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Lecture 1 : The Global Economy and Macroeconomics
Economics II
Spring 2021
2.National Accounting
Lecture 2 : National Accounting
The intuition behind measuring economic activity
Page 2
Demand / Expenditure
Output /
Supply
Income
There are three ways to measure the overall economic activity Lecture 2 : National Accounting
The intuition behind measuring economic activity
La Rosalía C.Tangana J Balvin Becky G Demand: hours of skipped classes Supply: class notes per hour Income: coupons 4 4 0 0 0 0 2 6 0 0 2 6 8 8 8 1 hour of 1 coupon class notes Hours skipped Class-notes taken Coupons exchanged Lecture 2 : National Accounting
GDP: Demand Side
Gross Domestic Product: is the market value of all final goods and services produced within a territory in a given period of time Demand/ Expenditure side:
The intuition behind Market Value Page 5 LeW¶V imagine a very tiny country that only produces 2 types of cars: Quantity of cars produced Market Price Total value
22, 000 ¼ 16 ,^000 ¼
3 cars produced
(not very informative)
38,000¼ is the final value
(noZ Ze¶re Walking) Measuring economic activity: GDP Page 6 Gross Domestic Product: is the market value of all final goods and services produced within a territory in a given period of time Demand/ Expenditure side: Lecture 2 : National Accounting The intuition behind Final Goods and Services Why aren¶W we taking into account the value of all the components of a car?
Because the value of intermediate goods is already included in the market price
To add the intermediate goods to the final goods would be double counting
Lecture 2 : National Accounting GDP: Demand Side Gross Domestic Product: is the market value of all final goods and services produced within a territory in a given period of time
Measuring GDP: Demand side Page 13 Demand / Expenditure side: Domestic Demand External Demand
GDP = C + I + G + NX
C = Private Consumption
I = Investment
G = Public Expenditure
NX = net exports (X ± M ) = Exports - Imports
Measuring GDP: Demand side Page 14 Demand / Expenditure side:
GDP = C + I + G + X ± M
C = Private Consumption: consists of the goods and services bought by households.
1. Nondurable goods are goods that last only a short time, such as food and clothing.
2. Durable goods are goods that last a long time, such as cars and TVs.
3. Services include the work done for consumers by individuals and firms, such as haircuts and
doctor visits.
The Vale of XVed goodV iV Waken inWo accoXnW, bXW doeV noW alWer GDP. IW¶V offVeW b\ an
increase/decrease in Investment
(unchanged) GDP = C(up/down) + I(down/up) + G + X ± M
Lecture 2 : National Accounting Measuring GDP: Demand side Demand / Expenditure side:
GDP = C + I + G + X ± M
I = Investment: consists of goods bought for future use.
1. Business fixed investment is the purchase of new plant and equipment by firms.
2. Residential investment is the purchase of new housing by households and landlords.
3. Inventory investment is the difference between goods produced (production) and goods sold
(sales)
Economists usually refer to Gross fixed capital formation (Business fixed investment + Residential
Investment) and Change in Inventories.
Investment = Gross capital formation = Gross Fixed capital formation + Change in Inventories
Lecture 2 : National Accounting Measuring GDP: Demand side Demand / Expenditure side:
GDP = C + I + G + X ± M
G = Government expenditure: are the goods and services bought by the Government
Military equipment, highways, etc.
Services provided by government workers.
It does not include transfer payments to individuals, such as Social Security and welfare.
Because transfer payments reallocate existing income and are not made in exchange for goods and
services, they are not part of GDP.
Measuring GDP: Demand side Page 17 Demand / Expenditure side:
GDP = C + I + G + X ± M
X ± M : net exports (NX) : value of goods and services sold to other countries (exports) minus
the value of goods and services that foreigners sell us (imports).
Very important: Imports are ±by definition- not produced within the territory.
The imports variable (M) functions as an accounting variable rather than an expenditure variable.
To be clear, the purchase of domestic goods and services increases GDP because it increases
domestic production (C+I+G), but the purchase of imported goods and services has no direct impact
on GDP.
