lecture 1 -- national income accounting autumn 2014
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Lecture 1
National Income Accounting 33840
September 26, 2014
“Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that foster maximum employment and price stability.”
Minutes of the July 29-30 2014 Meeting of the Federal Open Market Committee
“In particular, to further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent.”
Minutes of the July 29-30 2014 Meeting of the Federal Open Market Committee
“Beginning in August, the Desk is directed
to purchase longer-term Treasury securities at a pace of about $15 billion per month and to purchase mortgage-backed securities at a pace of about $10 billion per month.”
Minutes of the July 29-30, 2014 Meeting of the Federal Open Market Committee
“The Committee directs the Desk to
maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”
Minutes of the July 29-30, 2014 Meeting of the Federal Open Market Committee
“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output.”
Minutes of the December 11-12 2012 Meeting of the Federal Open Market Committee
The FOMC Minutes (circa 2012)
“The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.”
FOMC statement of longer-run goals and policy strategy, January 25 2012
Why the Change in Language? (Maybe the Federal Reserve Act has something to do with it?)
Basic Growth Accounting: Connecting a Few Dots
GDP growth = Productivity growth + Capital stock growth
+ Employment growth (If productivity growth is “exogenous” and if the capital stock changes slowly, pursuing maximum employment is roughly equivalent to pursuing maximum sustainable growth.)
Our Mission
To make sense of this statement. 1. Build a model that helps understand
how output, employment, prices, interest rates (and other stuff) are determined.
Our Mission To make sense of this statement. 2a. Figure out what it means to set the
funds rate in the range of 0 to ¼ percent (or anything else for that matter).
2b. Figure out all that other stuff the Fed has been up to.
Our Mission
3. Help the FOMC
get it right next time.
Gross Domestic Product
Gross Domestic Product is a measure of the value of all final goods and services newly produced within a specified country’s borders during a specified period of time (usually one year or one quarter).
HOW IS GDP MEASURED?
Three ways to capture total (aggregate) economic activity
We can measure GPD in market “values” from three “theoretically” identical measures:
1. How much is produced.
2. How much is earned.
3. How much is purchased.
The circular flow concept
Everything produced is an income source to someone.
Everything produced is paid for (is an expenditure) by someone.
Everything produced, is purchased by someone…
Total Production = Total Expenditure
Gross Domestic Product: The Expenditures Approach
Y = C + I + G + (X - M)
To calculate GDP:
Exports
Investment
Consumption Government Purchases
Imports
Problems with GDP as a measure of welfare
Let’s stipulate that we want to talk Real, Per Capita GDP. GDP still falls short because income per se does not generate “happiness”, or “well-being.”
• Leisure isn’t valued • Non-market work isn’t counted
Problems with GDP as a measure of welfare
Source: “Hours Worked: Long-Run Trends,” Jeremy Greenwood and Guillaume Vandenbrouke, September 2005
Market hours worked by women have increased dramatically since 1900, but housework hours have decreased
Source: “A Summary of Trends in U.S. Time Use: 1965-2005,” Mark Aguiar and Erik Hurst, May 2008
Leisure Enjoyed by Women Has Increased Since 1965, Despite An Increase In Market Hours
Leisure Enjoyed by Men Has Increased Since 1965, But Less Rapidly Than Market Hours Have Declined
Source: “A Summary of Trends in U.S. Time Use: 1965-2005,” Mark Aguiar and Erik Hurst, May 2008
• Leisure isn’t valued • Non-market work isn’t counted • Consumption is not equal to income • Income inequality doesn’t matter
Problems with GDP as a measure of welfare
Life Expectancy
Public and Private
Consumption Relative to
Income
Leisure (and Home
Production)
Inequality in Consumption
Western Europe
+ - + +
Eastern Europe - - + - Latin America - + - - North Africa/Middle-East
- - + -
Coastal Asia - + - - Sub-Saharan Africa
- + - -
Cross-regional contributors to economic welfare relative to the United States (2001)
Source: “Beyond GDP? Welfare Across Countries and Time,” Charles I. Jones and Peter J. Klenow, February 2011
Source: “Beyond GDP? Welfare Across Countries and Time,” Charles I. Jones and Peter J. Klenow, February 2011
Income and the Jones-Klenow Measure of Welfare Are Correlated 0.95 in 2000
Source: “Beyond GDP? Welfare Across Countries and Time,” Charles I. Jones and Peter J. Klenow, February 2011
Income and Jones-Klenow Welfare Growth Are Correlated 0.82 for the 1980-2000 Period
