggregate expenditure value of total output

Consumption (C) –durable goods last a long time e.g., cars, home appliances –nondurable goods last a short time e.g., food, clothing –services intangible items purchased by consumers e.g., dry cleaning, air travel definition: The value of all goods and services bought by households. Includes:

U.S. consumption, ,079 2,484 1,163 10,726 Services Nondurables Durables Consumption % of GDP$ billions

Investment (I) Spending on capital, a physical asset used in future production Includes: –Business fixed investment Spending on plant and equipment –Residential fixed investment Spending by consumers and landlords on housing units –Inventory investment The change in the value of all firms’ inventories

U.S. Investment, ,532 1,916 Inventory Residential Business fixed Investment % of GDP$ billions

Investment vs. Capital Note: Investment is spending on new capital. Example (assumes no depreciation) : –1/1/2012: Economy has $10 trillion worth of capital –during 2012: Investment = $2 trillion –1/1/2013: Economy will have $12 trillion worth of capital

Government spending (G) G includes all government spending on goods and services. G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and services.

U.S. Government Spending, Federal 20.13,031Govt spending - State & local Defense ,233 1, Non-defense % of GDP$ billions

Net exports (NX) NX = exports – imports –exports: the value of g&s sold to other countries –imports: the value of g&s purchased from other countries Hence, NX equals net spending from abroad on our g&s

U.S. Net Exports, 2011 $ billions% of GDP Net exports of g & s–579–3.8 Exports2, Goods1, Services Imports2, Goods2, Services4262.8

Net Exports: NX = EX – IM def: the value of total exports (EX) minus the value of total imports (IM)

Paradigm shifts The US in the Great depression of the 1930s Stagflation of the 1970s Subprime crisis Japan since the early 1990s Western Europe since 2008 ‘Using macroeconomic models is not like building a bridge’ because of anticipation and changing expectations. See Table 2.2.