macroeconomics slides 2nd lecture · slides 2nd lecture luisreyes1 panthéon sorbonne master in...

MacroeconomicsSlides 2nd lecture

Luis REYES1

Panthéon Sorbonne Master in Economics, Université Paris 1

[email protected], www.luisreyesortiz.orgL. Reyes (Paris 1) Macro 2 09/26/2018 1 / 41

Outline

1 Value, Volume and PriceValueVolumePrice

2 Flow of funds and balance sheetsDefinitionAssetsLiabilities

3 Stocks, Flows and RevaluationsStocksFlowsRevaluationsOther useful info

L. Reyes (Paris 1) Macro 2 09/26/2018 2 / 41

Outline





Value, Volume and PriceValue

In economics, value may refer to several things:

The classics (Smith, Ricardo, Mill...) distinguished between value inuse and value in exchange.In neoclassical theory, value depends on the costs involved inproducing that product (definition closely linked to distribution).Market value refers to the price an asset would fetch in themarketplace (from Investopedia... this definition is a bit misleading).Book value is the value at which an asset is carried on a balancesheet.

Given our interest in a complete and coherent analysis of financialaccounts, we will stick to the last definition: Book Value.



In economics, value may refer to several things:The classics (Smith, Ricardo, Mill...) distinguished between value inuse and value in exchange.

In neoclassical theory, value depends on the costs involved inproducing that product (definition closely linked to distribution).Market value refers to the price an asset would fetch in themarketplace (from Investopedia... this definition is a bit misleading).Book value is the value at which an asset is carried on a balancesheet.




In economics, value may refer to several things:The classics (Smith, Ricardo, Mill...) distinguished between value inuse and value in exchange.In neoclassical theory, value depends on the costs involved inproducing that product (definition closely linked to distribution).

Market value refers to the price an asset would fetch in themarketplace (from Investopedia... this definition is a bit misleading).Book value is the value at which an asset is carried on a balancesheet.




In economics, value may refer to several things:The classics (Smith, Ricardo, Mill...) distinguished between value inuse and value in exchange.In neoclassical theory, value depends on the costs involved inproducing that product (definition closely linked to distribution).Market value refers to the price an asset would fetch in themarketplace (from Investopedia... this definition is a bit misleading).

Book value is the value at which an asset is carried on a balancesheet.




In economics, value may refer to several things:The classics (Smith, Ricardo, Mill...) distinguished between value inuse and value in exchange.In neoclassical theory, value depends on the costs involved inproducing that product (definition closely linked to distribution).Market value refers to the price an asset would fetch in themarketplace (from Investopedia... this definition is a bit misleading).Book value is the value at which an asset is carried on a balancesheet.





Given our interest in a complete and coherent analysis of financialaccounts, we will stick to the last definition:

Book Value.


Value, Volume and PriceValue, see Piriou and Bournay, 2012.

Value = Price × Quantity

(V = P ×Q).

Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because (1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and (2) they are qualitativelydifferent.To do so, we must weight quantities by prices, in order to get moneyvalues.

2The value of the box itself is assumed to be zero.3This is a problem called heterogeneity.



Value = Price × Quantity (V = P ×Q).

Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because (1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and (2) they are qualitativelydifferent.To do so, we must weight quantities by prices, in order to get moneyvalues.




Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.

However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because

(1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and (2) they are qualitativelydifferent.To do so, we must weight quantities by prices, in order to get moneyvalues.

2The value of the box itself is assumed to be zero.

3This is a problem called heterogeneity.



Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.

Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because





Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.

This is so because





Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because

(1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and (2) they are qualitativelydifferent.

To do so, we must weight quantities by prices, in order to get moneyvalues.




Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because (1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and

(2) they are qualitativelydifferent.





Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because (1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and (2) they are qualitativelydifferent.





Value = Price × Quantity (V = P ×Q).Example: the value of a box of apples equals the price of each appletimes the number of apples contained in the box2.However, this simple relationship becomes complicated when there ismore than one product, say, pears3.Quantities are not additive; one cannot measure the value of applesand pears using a simple valuation rule.This is so because (1) they have different prices (thus, 1 apple + 1pear is not the same thing as 2 apples), and (2) they are qualitativelydifferent.To do so, we must weight quantities by prices, in order to get moneyvalues.



Outline





Value, Volume and PriceQuantity vs. Volume, see Piriou and Bournay, 2012.

The evolution of different operations, production, consumption, etc.,is said to follow an evolution at current value (or simply in value).

But it is necessary to distinguish in this evolution the part due to theevolution of prices, and the residual part (the evolution in volume).The latter results of the evolution of quantity and that of quality of aproduct.Assessing the quality effects is one of the main difficulties ofmeasuring price changes, which must be at constant quality.Hereafter, when we refer to a quantity, we will be speaking morebroadly of a volume.