(unchanged) GDP = C(up/down) + I(up/down) + G + X ± M (up/down)
Measuring GDP: Supply side Page 18 Supply side /Gross Value Added:
GDP = GVA (Primary Sector) + GVA(Secondary Sector) + GVAR (Tertiary Sector) + Net Taxes
Gross Domestic Product: is the aggregated added value of the firms in a territory during
an Vpecific period of Wime«
Lecture 2 : National Accounting The intuition behind Value Added Car producer: (^10) **, 000 ¼ Car seller: 16 , 000 ¼
- 6 , 000 ¼ Value Added of the car producer: 10,000¼ Value Added of the car seller: 6,000¼ Sum of Value Added of all firms = Gross Value Added (GVA) GDP = GVA + net indirect taxes (V.A.T) Lecture 2** : National Accounting Measuring GDP: Income approach Income approach: GDP = Compensation of employees (salaries + social contributions) + Operating surplus + Net indirect taxes
Gross Domestic Product: total income earned thanks to the production factors in a
territory during an specific period of time
1. Compensation of employees: total remuneration, in cash or in kind, payable by an employer
to an employee
2. Operating surplus: It is the surplus generated by operating activities after the labour factor
input has been recompensed (a proxy for post-Wa[ profiWV). NoW onl\ μcompanieV¶, alVo Velf-
employed.
GDP ± Compensation of employees ± Net taxes = Operating surplus
Computing GDP growth Page 25 Spain¶V real GDP ( 2015 - b¼): Quarter on Quarter growth (QoQ)
Q
Q
Q
Q
𝐐𝐨𝐐 % ൌ 𝐐𝐧^ 𝐘𝐞𝐚 𝐐𝐫𝐭^ െ^ 𝐐𝐧ି^ ^ 𝐘𝐞𝐚𝐫𝐭
ൌ 𝐐𝐐𝐧^ 𝐘𝐞𝐚𝐫𝐭
ૢ𝐐 𝐐𝐨𝐐% ൌ ૢૡ^.^ ૢૠ^ െ .ૢૠ .^ ൌ ૢૡ ૢૠ^ ..^ െ ൌ . %
The QoQ growth is a useful way to analyse the latest evolution of GDP (economic momentum). In order to be informative, you need to compute it using seasonally adjusted GDP (remove fluctuations that normally occur at about the same time and the same magnitude each year) QoQ only takes into account the actual quarter and the last quarter. That is way economists also compute the annualized QoQ growth (insight: they want to know how much a country would grow in a year if the growth was equal to the actual quarter). 𝐀𝐧𝐧ܝ𝐚𝐥𝐢ܢ𝐞𝐝 𝐐𝐨𝐐 % ൌ
െ 𝐀𝐧𝐧ܝ𝐚𝐥𝐢ܢ𝐞𝐝^ ૢ𝐐^ 𝐐𝐨𝐐^ %^ ൌ^
െ ൌ . %
Computing GDP growth Page 26 Spain¶V real GDP ( 2015 - b¼): Year on Year growth (YoY)
𝐐𝐧 𝐘𝐞𝐚𝐫𝐭ି ^ ൌ^
𝐐𝐧 𝐘𝐞𝐚𝐫𝐭ି ^ െ^
ૢ𝐐 𝐘𝐨𝐘% ൌ ૢૡ^.^ ૢ^ െ ૢ^ ൌ ૢૡ ૢ^. െ ൌ . ૢ%
The YoY growth provides a less noisy picture of the evolution of GDP (that is why economists typically talk about this kind of growth ) It compares the current quarter over the same quarter one year ago. 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec- Source: Haver, BBVA AM
2018 2019 QoQ (rhs) Ann. QoQ YoY
Q
Q
Q
Q
Lecture 2 : National Accounting Computing GDP growth Page 27 Spain¶V real GDP ( 2015 - b¼): Annual growth
σ 𝐐𝐧 𝐘𝐞𝐚𝐫𝐭ି ^ െ^
ૢ ૢ. ૢ ૢ. ૠ ൌ^
ૢ. െ^ ^ ~^ .^ %ሺ∗ሻ
Annual growth is the most comprehensive measure, since it takes into account the evolution of the whole year with respect to last year. 1.5% 1.7% 1.9% 2.1% 2.3% 2.5% 2.7% 2.9% 3.1% Mar-18^ Jun-18 Sep-18 Dec-18 Mar-19^ Jun-19 Sep-19 Dec- Source: Haver, BBVA AM Annual YoY (*) Due to approximation, the result is 1.9% (but with decimals is equal to 2%)
Q
Q
Q
Q
Lecture 2 : National Accounting Spanish GDP (Demand Side) Page 28 -2% -1% 1% 2% 3% 4% 2016 2017 2018 2019 SPAIN: CONTRIBUTIONS TO GDP GROWTH (CONSTANT PRICES) %YoY pp Private Consumption Goverment Expenditure Fixed Investment Inventories Net Exports GDP Source: Haver, BBVA AM GDP is usually expressed in % terms comparing the current quarter over the same quarter from the year ago. (%YoY = year over year). Piled Bars (the components of GDP) represent contributions to growth, not growth: Contribution = Share * Growth E.g: in the last quarter, Private Consumption did not grow at around 1.2% YoY. Instead, it contributed to generate 1.2% growth of GDP In the 3Q of 2019, Spanish GDP (at constant prices) grew 2% YoY, driven mainly by Consumption (both private and Public).
