Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 1

Econ 120D Intermediate Macroeconomics

Spring 2014

Professor Kevin D. Hoover

Topic 1Introduction to Macroeconomics

and the National Income Accounts

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 2

The Origins of “Macroeconomics”

Ragnar Frisch, the Norwegian economist, coined the terms microeconomics and macroeconomics in 1933.

Frisch shared the first Nobel Prize in Economics with Jan Tinbergen in 1969.

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London

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London Underground Map

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The Worst Economy Since the Great Depression?

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The Beginnings of National Accounting

William Petty (1623-1687)

Earliest macroeconomic measurement

What was Ireland worth to England?

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 7

The Physiocrats take the King’s-eye View

François Quesnay (1694-1774)

Victor de Riquetti, Marquis de Mirabeau (1715-1789)

Tableau Economique – the first formal macroeconomic model

How to maximize the King’s revenue

Unproductive spending by the nobility = the stimulus

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 8

Adam Smith: A Nation is Rich when its People are Rich Adam Smith (1723-1790),

Scottish philosopher The Wealth of Nations,

beginning of modern economics

“According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniencies for which it has occasion.”

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 9

The Founders of National-Income Accounting

Colin Clark (1905-1989)Australian economist

Simon Kuznets (1901-1985), American economist, Nobel Prize 1971

James Meade (1907-1995), English economist, Nobel Prize 1977

Richard Stone (1913-1991), English economist, Nobel Prize 1984

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 10

Stocks and Flows

Income

ExpenditureWealth

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Gross Domestic Product

“the market value of all the final goods and services produced by labor and property located” within the borders of a country within a definite period.

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The Circular Flow of Income and Expenditure

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National Income Accounting Identities Product-expenditure Identity

Y C + I + G + NX

Disposable-income Identity YD Y – T + TR C + S

Sectoral-deficits Identity [G – (T – TR)] + [I – S] + [EX – IM] 0

government budget deficit + private sector deficit + foreign sector deficit 0

Inflow-Outflow Identity I + G + EX S + (T – TR) + IM

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Accounting for Price Change

Real GDP in Constant Dollars of

Reference Year

YearNominal GDP

Price of

Coke1960 2013

1960 $60543b 0.10 $60543b $134,072b

2013 $1316,768b

0.75 $602,236b $1316,768b

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 16

Accounting for Price Change Using the GDP Implicit Price Deflator

Real GDP in Constant Dollars

of Reference Year

Year

Nominal GDP

Implicit Price

Deflator(2010=100)

1960 2013

1960

$60

543b 17 $60

543b$13

3,367b

2013

$1316,768b

105 $602,704b

$1316,768b

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Nominal vs. Real: A Vital Distinction Nominal (or current-dollar or market) =

quantities measured in the actual dollars of each period.

Real (or constant-dollar) = quantities adjusted for price changes.

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Deflation: Converting Nominal to Real Reference Period = period in whose

dollars real values are expressed. Price Factor =

pft = preference/pt

Conversion to constant dollars

$referenceXt = pft $tXt

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International GDP Comparisons

Table 2.2 GDP in 2013 for Selected Countries Rank GDP

(billions, 2013 U.S. dollars at purchasing power parity

The G-7 United States 1 16,720 Japan 5 4,729 Germany 6 3,227 United Kingdom 9 2,387 France 10 2,276 Italy 12 1,805 Canada 14 1,518

Selected Other Countries

European Union 2 15,850 China 3 13,390 India 4 4,490 Russia 7 2,553 Brazil 8 2,416 Mexico 11 1,845 South Korea 13 1,666 Turkey 17 1,167 Saudi Arabia 20 928 Thailand 25 673 South Africa 26 596 Singapore 47 339 Ethiopia 69 43 Luxembourg 103 43 Burundi 167 5 World 103,099

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International GDP per Capita Comparisons

Table 2.3

GDP and GDP per Capita in 2013 for Selected Countries (ranked by GDP per capita)

Countries GDP (billions,

2013 U.S. dollars at purchasing-power

parity)

Rank GDP per Capita (2013 U.S. dollars at purchasing power

parity)

Rank

Qatar 199 56 102,100 1 Liechtenstein 32 173 89,400 2 Singapore 339 47 62,400 7 Norway 282 48 55,400 9 United States 16,720 1 52,800 14 Hong Kong 381 36 52,700 15 Canada 1,518 14 43,100 19 Germany 3,227 6 39,500 29 United Kingdom 2,387 9 37,300 34 Japan 4,729 4 37,100 36 France 2,276 10 35,700 39 European Union 15,850 2 34,500 41 South Korea 1,666 13 33,200 42 Saudi Arabia 928 20 31,300 44 Italy 1,805 12 29,600 51 Russia 2,553 7 18,100 77 Mexico 1,845 11 14,200 81 Turkey 1,167 17 15,300 90 Brazil 2,416 8 12,100 105 South Africa 596 26 11,500 108 Thailand 673 25 9,900 120 China 13,390 3 9,800 121 India 4,490 5 4,000 169 Ethiopia 43 69 1,300 211 Burundi 5 173 600 225 World 103,099 14,150

Source: Central Intelligence Agency, The World Factbook 2014.

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U.S. GDP Growth Rates Over Time – 1

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U.S. GDP Growth Rates Over Time – 2

Professor K.D. Hoover, Econ 210D Topic 1 Fall 2015 23

U.S. Inflation Rates Over Time

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END of Topic 1

Next Topic: 2. Trends and Cycles