The evolution of different operations, production, consumption, etc.,is said to follow an evolution at current value (or simply in value).But it is necessary to distinguish in this evolution the part due to theevolution of prices, and the residual part (the evolution in volume).

The latter results of the evolution of quantity and that of quality of aproduct.Assessing the quality effects is one of the main difficulties ofmeasuring price changes, which must be at constant quality.Hereafter, when we refer to a quantity, we will be speaking morebroadly of a volume.



The evolution of different operations, production, consumption, etc.,is said to follow an evolution at current value (or simply in value).But it is necessary to distinguish in this evolution the part due to theevolution of prices, and the residual part (the evolution in volume).The latter results of the evolution of quantity and that of quality of aproduct.

Assessing the quality effects is one of the main difficulties ofmeasuring price changes, which must be at constant quality.Hereafter, when we refer to a quantity, we will be speaking morebroadly of a volume.



The evolution of different operations, production, consumption, etc.,is said to follow an evolution at current value (or simply in value).But it is necessary to distinguish in this evolution the part due to theevolution of prices, and the residual part (the evolution in volume).The latter results of the evolution of quantity and that of quality of aproduct.Assessing the quality effects is one of the main difficulties ofmeasuring price changes, which must be at constant quality.

Hereafter, when we refer to a quantity, we will be speaking morebroadly of a volume.



The evolution of different operations, production, consumption, etc.,is said to follow an evolution at current value (or simply in value).But it is necessary to distinguish in this evolution the part due to theevolution of prices, and the residual part (the evolution in volume).The latter results of the evolution of quantity and that of quality of aproduct.Assessing the quality effects is one of the main difficulties ofmeasuring price changes, which must be at constant quality.Hereafter, when we refer to a quantity, we will be speaking morebroadly of a volume.


Value, Volume and PriceQuantity indices, see Piriou and Bournay, 2012.

Let us consider i products over the period 0 − t, in quantity qi atprices pi .

We can measure the evolution of quantities between 0 and t indifferent ways.

The three most commonly used indices are:

1 Laspeyres; quantities are weighted by price at the starting period.

Lq =Σipi

0 × qit

Σipi0 × qi

02 Paasche; quantities are weighted by prices at the end period.

Pq =Σipi

t × qit

Σipit × qi

03 Fisher; geometric mean of the Laspeyres and Paasche indices.

Fq = (Lq × Pq)1/2



Let us consider i products over the period 0 − t, in quantity qi atprices pi .We can measure the evolution of quantities between 0 and t indifferent ways.

The three most commonly used indices are:


Lq =Σipi

0 × qit

Σipi0 × qi


Pq =Σipi

t × qit

Σipit × qi


Fq = (Lq × Pq)1/2



Let us consider i products over the period 0 − t, in quantity qi atprices pi .We can measure the evolution of quantities between 0 and t indifferent ways. The three most commonly used indices are:


Lq =Σipi

0 × qit

Σipi0 × qi


Pq =Σipi

t × qit

Σipit × qi


Fq = (Lq × Pq)1/2





Lq =Σipi

0 × qit

Σipi0 × qi

0


Pq =Σipi

t × qit

Σipit × qi


Fq = (Lq × Pq)1/2





Lq =Σipi

0 × qit

Σipi0 × qi


Pq =Σipi

t × qit

Σipit × qi

0


Fq = (Lq × Pq)1/2





Lq =Σipi

0 × qit

Σipi0 × qi


Pq =Σipi

t × qit

Σipit × qi


Fq = (Lq × Pq)1/2


Outline





Value, Volume and PriceLaspeyres v. Paasche. See: ILO, 2004.

A Laspeyres index measures the change between two periods of timein the total cost of purchasing a basket of goods and services that isrepresentative of the first, or base, period.

The base period basket of consumer purchases is priced first at baseperiod prices and then repeatedly priced at the prices of successivetime periods.The Paasche index uses the basket of quantities from the currentperiod instead of the basket from the base period.Traditionally, one of the main reasons for compiling a CPI was tocompensate wage-earners for inflation by adjusting their wage rates inproportion to the percentage change in the CPI, a procedure knownas indexation.



A Laspeyres index measures the change between two periods of timein the total cost of purchasing a basket of goods and services that isrepresentative of the first, or base, period.The base period basket of consumer purchases is priced first at baseperiod prices and then repeatedly priced at the prices of successivetime periods.

The Paasche index uses the basket of quantities from the currentperiod instead of the basket from the base period.Traditionally, one of the main reasons for compiling a CPI was tocompensate wage-earners for inflation by adjusting their wage rates inproportion to the percentage change in the CPI, a procedure knownas indexation.



