Macroeconomics II (2nd course)

(Degrees: Economics & Int. Relations)

2020-21

CHAPTER 1: NATIONAL ACCOUNTS

PROF. JUAN GABRIEL RODRÍGUEZ

(COORDINATOR)

Department of Economic Analysis

Question

How can we measure aggregate economic activity?

National income and product accounts are essential

for the understanding of macroeconomic functioning
in society…
 INDEX
3

1. Introduction
2. Gross Domestic Product
3. The rate of inflation
4. GDP from a demand perspective
5. GDP at factor cost
6. The GDP by branches of activity
7. The Net Interior Product
8. GDP from an income perspective
9. The current account balance
10. Gross National Disposable Income
11. Gross National Savings
12. The capacity or need for financing
 References
4

1. Theory
• Chapters 1 and 2 in Blanchard (2016)

2. Practice
• List of exercises in Campus Virtual

3. Indicators
• Macroeconomic indicators in Campus Virtual
 1. Introduction
5

- Macroeconomics studies the determination of aggregate production

levels, employment and prices in an economy, as well as their rates of
variation over time.

- Macroeconomics studies aggregated variables, that is, the result of

the sum or average of individual variables referred to people or
companies.

- Macroeconomics tries to explain reality through macroeconomic

models. A macroeconomic model is a simplified representation of the
entire economy, expressed through a system of equations that relate a
set of aggregate variables to each other, and from which predictions
are then made about the behavior of the variables it includes.
1. Introduction: main variables
 Aggregate Output
◼ Main determinant of standard of living →
Productivity is the key!
 The Unemployment Rate
◼ Main source of (no) earnings for people
 The Inflation Rate
◼ Reduces real wages…which affects income
distribution
◼ Modifies relative prices → Increases uncertainty →
Reduces the propensity to save → Reduces
investment
◼ Reduces the level of competitiveness of national
firms
What about the Income Distribution?...
1. Introduction: GDP pc
1. Introduction: GDP pc
1. Introduction: GDP pc
1. Introduction: GDP pc and happiness

J. Andrés and R. Doménech (2020): “La era de la disrupción digital”. Ed. Deusto.
1. Introduction: GDP pc and life expectancy

J. Andrés and R. Doménech (2020): “La era de la disrupción digital”. Ed. Deusto.
1. Introduction: Consumption and productivity growth

J. Andrés and R. Doménech (2020): “La era de la disrupción digital”. Ed. Deusto.
1. Introduction: convergence
1. Introduction: convergence
 2. Gross Domestic Product
15

It is mainly used to measure economic activity

Measure of aggregate output in the national income accounts
(The accounting system is on a statistical basis)

 SOME ISSUES
 SUM OF APPLES AND ORANGES: value (not quantity)

 NOMINAL AND REAL FIGURES

 DOUBLE COUNTING: Intermediate goods…

RATE OF GROWTH - Expansions - Recessions

FLOW - A GIVEN PERIOD

APPLES AND ORANGES…
 GDP is the value (at current market prices) of the
final goods and services produced in the economy
during a given period (regardless who possesses
the factors of production)
A final good is a good used for consumption or
investment
 An intermediate good is a good used in the
production of another good

Output   Final Value   Final p  Q

NOMINAL Vs REAL GDP

 Nominal GDP
 Sum of final goods produced times their current price
◼ Growth due to quantity
◼ Growth due to prices

Output   Final Value   Final p  Q for p=pt

 Real GDP
 Sum of final goods produced times their base year
Price
Output   Value   p Q for p=p0
Final Final
 2. Gross Domestic Product
18

✓ Example 1: GDP (at current market prices) in millions of euros

(nominal terms) for Spain (2014-2019). Annual variation rates in
parenthesis. Data source: INE.

