Macroeconomic Theory

National Income and Product

Nathaniel Cline

Warm up


What pop macro did you read?

Agenda

1

GDP Definitions and History

2

GDP Measurement

3

Review and To-Do

Origins

  • Political motivations to count

  • Idea that national income depended on how much available to spend vs. increasing stock of assets

  • Smith introduces “productive” vs. “unproductive”

  • Differing notions of what “the economy” is motivates different approaches to counting

Neoclassical

  • Rise of marginalism in 19th century leads to notions of subjective value

  • Productive vs. unproductive in the eye of the beholder

  • This is much harder to count!

Modern accounting

  • Modern national income statistics were motivated by depression and war

  • Depression motivates a new kind of interest in measuring the economy - to achieve maximum employment through government policy

  • WWII is concerned with national resources available to fight, and planning to transform peactime to wartime production

Kuznets

  • The key figure in early GDP calculations is Kuznets

  • Kuznets focuses on welfare rather than output or simple money flows

Money Flows

Welfare

Fact or fiction?

GDP is not a thing that exists in the world. Instead it is a social construction.

This means it is influenced by social and political forces that make active choices about what counts and what does not.

GDP Defined


A measure of aggregate output in the national income and product accounts;


the market value of the goods and services produced by labor and property located in the United States, during a given period.

Ways of counting


3 ways to measure


  1. Expenditure
  2. Income
  3. Value added

Production = Income


When goods are produced, they are eventually sold, and they generate revenue that goes into national income

Intermediate Product Income Expenditures
Farmer, Wheat $0 $1 $1
Miller, Flour $1 $2 $3
Baker, Bread $3 $4 $7
Total $4 $7 $11

Intermediate Product Income Expenditures
Farmer, Wheat $0 $1 $1
Miller, Flour $1 $2 $3
Baker, Bread $3 $4 $7
Total $4 $7 $11

Income = $1 + $2 + $4 = $7

Expenditures = $7

Value Added = $11 - $4 = $7

  1. Which of the following activities have a direct effect on GDP? How much does each activity change GDP? Give a brief explanation for your answer in each case (a few words will do.)

  1. Smith pays a carpenter $8,000 to build a garage.

  2. Smith purchases $2,000 worth of materials and builds a garage herself, which adds $8,000 to the value of her house.

  3. Smith goes to the woods, cuts down trees, and builds a garage from logs that is worth $8,000.

  1. The Jones family sells its old house to the Reynolds family for $125,000. The Joneses then buy a newly constructed house for $180,000

  2. Ms. Wang sells 100 shares of Microsoft common stock at a profit of $10 per share.

  3. Due to a price increase, Honda’s sales rise by $10 million on cars produced in Ohio.

  4. A change in government regulations forces firms to spend $20 billion more on pollution control equipment.

Review

1

GDP Definitions and History

2

GDP Measurement

To Do

1

Read

BLS, “How the Government Measures Unemployment”

“A Historic Labor Market Recovery” by Joey Politano (Apricitas)

“Labor Market Recap July 2023” by Employ America

2

Assignment 2: FRED and GDP