A Laspeyres index measures the change between two periods of timein the total cost of purchasing a basket of goods and services that isrepresentative of the first, or base, period.The base period basket of consumer purchases is priced first at baseperiod prices and then repeatedly priced at the prices of successivetime periods.The Paasche index uses the basket of quantities from the currentperiod instead of the basket from the base period.

Traditionally, one of the main reasons for compiling a CPI was tocompensate wage-earners for inflation by adjusting their wage rates inproportion to the percentage change in the CPI, a procedure knownas indexation.



A Laspeyres index measures the change between two periods of timein the total cost of purchasing a basket of goods and services that isrepresentative of the first, or base, period.The base period basket of consumer purchases is priced first at baseperiod prices and then repeatedly priced at the prices of successivetime periods.The Paasche index uses the basket of quantities from the currentperiod instead of the basket from the base period.Traditionally, one of the main reasons for compiling a CPI was tocompensate wage-earners for inflation by adjusting their wage rates inproportion to the percentage change in the CPI, a procedure knownas indexation.


Value, Volume and PricePrice indices, see Piriou and Bournay, 2012.

For obvious reasons, the same reasoning applies to prices...

1 Laspeyres; prices are weighted by quantities at the starting period.

Lp =Σipi

t × qi0

Σipi0 × qi

0

2 Paasche; prices are weighted by quantities at the end period.

Pp =Σipi

t × qit

Σipi0 × qi

t


Fp = (Lp × Pp)1/2


Value, Volume and PricePrice indices, see Piriou and Bournay, 2012.

For obvious reasons, the same reasoning applies to prices...1 Laspeyres; prices are weighted by quantities at the starting period.

Lp =Σipi

t × qi0

Σipi0 × qi

0

2 Paasche; prices are weighted by quantities at the end period.

Pp =Σipi

t × qit

Σipi0 × qi

t


Fp = (Lp × Pp)1/2


Value, Volume and PriceThe Effective Exchange Rate (EER), see Gandolfo, 2002, Chapter 2. (1)

While the exchange rate involves two currencies only, it may bedesirable to have an idea of the overall external value of a currency,namely with respect to the rest of the world.

The presence of floating exchange rates makes it difficult to ascertainthe behavior of the external value of a currency.In a floating regime a currency may simultaneously depreciate withrespect to one (or more) foreign currency and appreciate with respectto another (or several others).



While the exchange rate involves two currencies only, it may bedesirable to have an idea of the overall external value of a currency,namely with respect to the rest of the world.The presence of floating exchange rates makes it difficult to ascertainthe behavior of the external value of a currency.

In a floating regime a currency may simultaneously depreciate withrespect to one (or more) foreign currency and appreciate with respectto another (or several others).



While the exchange rate involves two currencies only, it may bedesirable to have an idea of the overall external value of a currency,namely with respect to the rest of the world.The presence of floating exchange rates makes it difficult to ascertainthe behavior of the external value of a currency.In a floating regime a currency may simultaneously depreciate withrespect to one (or more) foreign currency and appreciate with respectto another (or several others).



In such a situation it is necessary to have recourse to an indexnumber (the EER!):

1 rei = effective exchange rate of currency i ,2 rji = nominal exchange rate of currency i with respect to currency j ,3 wj = weight given to currency j in the construction of the index.

By definition:n∑

j=1,j≠iwj = 1

Therefore, the EER is defined as:

rei =n∑

j=1,j≠iwj × rji

Of course, this applies to either nominal or real exchange rates.




1 rei = effective exchange rate of currency i ,

2 rji = nominal exchange rate of currency i with respect to currency j ,3 wj = weight given to currency j in the construction of the index.

By definition:n∑

j=1,j≠iwj = 1


rei =n∑

j=1,j≠iwj × rji





1 rei = effective exchange rate of currency i ,2 rji = nominal exchange rate of currency i with respect to currency j ,

3 wj = weight given to currency j in the construction of the index.By definition:

n∑

j=1,j≠iwj = 1


rei =n∑

j=1,j≠iwj × rji





1 rei = effective exchange rate of currency i ,2 rji = nominal exchange rate of currency i with respect to currency j ,3 wj = weight given to currency j in the construction of the index.

By definition:n∑

j=1,j≠iwj = 1


rei =n∑

j=1,j≠iwj × rji



Outline





Balance SheetsDefinition

In financial accounting, a balance sheet or statement of financialposition is a summary of the financial balances of a sole proprietorship,a business partnership, a corporation or other business organization.