2014 2015 2016 2017 2018 2019

1,032,158 1,077,550 1,113,840 1,161,878 1,202,193 1,245,331
(1.2%) (4.4%) (3.4%) (4.3%) (3.5%) (3.6%)

✓Example 2: GDP (at current market prices) in millions of constant

euros (real terms, base year: 2015) for Spain (2014-2019)

2014 2015 2016 2017 2018 2019

1,037,345 1,077,550 1,110,508 1,142,456 1,169,448 1,192,785
(1.4%) (3.8%) (3.0%) (2.9%) (2.4%) (2.0%)
 2. Gross Domestic Product
19

✓ The GDP deflator is a joint measure of the variation (increase or

decrease) of prices from one year to another in the set of goods and
services that make up the GDP:

Nominal GDP σ 𝑞𝑖𝑡 𝑝𝑖𝑡

GDP Deflactor = x 100 = 𝑡 2015 x 100
Real GDP σ 𝑞𝑖 𝑝𝑖

✓GDP Deflactor for Spain (2014-2019), Year Base 2015 = 100:

2014 2015 2016 2017 2018 2019

99.5 100.0 100.3 101.7 102.8 104.4
(-0.2%) (0.5%) (0.3%) (1.4%) (1.1%) (1.6%)
 2. Gross Domestic Product
20
%)

2. Gross Domestic Product

21

Nominal and real GDP in Spain, 1960–2019 (data source: INE)

- From 1960 to 2019, nominal GDP increased 327 times, while real
GDP increased 9 times and the GDP deflator increased 327/9 =
36.3. In other words, during those 59 years on average, nominal
GDP grew at 9.8%, real GDP at 3.7% and the GDP deflator at
6.1%
- Nominal and real GDP are the same in 2010, because the data
series used is based on 2010 prices. Before 2010, nominal GDP was
growing faster than real GDP, so the GDP deflator was increasing
(there was inflation). From 2009 to 2016, nominal and real GDP
evolved very similarly, meaning that the GDP deflator varied little
or not at all (there was hardly any inflation). In 2017, 2018 and
2019, the deflator rose by 1.4%, 1.1% and 1.6%, respectively (low
inflation). As a result, nominal GDP grew more than real GDP and
the blue line became steeper than the red line.
%)

2. Gross Domestic Product

22

After the fall in real GDP between 2009 and 2013 associated with the Great
Financial Crisis, real GDP has recovered from 2014 to 2019, but has suffered
a sharp drop of 4.1% year-on-year in 2020:I, which will deepen in 2020:II
due to the effects of Covid-19 (data source: FUNCAS)
3. The inflation rate

 The GDP deflactor is an average price for all

goods and services that are produced in a
country.

 The CPI is an average price for all goods and

services that are consumed by families in a
country. It measures the cost of living.

 The CPI measures the cost of a basket of goods

that typically a representative family consumes
in one period of time.
3. The inflation rate: Construction of the CPI

 We know that…
A B
p p Family expenses on A
CPIt = w A  At + w B  Bt , wA =
p0 p0 Total expenses

 Relative Prices → Monthly survey in establishments.

 Weights → Encuesta Continua de Presupuestos Familiares
(ECPF).
 Weights must change from time to time to adapt the index to
changes in family consumption habits.
3. The inflation rate: Calculating the CPI in Spain

Weights
 3. The inflation rate
26

The inflation rate (CPI and GDP deflator) in Spain, 1996-2018

The CPI or GDP deflator follow similar trends and basically differ
because of imported fuel prices and indirect taxes. As of 2009,
inflation has been lower than in previous years: the average GDP
deflator from 1995 to 2008 was 3.3%, while from 2009 to 2019 it
was 0.6%. Likewise, the average CPI between 1995 and 2008 was
3.2%, having been 1.1% between 2009 and 2019. (data source: INE)
%)

3. The inflation rate

27

In 2020:I, the GDP deflator remained the same as in 2019 (1.6%). The overall
CPI, which was 0.7% in 2019, has fallen to negative rates (-0.9% in May and -
0.3% in June 2020) basically as a result of the sharp fall in fuel prices. The
underlying CPI, which does not include energy or fresh food prices, has
remained at the same levels as in 2019 (1.1%). (data source: FUNCAS)
Double Counting
Aggregate output can be measured
by the value of final goods produced
Revenues=200 in the economy.

