Macro notes

Macro notes week 9 source parkin ch.6 p.128

In the macroeconomy leakages equal injections. Leakages refer to the circular flow where money is not used for further investment, it comprises government expenditure, net imports, and savings. To see this, governments have to spend money on hospitals, roads, police, defence etc. households have to save money they don’t spend, the country buys products it cant produce cheaply from abroad. In each case the money goes out.

In the circular flow the output is equal to consumption + investment + government expenditure + net exports =Y. the inputs a firm receives equal the firms output, that is every money a firm receives it pays to people as wages.

The chapter is basically about how to calculate gdp, this is in the region of $7500 bn, nearly a tenth of a $tn. There are three approaches to measuring gdp, the expenditure approach (preference) , factor income approach, and the value added approach. I know about double counting, it’s counting the same value added twice. For example, a baker buys flour, the farmer has added value, a consumer buys a loaf of bread, if you add the value at each stage you count the farmers valued added twice.

Gdp is a big number, it is the aggregate of goods and services provision, actually two thirds of gdp is consumer expenditure on goods and services. A consumer expenditure on goods and services are food from the supermarket and a haircut from the barber.


Price level and inflation
Inflation is the average change in prices, it is an increase as deflation is the average fall in the price level.

Inflation is measured in two ways; the CPI (consumer price index) (preference) and the GDP deflator. Both measures give a very similar, but not exactly the same result. Both measures also suffer from upward bias, in the region of 2-3% a year. Upward bias happens for 3 reasons; new goods, increases in quality and substitution. To understand these three reasons it is first necessary to know the general idea behind calculating inflation. The method is to take the price and quantity of goods in one year, and the new price and new quantity of the same goods in the next year, by using a formula it’s possible to calculate the percentage change. Now it’s possible to explain the three reasons listed above. Firstly, new goods. In the time period of a year new goods are created, and so the original basked of goods used has to be updated to include the new goods, because the original basket might include for example a cd walkman and a tv (non flat screen), after a year there are new goods; the mp3 player and the flat screen tv. As mp3 players and flat screen tvs are more expensive this creates the upward bias. Second reason; increased quality of goods, during a year the quality of goods increases, for example a new, revised edition of a text book, a computer with faster components and more disk space, most often higher quality increases the price so there is an upward bias. Third; substitution, the basket of goods changes because consumers change where they shop to get more bargains, for example people go to discount shops and buy discount air plane tickets online. This overstates the effect of a price change.

GDP if far from being a perfect measure of the economy of a country. GDP doesn’t include the pleasure from taking time out of work to enjoy ourselves nor does it include the productive activities we do everyday in our homes, such as cooking, cleaning, teaching our family new things.

The gdp omits illegal activites such as drug selling, child slave labour, and this counts for between 9 and 30% of gdp, and even more in some countries.

The value of an hour spent in leisure must be higher than the value of the last hour I worked, otherwise I would continue working.

The way the imf and worldbank measure gdp presents a distorted picture of economies. How rich are countries really? If by changing the type of way to calculate gdp results in wealth per person becoming six times larger. Purchasing power parity takes into account how many good you can actually buy with your money.

Gdp fails to measure things that have an important effect on our wellbeing and lives in general. The right to vote, the freedom of speech and expression don’t get measured by gdp.

A stock is something that is built up and stored. A flow is something measured during a period of time that adds to the stock. Gdp is a stock and investment is a flow that contributes to the stock. Wealth is a stock and saving is a flow that increases wealth.

Aggregate expenditure is composed of consumption on goods and services, investment, government spending, and net exports.

Aggregate income is composed of wages paid by firms to households.

All expenditure goes to firms who pay it all out in wages to households.

Governments spend money on roads, police, nhs, defense, and government receives money through taxing people. Transfer payments from government to people in the form of unemployment benefit, child care benefit.

Injections equal leakages. Leakages are saving, taxes, imports, injections are investment, government expenditure and net exports.