GDP = C + FI + Inv. + G + X ± M
Spanish GDP (Supply Side) Page 29 In the 3Q of 2019, Spanish GDP (at constant prices) grew 2% YoY, driven mainly by the Services Sector Notice the diminishing role of manufacturing activities since the beginning of 2018 The barV don¶W add Xp Wo Whe black line (GDP) becaXVe Ze¶re noW graphing neW Wa[eV (remember the formula). -0.3% 0.7% 1.7% 2.7% 3.7% 4.7% 2016 2017 2018 2019 SPAIN: CONTRIBUTIONS TO GDP AT CONSTANT PRICES %YoY Agriculture Manufacturing Construction GDP Services Source: Haver, BBVA AM GDP = GVA (Primary Sector) + GVA(Secondary Sector) + GVAR (Tertiary Sector) + Net Taxes Spanish GDP (Income Approach) Page 30 We usually analyse the Income Approach at Current/Market Prices. In the 3Q of 2019, Spanish GDP at Market Prices grew 3.7% YoY. Compensation of employees grew 4.5% YoY. Important: this is the overall compensation. It can grow because there are more employees (maintaining the same compensation per employee). It is actually what has happened in Spain since 2012 until 2018. -12% -8% -4% 0% 4% 8% 12% 16% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Spain: Income approach YoY % Operating Surplus Compensation of employees GDP at Market Prices Source: Haver, BBVA AM GDP = Compensation of employees (salaries + social contributions) + Operating surplus + Net taxes -12% -8% -4% 0% 4% 8% 12% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Spain: Compensation of Employees Average Compensation Employees Compensation of employees Source: Haver, BBVA AM Lecture 2 : National Accounting Spanish GDP deflator When Ze¶re talking about % growth, and we know both GDP at Market and Constant prices, then iW¶V really simple to obtain GDP deflator for a given moment of time. For instance, in 3 Q of 2019 : GDP at Market Prices (PQ) grew at 3. 7 % YoY and GDP at Constant Prices (Q) grew 2 % YoY GDP at Market prices (PQ) GDP deflator = 3. 7 % ± 2 % = 1. 7 % GDP deflator (P) = GDP at Constant prices (Q) 1.7% -1% 0% 1% 2% 2016 2017 2018 2019 SPAIN GDP DEFLATOR Source: Haver, BBVA AM Remember that GDP deflator measures the evolution of prices in the economy. Lecture 2 : National Accounting GDP: BASE 100 Economists also tend to compare the evolution of GDP across countries with a base-100 index. We set 2008Q2 as 100 (the spark of the global financial crisis) , and then we apply the QoQ% variations to that index. Trick: the last data of Spain is around 105. That meanV iW¶V groZn 5% Vince 2008 (accXmXlaWed). Germany, on the contrary, has grown three times more. IWal\« Zell. 90 95 100 105 110 115 120 2008 2010 2012 2014 2016 2018 REAL GDP Base 100 (2008Q2) UEM Alemania Francia Italia España Fuente: Haver, BBVA AM