Wages=70
Profit=30
Revenues=100

Intermediate Wages=80
Costs=100 Profit=20

Final good Intermediate good

(Car company) (Steel company)
Double Counting
Aggregate output can be measured
by summing the value added of all
Revenues=200 goods in the economy.

Wages=70
VA2
Profit=30
Revenues=100

Intermediate Wages=80
Costs=100 Profit=20 VA1

Car company Steel company

VA=Revenues –intermediate costs
Double Counting
Aggregate output can be measured
by summing the incomes in the
Revenues=200 economy (wages, profits, …,
interests, taxes,…).
Wages=70
Profit=30

Intermediate Wages=80
Costs=100 Profit=20

Final good Intermediate good

CALCULATING GDP

 AGGREGATE OUTPUT
 Value of the final goods and services produced
by the economy in a given period.
 SUM OF VALUED ADDED
 Value added equals the value of a firm´s
production minus the value of the intermediate
goods it uses in production.
 SUM OF INCOMES IN THE ECONOMY
 Value received by the factors of production for
their participation in the process.
%)

4. GDP from a demand perspective

32

GDP from the perspective of expenditure or demand

In an open economy, the set of goods and services available for sale in
a period of time is the sum of domestic production (GDP) and imports
(Q). This set of production must be equal to: national demand, i.e., that
made by agents residing in the country, and which is made up of the
final consumption expenditure of households (C) and Public
Administrations (G), private and public demand for investment or gross
fixed capital formation (I) and investment in stocks (Is), to which must be
added demand from abroad or exports (X):

GDPmp + Q ≡ C + G + I + Is + X

Then: Y ≡ GDPmp ≡ C + G + I + Is + (X – Q)

And research?
Types of investment

 Fixed Investment or GFCF:

• Nonresidential investment: new plants, new
machines …
• Residential investment: new houses and apartments.

 Inventory Investment or investment in stocks:

the difference between goods produced and
goods sold in a given year.

Production = Sales + investment in stocks

 4. GDP from a demand perspective
34

Components of the demand in GDPmp (millions of euros at current prices) for Spain
(2016-19). Last column: % /GDPmp in 2019 (in parenthesis: anual rates of variation).
2016 2017 2018 2019
FINAL CONSUMPTION 860,543 894,561 924,621 950,525 (76.3%)
(2.4) (4.0) (3.4) (2.8)
Households (C) 648,265 678,229 700,802 717,287 (57.6%)
(2.9) (4.6) (3.3) (2.3)
Public Administrations (G) 212,278 216,332 223,819 233,238 (18.7%)
(1.1) (1.9) (3.5) (4.2)
GFCF (I) 200,048 216,838 233,584 249,259 (20.0%)
(3.1) (8.4) (7.7) (6.7)
INVENTORY INV. (Is) 8,834 8,893 11,365 10,386 (0.9%)
NACIONAL DEMAND (ND) 1,069,425 1,120,292 1,169,570 1,210,170 (97.2%)
(C + G + I + Is) (2.4) (4.8) (4.4) (3.5)

EXPORTS (X) 377,370 408,730 422,170 434,250 (34.9%)

(4.1) (8.3) (3.3) (2.9)
IMPORTS (Q) 332,955 367,144 389,547 399,089 (32.1%)
(1.0) (10.3) (6.1) (2.4)
NET EXPORTS 44,415 41,586 32,623 35,161 (2.8%)
(X-Q)
GDPmp 1,113,840 1,161,878 1,202,193 1,245,331 (100.0%)
(4.2) (3.5) (4.3) (3.6)
 4. GDP from a demand perspective
35