Assets, liabilities and ownership equity are listed as of a specific date,such as the end of its financial year.These three balance sheet segments give investors an idea as to whatthe company (or institutional sector) owns and owes, as well as theamount invested by the shareholders.It is called a balance sheet because the two sides balance out. Thismakes sense: a company has to pay for all the things it has (assets)by either borrowing money (liabilities) or getting it from shareholders(shareholders’ equity).Accounts such as cash, inventory and property are on the asset side ofthe balance sheet, while on the liability side there are accounts suchas accounts payable or long-term debt.



In financial accounting, a balance sheet or statement of financialposition is a summary of the financial balances of a sole proprietorship,a business partnership, a corporation or other business organization.Assets, liabilities and ownership equity are listed as of a specific date,such as the end of its financial year.

These three balance sheet segments give investors an idea as to whatthe company (or institutional sector) owns and owes, as well as theamount invested by the shareholders.It is called a balance sheet because the two sides balance out. Thismakes sense: a company has to pay for all the things it has (assets)by either borrowing money (liabilities) or getting it from shareholders(shareholders’ equity).Accounts such as cash, inventory and property are on the asset side ofthe balance sheet, while on the liability side there are accounts suchas accounts payable or long-term debt.



In financial accounting, a balance sheet or statement of financialposition is a summary of the financial balances of a sole proprietorship,a business partnership, a corporation or other business organization.Assets, liabilities and ownership equity are listed as of a specific date,such as the end of its financial year.These three balance sheet segments give investors an idea as to whatthe company (or institutional sector) owns and owes, as well as theamount invested by the shareholders.

It is called a balance sheet because the two sides balance out. Thismakes sense: a company has to pay for all the things it has (assets)by either borrowing money (liabilities) or getting it from shareholders(shareholders’ equity).Accounts such as cash, inventory and property are on the asset side ofthe balance sheet, while on the liability side there are accounts suchas accounts payable or long-term debt.



In financial accounting, a balance sheet or statement of financialposition is a summary of the financial balances of a sole proprietorship,a business partnership, a corporation or other business organization.Assets, liabilities and ownership equity are listed as of a specific date,such as the end of its financial year.These three balance sheet segments give investors an idea as to whatthe company (or institutional sector) owns and owes, as well as theamount invested by the shareholders.It is called a balance sheet because the two sides balance out. Thismakes sense: a company has to pay for all the things it has (assets)by either borrowing money (liabilities) or getting it from shareholders(shareholders’ equity).

Accounts such as cash, inventory and property are on the asset side ofthe balance sheet, while on the liability side there are accounts suchas accounts payable or long-term debt.



In financial accounting, a balance sheet or statement of financialposition is a summary of the financial balances of a sole proprietorship,a business partnership, a corporation or other business organization.Assets, liabilities and ownership equity are listed as of a specific date,such as the end of its financial year.These three balance sheet segments give investors an idea as to whatthe company (or institutional sector) owns and owes, as well as theamount invested by the shareholders.It is called a balance sheet because the two sides balance out. Thismakes sense: a company has to pay for all the things it has (assets)by either borrowing money (liabilities) or getting it from shareholders(shareholders’ equity).Accounts such as cash, inventory and property are on the asset side ofthe balance sheet, while on the liability side there are accounts suchas accounts payable or long-term debt.L. Reyes (Paris 1) Macro 2 09/26/2018 17 / 41

Balance SheetsBalance Sheet of a Firm

Figure: Source: Investopedia.L. Reyes (Paris 1) Macro 2 09/26/2018 18 / 41

Balance SheetsBalance Sheet Diagram, see Piriou and Bournay, 2012.

Assets LiabilitiesAN Non-financial assets

AN.1 Produced assetsAN.2 Non-produced assets

AF Financial assets PF Financial liabilitiesB.90 Net value


Outline





AssetDefinition (1)

An asset is:

A resource with economic value that an individual, corporation orcountry owns or controls with the expectation that it will providefuture benefit.A balance sheet item representing what a firm owns.

It can be:

Non-financial (those upon which it is possible to exercise propertyrights), in turn,Produced;

1 Fixed (dwellings, buildings, materials, software, mineral exploration,artwork, etc.).

2 Inventory (user stock, work in progress, etc.).3 Valuables (jewelry, antiquities, mainly).

Non-produced (land, deposits, patents, goodwill, etc.).


AssetDefinition (1)

An asset is:A resource with economic value that an individual, corporation orcountry owns or controls with the expectation that it will providefuture benefit.

A balance sheet item representing what a firm owns.It can be:






AssetDefinition (1)

An asset is:A resource with economic value that an individual, corporation orcountry owns or controls with the expectation that it will providefuture benefit.A balance sheet item representing what a firm owns.