• Leisure isn’t valued • Non-market activities aren’t counted • Consumption is not equal to income • Income inequality doesn’t matter • Non-economic “values” are omitted
Problems with GDP as a measure of welfare
The HDI is based on: 1. Long and healthy life --- Life expectancy
2. Access to knowledge --- Mean adult educational attainment --- Expected years of education for children of school entrance age
3. Standard of living --- Gross national income
Another alternative: The United Nations Human Development Index (HDI)
Source: Human Development Index 2011, http://hdrstats.undp.org/images/explanations/USA.pdf
For the United States, the HDI has been growing faster than national income over the past decade
Source: Human Development Index 2011, http://hdrstats.undp.org/images/explanations/USA.pdf
• Leisure isn’t valued • Non-market activities aren’t counted • Consumption is not equal to income • Income inequality doesn’t matter • Non-economic “values” are omitted • Externalities may be missed
Problems with GDP as a measure of welfare
The Genuine Progress Indicator: United States
Source: “The Genuine Progress Indicator 2006”, Dr. John Talberth, Clifford Cobb, and Noah Slattery, February 2007
The Genuine Progress Indicator Consumption + (consumer durable services
+ services of highways and streets + net investment (not foreign-financed)) X discount for
income inequality
+ value of time in leisure, parenting, volunteering, education
- value of leisure lost in working and commuting - social costs of pollution (including noise), loss of
wetlands, farm land, forests, depletion of nonrenewable resources
- household costs of pollution abatement, crime and crime prevention
- cost of unemployment (value of “unwanted” leisure)
The Largest Negative to the GPI is Natural Resource Depletion and the Cumulative Effect of “Global Warming”
Source: “The Genuine Progress Indicator 2006”, Dr. John Talberth, Clifford Cobb, and Noah Slattery, February 2007
The Genuine Progress Indicator: Growth Rates
Source: “The Genuine Progress Indicator 2006”, Dr. John Talberth, Clifford Cobb, and Noah Slattery, February 2007
• GDP growth is arguably highly correlated with underlying economic welfare
• We will generally think of growth in the
level of GDP as a reasonable indicator of economic progress, bearing in mind all appropriate caveats
Bottom Line
36
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Source: Bureau of Economic Analysis
GDP Components Share of total nominal GDP
through Q2 2014
Government
Investment
Net Exports
Consump4on
The Components of Consumption
1960 2013
Source: Bureau of Economic Analysis
Nondurables
Durables
Services
Nondurables
Durables
Services
The Components of Investment
1960 2013
Source: Bureau of Economic Analysis
Nonresidential Structures
Residential Structures
Equipment & Software
Nonresidential Structures
Residential Structures Equipment &
Software
Nonresidential Structures
Residential Structures Equipment &
Software
Investment: Pre- and Post- Housing Crash
2004 2013
Source: Bureau of Economic Analysis
Nonresidential Structures
Residential Structures Equipment &
Software
The Components of Government Purchases
1960 2013
Source: Bureau of Economic Analysis
State & Local Federal Defense
State & Local
Federal Defense
Federal Non-defense Federal
Non-defense
Everything produced, is income to someone…
Total Production = Total Income
42
3000
5000
7000
9000
11000
13000
15000
17000
59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Source: Bureau of Economic Analysis
GDP and GDI SAAR, Chained 2009 Bill. $
through Q2 2014
Gross Domes4c Product
Gross Domes4c Income
The Components of Personal Income
Source: Bureau of Economic Analysis
11960
72%
Compensation
Proprietors Income Rental
Dividends
Interest
Net Transfers
2014
63%
Macroeconomics in 6 Easy Bullet Points
Macro in Bullet Points
1. Ultimately, fundamentals (not
demand) determine GDP.
(If “tighter” monetary policy slows down the economy, something isn’t working right.)
Macro in Bullet Points
2. In the end, interest rates are
determined in the market for goods and services.
(Interest rates are low, but mostly it isn’t because of the Fed – or at least not for the reason you might think.)
Macro in Bullet Points
3. Prices are what they are (neither
necessarily good nor necessarily bad).
(Right now, rising interest rates would look like a good thing.)
Macro in Bullet Points
4. The future is now (expectations
rule).
(The impact of any particular fiscal or monetary policy depends not on the government does today, but on what people expect it to do down the road.)
Macro in Bullet Points
5. Inflation is everywhere and always a
monetary phenomenon.
(But it’s complicated: Maybe all that money the Fed printed doesn’t matter.)
Macro in Bullet Points
6. A higher funds rate does not
necessarily mean monetary policy is getting “tighter.”
(Maybe it does, maybe it doesn’t!)
End of Lecture 1
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