National Income Accounting II

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National Income Accounting II

• Stock and Flow Variables
• Saving and Wealth
• Measurement of Prices
• Uses of Economic Theory

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Stock and Flow Variables

• A stock variable is a variable measured at a
  particular moment in time.
• Examples
• - Amount of water in a bathtub this very
  second.
• - National debt at the end of the year.
• - Amount of capital the U.S. has at the
  beginning 2007.

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• A flow variable is a variable measured per unit
  of time.
• Examples
• - Rate at which water is filling the tub
  (gal/min).
• - Federal budget deficit over this year.
• - Amount of additional capital in 2007
• (i.e. Investment)

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National Saving and Wealth

• The economic well-being of a person or country
  also depends on saving and wealth.
• Private Saving (Sp)
• Private Disposable Income Consumption
• (Y NFPTR INT T) C
• Government Saving (Sg) Taxes Gov Spending
• T (G TR INT)
• Government budget Surplus

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• Relationship Between Saving and Investment
• S Y NFP (CG)
• (CIGNX) NFP C G
• I (NX NFP)
• The current account (CA) is total net payments
  received from foreigners
• CA NX NFP
• - CA deficit, surplus

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• The Saving-Investment Identity
• S I CA
• Interpretations
• (1) CA and international lending/borrowing
• CA S - I
• (2) Accumulation of National Wealth
• (3) Flow of Funds
• Sp I CA - Sg

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Measurement of Prices

• Nominal quantities are quantities that are valued
  at the market prices of the current year.
• Real quantities are quantities valued at the
  market prices of a fixed base year.
• Real GDP is GDP measured in constant (base-year
  dollars).

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• Example Apples and Oranges
• (1) Nominal GDP in 2006 measures 2006 quantities
  at 2006 prices.
• (2) Real GDP in 2006 measures 2006 quantities at
  fixed or constant prices of a base year (e.g.,
  2000).
• (3) Real GDP Nominal GDP for the base year.
• (4) A country is not necessarily producing more
  just because nominal GDP has increased.

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• A price index (P) measures the average price of
  goods and services relative to the prices of a
  base year.
• The inflation rate (p) measures the rate of
  change of a price index
• Inflation Rate between Year 2 and Year 1
• (P2 P1)/P1 100
• In general p (Pt1 Pt)/Pt DP/P

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• The implicit GDP deflator (P) is a price index
  measured by
• P Nominal GDP/Real GDP
• Inflation Rate in Example

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• Remarks
• (1) GDP deflator is a variable weight
  deflator
• (2) Real Nominal/Deflator

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• 3 Commonly Used Price Indices
• (1) The implicit GDP deflator.
• (2) Consumer price index (CPI) - cost of buying
  a fixed basket of goods for the representative
  consumer.
• (3) Producer Price Index (PPI) - cost of a fixed
  basket of goods for the representative producer.
• The CPI and PPI are "fixed-weight" Indices.

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• Fixed weight deflator
• Biases of the CPI
• (i) Quality of Goods
• (ii) Introduction of New Goods
• (iii) Substitution bias

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Interest Rates

• Interest Rates are the price lenders charge
  borrowers. Quoted as a rate of return of the
  loan.
• Nominal Interest Rates (i) denote how much the
  nominal value of a loan grows over time.
• Real Interest Rates denote how much the real
  value of the loan (or its purchasing power)
  changes over time.

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• real interest rate
• nominal interest rate - inflation rate
• i - p

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• The Expected Real Interest Rate (r) is the real
  rate of return lenders expect to obtain and is
  based upon the expected inflation rate.
• Expected real interest rate (r)
• nominal rate - expected inflation rate
• i - pe
• The Fisher Effect pe and i should move
  together.

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Figure 7.4 Inflation and the nominal interest
rate in the United States, 19602003
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Macroeconomic DataWhere Do you Find Them?

• Economic Report of the President
• - White House, Presidents Council of Economic
  Advisors
• http//w3.access.gpo.gov/eop/
• Bureau of Economic Analysis (BEA)
• - Commerce Dept (NIPA)
• www.bea.gov

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• Bureau of Labor Statistics (BLS)
• - Labor Department
• - www.bls.gov
• Federal Reserve Bulletin
• - www.federalreserve.gov

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• Federal Reserve Bank of St. Louis
• - Federal Reserve Economic Data (FRED)
• - Nice summary of current and historical data
• - www.stls.frb.org/fred

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Role of Economic Theory

• An economic theory or model is a simplified
  version of the actual working economy.
• 2 Purposes of Economic Theory
• (1) Positive economics - "what the economy is."
  
• (2) Normative economics - "what the economy
  ought to be."

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• DEVELOPING an ECONOMIC THEORY
• (1) Start with the research question.
• (2) Make assumptions about economic environment
  and actors.
• (3) Work out the predictions of theory.
• (4) Compare predictions with "real life.
• (5) If fits, then done. We can use this model
  for to forecast. If does not fit, go back to
  (2).