It can be:






AssetDefinition (1)


It can be:Non-financial (those upon which it is possible to exercise propertyrights), in turn,

Produced;





AssetDefinition (1)


It can be:Non-financial (those upon which it is possible to exercise propertyrights), in turn,Produced;





AssetDefinition (1)




2 Inventory (user stock, work in progress, etc.).

3 Valuables (jewelry, antiquities, mainly).Non-produced (land, deposits, patents, goodwill, etc.).


AssetDefinition (1)







AssetDefinition (2)

Financial (an asset that derives value because of a contractual claim),for instance:

1 Stocks2 Bonds3 Bank deposits

In this sense, the term stock is conceptually different from that usedin the next section.A stock may refer to: a type of security that signifies ownership in acorporation and represents a claim on part of the corporation’s assetsand earnings.In this sense, it is a synonym of share (a unit of ownership thatrepresents an equal proportion of a company’s capital) and equity (astock or any other security representing an ownership interest).


AssetDefinition (2)


1 Stocks

2 Bonds3 Bank deposits



AssetDefinition (2)


1 Stocks2 Bonds

3 Bank depositsIn this sense, the term stock is conceptually different from that usedin the next section.A stock may refer to: a type of security that signifies ownership in acorporation and represents a claim on part of the corporation’s assetsand earnings.In this sense, it is a synonym of share (a unit of ownership thatrepresents an equal proportion of a company’s capital) and equity (astock or any other security representing an ownership interest).


AssetDefinition (2)





AssetDefinition (2)



In this sense, the term stock is conceptually different from that usedin the next section.

A stock may refer to: a type of security that signifies ownership in acorporation and represents a claim on part of the corporation’s assetsand earnings.In this sense, it is a synonym of share (a unit of ownership thatrepresents an equal proportion of a company’s capital) and equity (astock or any other security representing an ownership interest).


AssetDefinition (2)



In this sense, the term stock is conceptually different from that usedin the next section.A stock may refer to: a type of security that signifies ownership in acorporation and represents a claim on part of the corporation’s assetsand earnings.

In this sense, it is a synonym of share (a unit of ownership thatrepresents an equal proportion of a company’s capital) and equity (astock or any other security representing an ownership interest).


AssetDefinition (2)





Outline





LiabilitiesDefinition

A liability is: a company’s legal debts or obligations that arise duringthe course of business operations.

Liabilities are settled over time through the transfer of economicbenefits including money, goods or services.Recorded on the balance sheet (right side), liabilities include loans,accounts payable, mortgages, deferred revenues and accrued expenses.Liabilities are a vital aspect of a company’s operations because theyare used to finance these and pay for large expansions.They can also be in the form of:

1 Stocks2 Bonds3 Bank deposits4 etc.



A liability is: a company’s legal debts or obligations that arise duringthe course of business operations.Liabilities are settled over time through the transfer of economicbenefits including money, goods or services.

Recorded on the balance sheet (right side), liabilities include loans,accounts payable, mortgages, deferred revenues and accrued expenses.Liabilities are a vital aspect of a company’s operations because theyare used to finance these and pay for large expansions.They can also be in the form of:




A liability is: a company’s legal debts or obligations that arise duringthe course of business operations.Liabilities are settled over time through the transfer of economicbenefits including money, goods or services.Recorded on the balance sheet (right side), liabilities include loans,accounts payable, mortgages, deferred revenues and accrued expenses.

Liabilities are a vital aspect of a company’s operations because theyare used to finance these and pay for large expansions.They can also be in the form of:




A liability is: a company’s legal debts or obligations that arise duringthe course of business operations.Liabilities are settled over time through the transfer of economicbenefits including money, goods or services.Recorded on the balance sheet (right side), liabilities include loans,accounts payable, mortgages, deferred revenues and accrued expenses.Liabilities are a vital aspect of a company’s operations because theyare used to finance these and pay for large expansions.

They can also be in the form of:




A liability is: a company’s legal debts or obligations that arise duringthe course of business operations.Liabilities are settled over time through the transfer of economicbenefits including money, goods or services.Recorded on the balance sheet (right side), liabilities include loans,accounts payable, mortgages, deferred revenues and accrued expenses.Liabilities are a vital aspect of a company’s operations because theyare used to finance these and pay for large expansions.They can also be in the form of:





1 Stocks

2 Bonds3 Bank deposits4 etc.




1 Stocks2 Bonds

3 Bank deposits4 etc.





4 etc.


Outline





Stocks, Flows and RevaluationsStocks

So far, we have been referring to stocks of assets and liabilities only!(balance sheets refer to these).

But, what is a stock in the accounting jargon?A stock variable is measured at one specific time, and represents aquantity existing at that point in time (say, December 31, 2013),which may have accumulated in the past.Thus, a stock refers to the value of an asset at a balance date (orpoint in time), while a flow refers to the total value of transactions(sales or purchases, incomes or expenditures) during an accountingperiod.A stock may also be financial. For instance, a stock of debt (i.e. theoutstanding debt of an economic agent, in contrast to her/hismonthly payments for it).