In 2014-2019, real GDP (bars) grew thanks to DN (black line). In contrast, X-Q
(blue line) contributed less because X and Q grew at similar rates. The sharp
fall in GDP in 2020:I was mainly due to the fall in DN (in year-on-year rates, C
fell by 5.7% and I by 6.5%, while G grew by 3.6%). Also X-Q has made a
negative contribution of 0.3% because X has fallen by 6.5%, more than Q
(5.5%). (data source: FUNCAS)
 5. GDP at factor cost
36

GDP at factor cost (GDPfc) or at basic prices

The consideration of indirect taxes on products, which are incorporated into the
final price of these, and of the subsidies that companies receive and which, on
the contrary, allow market prices to be reduced, makes it possible to distinguish
between GDP at market prices and GDP at factor cost:

GDPmp ≡ GDPfc + Ti (net of subsidies)

Example: GDPmp and GDPfc for Spain in 2019 (millions of current euros)

GDPmp Ti (gross) Subsidies Ti (net) GDPfc

1,245,331 128,309 12,706 115,603 1,129,728
(100%) (10.3%) (1.0%) (9.3%) (90.7%)
 6. The GDP by branches of activity
37

Distribution of GDPfc by branches of activity in Spain (2019, millions of current

euros)

GDPfc GVA Agriculture GVA Industry GVA Constr. GVA Servicies

1,129,728 33,017 178,082 73,470 845,159
(100.0%) (2.9%) (15.8%) (6.5%) (74.8%)

Total services (74.8%):

Trade, transport and hospitality (23.8%)
Information and communications (3.6%)
Financial and insurance activities (4.0%)
Real estate activities (11.6%)
Professional activities (9.1%)
Public administration, health and education (18.0%)
Artistic and recreational activities and other services (4.7%)
 7. Net Domestic Product
38

Net domestic Product (NDP)

In each period of time, a portion of the fixed capital installed in the economy
suffers a phenomenon of depreciation, either due to its mere use or to the loss
of value that it could suffer due to the appearance of more perfected capital
goods (obsolescence). The part of the gross fixed capital formation destined to
replace in each period the portion of depreciated capital is called
replacement investment, depreciation or consumption of fixed capital (CFC).
The Net Domestic Product is equal to the Gross Domestic Product, eliminating
the portion of the production of capital goods of the period destined to the
replacement of depreciated capital: NDP ≡ GDP – CFC

Example: GDPfc (Spain, 2019 in millions of current euros)

GDPfc CFC NDPfc

1,129,728 187,850 941,878
(100.0%) (16.6%) (83.4%)
 8. GDP from an income perspective
39

GDP from the perspective of income or revenue

The value of the production of goods and services is devoted to
remunerating the productive factors: labor (the remuneration of
employees) and capital (the net operating surplus of companies and
the mixed income of self-employed workers).

Example: Factorial distribution of GDPfc (Spain, 2019 in millions of

current euros)

GDPfc CFC Salaries Net Op. Surplus/Mix Income

1,129,728 187,850 570,433 371,445
(100.0%) (16.6%) (50.5%) (32.9%)
 9. The current account balance
40

Current Account Balance

The current account balance of an economy over a period of time is the
record of transactions that generate income in the country or in the rest
of the world, or that affect the current income available for the
economy's expenditure in the period. Components:
- the trade balance or external balance (exports and imports of
goods and services), X - Q
- the balance of primary income, that is, the net external income of
the productive factors (nationals operating abroad minus foreigners
operating in the national territory), PI
- the balance of secondary income (which includes current transfers,
i.e., current income and payments without counterpart), SI.
CAB ≡ (X – Q) + PI + SI
 9. The current account balance
41

Example: Current account balance, dark blue line (Spain, 2019 in millions of
current euros and percentage of GDPmp)
X Q TB PI SI CAB
434,250 399,089 35,161 2,473 –12,729 24,905
(34.9%) (32.1%) (2.8%) (0.2%) (–1.0%) (2.0%)
Trade balance (X-Q) in light blue bars. (data source: FUNCAS)
 10. Gross National Disposable Income
42