So far, we have been referring to stocks of assets and liabilities only!(balance sheets refer to these).But, what is a stock in the accounting jargon?

A stock variable is measured at one specific time, and represents aquantity existing at that point in time (say, December 31, 2013),which may have accumulated in the past.Thus, a stock refers to the value of an asset at a balance date (orpoint in time), while a flow refers to the total value of transactions(sales or purchases, incomes or expenditures) during an accountingperiod.A stock may also be financial. For instance, a stock of debt (i.e. theoutstanding debt of an economic agent, in contrast to her/hismonthly payments for it).



So far, we have been referring to stocks of assets and liabilities only!(balance sheets refer to these).But, what is a stock in the accounting jargon?A stock variable is measured at one specific time, and represents aquantity existing at that point in time (say, December 31, 2013),which may have accumulated in the past.

Thus, a stock refers to the value of an asset at a balance date (orpoint in time), while a flow refers to the total value of transactions(sales or purchases, incomes or expenditures) during an accountingperiod.A stock may also be financial. For instance, a stock of debt (i.e. theoutstanding debt of an economic agent, in contrast to her/hismonthly payments for it).



So far, we have been referring to stocks of assets and liabilities only!(balance sheets refer to these).But, what is a stock in the accounting jargon?A stock variable is measured at one specific time, and represents aquantity existing at that point in time (say, December 31, 2013),which may have accumulated in the past.Thus, a stock refers to the value of an asset at a balance date (orpoint in time), while a flow refers to the total value of transactions(sales or purchases, incomes or expenditures) during an accountingperiod.

A stock may also be financial. For instance, a stock of debt (i.e. theoutstanding debt of an economic agent, in contrast to her/hismonthly payments for it).



So far, we have been referring to stocks of assets and liabilities only!(balance sheets refer to these).But, what is a stock in the accounting jargon?A stock variable is measured at one specific time, and represents aquantity existing at that point in time (say, December 31, 2013),which may have accumulated in the past.Thus, a stock refers to the value of an asset at a balance date (orpoint in time), while a flow refers to the total value of transactions(sales or purchases, incomes or expenditures) during an accountingperiod.A stock may also be financial. For instance, a stock of debt (i.e. theoutstanding debt of an economic agent, in contrast to her/hismonthly payments for it).


Stocks, Flows and RevaluationsStocks and Flows Diagram


Outline





Stocks, Flows and RevaluationsFlows

As we saw above, stocks of assets or liabilities are made up of flows.

A flow variable is measured over an interval of time.Therefore a flow would be measured per unit of time (a year, aquarter, etc.).Flow is roughly analogous to rate or speed in this sense.For example, the nominal gross domestic product (GDP) of a countryx refers to a total number of currency units spent over a time period(a year, a quarter, etc.).Of course, assets and liabilities are also measured as flows.



As we saw above, stocks of assets or liabilities are made up of flows.A flow variable is measured over an interval of time.

Therefore a flow would be measured per unit of time (a year, aquarter, etc.).Flow is roughly analogous to rate or speed in this sense.For example, the nominal gross domestic product (GDP) of a countryx refers to a total number of currency units spent over a time period(a year, a quarter, etc.).Of course, assets and liabilities are also measured as flows.



As we saw above, stocks of assets or liabilities are made up of flows.A flow variable is measured over an interval of time.Therefore a flow would be measured per unit of time (a year, aquarter, etc.).

Flow is roughly analogous to rate or speed in this sense.For example, the nominal gross domestic product (GDP) of a countryx refers to a total number of currency units spent over a time period(a year, a quarter, etc.).Of course, assets and liabilities are also measured as flows.



As we saw above, stocks of assets or liabilities are made up of flows.A flow variable is measured over an interval of time.Therefore a flow would be measured per unit of time (a year, aquarter, etc.).Flow is roughly analogous to rate or speed in this sense.

For example, the nominal gross domestic product (GDP) of a countryx refers to a total number of currency units spent over a time period(a year, a quarter, etc.).Of course, assets and liabilities are also measured as flows.



As we saw above, stocks of assets or liabilities are made up of flows.A flow variable is measured over an interval of time.Therefore a flow would be measured per unit of time (a year, aquarter, etc.).Flow is roughly analogous to rate or speed in this sense.For example, the nominal gross domestic product (GDP) of a countryx refers to a total number of currency units spent over a time period(a year, a quarter, etc.).

Of course, assets and liabilities are also measured as flows.



As we saw above, stocks of assets or liabilities are made up of flows.A flow variable is measured over an interval of time.Therefore a flow would be measured per unit of time (a year, aquarter, etc.).Flow is roughly analogous to rate or speed in this sense.For example, the nominal gross domestic product (GDP) of a countryx refers to a total number of currency units spent over a time period(a year, a quarter, etc.).Of course, assets and liabilities are also measured as flows.


Stocks, Flows and RevaluationsPerpetual inventory

Let us call pKt ×Kt the value of the stock of physical capital4 atperiod t, where pKt is the price of capital and Kt its volume.

The flow of capital from period t to t + 1 is defined as pKt ×∆Kt+1,where ∆ is the difference operator5.In other words, the flow of capital (i.e. gross investment) isequivalent to a change in the stock of capital from period t to periodt + 1, due to its volume.However, during that period, physical capital has surely suffered wearand tear (i.e. depreciation).When we deduct depreciation from the flow of capital, we may callthis net investment.Are we missing something?

4AKA, the stock of non-financial assets.

5Such that ∆Kt+1 = Kt+1 −Kt



Let us call pKt ×Kt the value of the stock of physical capital4 atperiod t, where pKt is the price of capital and Kt its volume.The flow of capital from period t to t + 1 is defined as pKt ×∆Kt+1,where ∆ is the difference operator5.

In other words, the flow of capital (i.e. gross investment) isequivalent to a change in the stock of capital from period t to periodt + 1, due to its volume.However, during that period, physical capital has surely suffered wearand tear (i.e. depreciation).When we deduct depreciation from the flow of capital, we may callthis net investment.Are we missing something?

4AKA, the stock of non-financial assets.5Such that ∆Kt+1 = Kt+1 −Kt



Let us call pKt ×Kt the value of the stock of physical capital4 atperiod t, where pKt is the price of capital and Kt its volume.The flow of capital from period t to t + 1 is defined as pKt ×∆Kt+1,where ∆ is the difference operator5.In other words, the flow of capital (i.e. gross investment) isequivalent to a change in the stock of capital from period t to periodt + 1, due to its volume.

However, during that period, physical capital has surely suffered wearand tear (i.e. depreciation).When we deduct depreciation from the flow of capital, we may callthis net investment.Are we missing something?




Let us call pKt ×Kt the value of the stock of physical capital4 atperiod t, where pKt is the price of capital and Kt its volume.The flow of capital from period t to t + 1 is defined as pKt ×∆Kt+1,where ∆ is the difference operator5.In other words, the flow of capital (i.e. gross investment) isequivalent to a change in the stock of capital from period t to periodt + 1, due to its volume.However, during that period, physical capital has surely suffered wearand tear (i.e. depreciation).

When we deduct depreciation from the flow of capital, we may callthis net investment.Are we missing something?




Let us call pKt ×Kt the value of the stock of physical capital4 atperiod t, where pKt is the price of capital and Kt its volume.The flow of capital from period t to t + 1 is defined as pKt ×∆Kt+1,where ∆ is the difference operator5.In other words, the flow of capital (i.e. gross investment) isequivalent to a change in the stock of capital from period t to periodt + 1, due to its volume.However, during that period, physical capital has surely suffered wearand tear (i.e. depreciation).When we deduct depreciation from the flow of capital, we may callthis net investment.

Are we missing something?




Let us call pKt ×Kt the value of the stock of physical capital4 atperiod t, where pKt is the price of capital and Kt its volume.The flow of capital from period t to t + 1 is defined as pKt ×∆Kt+1,where ∆ is the difference operator5.In other words, the flow of capital (i.e. gross investment) isequivalent to a change in the stock of capital from period t to periodt + 1, due to its volume.However, during that period, physical capital has surely suffered wearand tear (i.e. depreciation).When we deduct depreciation from the flow of capital, we may callthis net investment.Are we missing something?



Outline





Stocks, Flows and RevaluationsRevaluations

The value of the stock of an asset/liability may also be altered(positively or negatively) by its price.

We refer to this as a revaluation effect.Thus, we may say that the change from period t to t + 1 of the priceof physical capital (i.e. the price index of non-financial assets) bringsalong a change of Kt ×∆pKt+1 of the stock of capital.Therefore, the revaluation effect tells us by how much the value of astock has changed from one period to another, given a change of itsprice (index).



The value of the stock of an asset/liability may also be altered(positively or negatively) by its price.We refer to this as a revaluation effect.

Thus, we may say that the change from period t to t + 1 of the priceof physical capital (i.e. the price index of non-financial assets) bringsalong a change of Kt ×∆pKt+1 of the stock of capital.Therefore, the revaluation effect tells us by how much the value of astock has changed from one period to another, given a change of itsprice (index).



The value of the stock of an asset/liability may also be altered(positively or negatively) by its price.We refer to this as a revaluation effect.Thus, we may say that the change from period t to t + 1 of the priceof physical capital (i.e. the price index of non-financial assets) bringsalong a change of Kt ×∆pKt+1 of the stock of capital.

Therefore, the revaluation effect tells us by how much the value of astock has changed from one period to another, given a change of itsprice (index).



The value of the stock of an asset/liability may also be altered(positively or negatively) by its price.We refer to this as a revaluation effect.Thus, we may say that the change from period t to t + 1 of the priceof physical capital (i.e. the price index of non-financial assets) bringsalong a change of Kt ×∆pKt+1 of the stock of capital.Therefore, the revaluation effect tells us by how much the value of astock has changed from one period to another, given a change of itsprice (index).


Outline





Stocks, Flows and RevaluationsConsolidation

We may thus conclude this boring lesson by saying that (sequentiallyspeaking) stocks, flows and revaluations may be consolidated, fromperiod t to period t + 1, as in the following examples:

Physical capital (aka non financial assets):

pKt+1 ×Kt+1 = pKt ×Kt + pKt ×∆Kt+1 − δ × pKt ×Kt +Kt ×∆pKt+1

Equity (aka "stocks"):

pEt+1 × Et+1 = pEt × Et + pEt ×∆Et+1 + Et ×∆pEt+1

where pEt ×Et is the value of the stock of equities held by an agent atperiod t...


Stocks, Flows and RevaluationsConsolidation

We may thus conclude this boring lesson by saying that (sequentiallyspeaking) stocks, flows and revaluations may be consolidated, fromperiod t to period t + 1, as in the following examples:Physical capital (aka non financial assets):

pKt+1 ×Kt+1 = pKt ×Kt + pKt ×∆Kt+1 − δ × pKt ×Kt +Kt ×∆pKt+1

Equity (aka "stocks"):

pEt+1 × Et+1 = pEt × Et + pEt ×∆Et+1 + Et ×∆pEt+1

where pEt ×Et is the value of the stock of equities held by an agent atperiod t...


Stocks, Flows and RevaluationsExample of the aggregate balance sheet of Firms

Asset LiabilityNon financial assets pF

K ∗KF+ Deposits DA

F+/− Equity pF

E ∗ EAF pF

E ∗ ELF

− Credit LLF

= Firms’ net wealth NWF

Table: Firms’ balance sheet (value).


Stocks, Flows and RevaluationsExample of the aggregate capital account of Firms

Asset LiabilityNon financial assets pF

K ∗∆KF+ Deposits ∆DA

F+/− Equity pF

E ∗∆EAF pF

E ∗∆ELF

− Credit ∆LLF

= Firms’ capital account KAF

Table: Firms’ capital account (value).

KAF may alternatively be called NAFA (net acquisition of financial assets)of firms.


Stocks, Flows and RevaluationsSome relevant info

So far we have only seen some "micro" examples.

However, it is also interesting to arrive at a description of thebalance of payments.This would not be possible without before explaining some accountingprinciples.The standard presentation of the balance of payments consists of twosections:

1 the current account,2 the capital account (an example of which was seen in the previous slide

for private firms).



So far we have only seen some "micro" examples.However, it is also interesting to arrive at a description of thebalance of payments.

This would not be possible without before explaining some accountingprinciples.The standard presentation of the balance of payments consists of twosections:


for private firms).



So far we have only seen some "micro" examples.However, it is also interesting to arrive at a description of thebalance of payments.This would not be possible without before explaining some accountingprinciples.

The standard presentation of the balance of payments consists of twosections:


for private firms).



So far we have only seen some "micro" examples.However, it is also interesting to arrive at a description of thebalance of payments.This would not be possible without before explaining some accountingprinciples.The standard presentation of the balance of payments consists of twosections:


for private firms).




1 the current account,

2 the capital account (an example of which was seen in the previous slidefor private firms).





for private firms).


Stocks, Flows and RevaluationsExample of a balance sheet of a country

Stocks of Asset LiabilityNon financial assets pK ∗K

+/− Deposits DA DL

+/− Securities pB ∗BA pB ∗BL

+/− Credit LA LL

+/− Equity pE ∗ EA pE ∗ EL

= Net wealth NW

Table: Balance sheet of country X (value).

NW may alternatively be called balance of indebtedness.


Stocks, Flows and RevaluationsExample of a capital account of a country

Flows of Asset LiabilityNon financial assets pK ∗∆K

+/− Deposits ∆DA ∆DL

+/− Securities pB ∗∆BA pB ∗∆BL

+/− Credit ∆LA ∆LL

+/− Equity pE ∗∆EA pE ∗∆EL

= Capital account KA

Table: Capital account of country X (value).


Last slide

End of the second lecture.


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