Gross National Disposable Income (GNDI)

It is a measure of an economy's ability to finance its consumption and
investment spending. It is defined as the total sum of the income of the
residents of a country. It is obtained by aggregating the production
obtained in the interior of the country (GDPmp), primary income (PI)
and secondary income (SI):

GNDI ≡ GDPmp + PI + SI

Example: GNDI (Spain, 2019, in millions of current euros)

GDPmp PI SI GNDI
1,245,331 2,473 -12,729 1,235,075
 11. Gross National Savings
43

Gross National Savings (GNS) or National Savings (NS)

This is the magnitude of GNDI remaining after subtracting household
and public consumption and which, together with net capital transfers
from the rest of the world (TRk), serves to finance investment or gross
capital formation.

GNS ≡ GNDI - (C + G)

Example: GNS (Spain, 2019, in millions of current euros)

GNDI C G GNS
1,235,075 717,287 233,238 284,550
 12. The capacity or need for financing
44

Financing Capacity or Need of the Economy

To finance the investment made in a period, an economy counts on gross
national savings and net capital transfers from the rest of the world
(TRk). If this sum is higher than the investment, then the economy has an
excess of financial capacity, which it uses to finance the rest of the
world.

Fin. Cap. ≡ GNS + TRk - (GFCF + Is)

Example: Financing capacity of the Spanish economy in 2019, in

millions of current euros

GNS TRk GNS + TRk GFCF Is GFCF + Is Fin. Cap.

284,550 4,072 288,622 249,259 10,386 259,645 28,977
 12. The capacity or need for financing
45

It can be seen that the sum of gross national savings and net capital
transfers received by the Spanish economy (288,622 m. of euros) was
more than enough to finance the total investment made (259,645 m. of
euros). Consequently, the Spanish economy had a financing capacity
given by the difference (28,977 m. of euros, 2.3% of GDPmp),
satisfied by net financial flows to the rest of the world.
It can also be seen that the financing capacity or need of an economy
is equal to the sum of the current account balance (CAB) and the net
capital transfers received from the rest of the world (TRk):

Fin. Cap. ≡ CAB + TRk

28,977 ≡ 24,905 + 4,072
 12. The capacity or need for financing
46

This is so, given the set of previous definitions:

Fin. Cap. ≡ GNS + TRk – (GFCF + Is)
GNS ≡ GNDI – (C + G)
GNDI ≡ GDPmp + PI + SI

By substituting terms…we have the following:

Fin. Cap. ≡ GDPmp + PI + SI – (C + G) + TRk – (GFCF + Is)

We know that GDPmp ≡ C + G + (GFCF + Is) + (X – Q), so:

Fin. Cap. ≡ C + G + (GFCF + Is) + (X – Q) + PI + SI – (C + G) + TRk

– (GFCF + Is)

Therefore: Fin. Cap. ≡ (X – Q) + PI + SI + TRk ≡ CAB + TRk

 12. The capacity or need for financing
47

Other interpretations of the concept of capacity or need for financing

Td are the direct taxes net of transfers paid by the private sector (families and
businesses) to the public sector. The total tax collection is T ≡ Td + Ti, that is, the
sum of direct taxes net of transfers (Td) and indirect taxes net of subsidies (Ti).
On the other hand, we know that GDPmp ≡ Y ≡ C + G + I + Is + (X - Q).

Passing the consumption of the families (C) to the first member of the identity
and subtracting the total tax collection (T) in both members, we have:
Y - T - C ≡ (I + Is) + (G - Td - Ti) + (X - Q)

Adding now in both members the primary income, the secondary income and
the net capital transfers, it remains:
(Y + PI + SI) + TRk – T – C ≡ (I + Is) + (G – T) + (X – Q) + PI + SI) + TRk

(GNDI – T – C) + TRk ≡ (I + Is) + (G – T) + (CAB + TRk)

 12. The capacity or need for financing
48

We define private sector savings (S) as the magnitude remaining after this
private sector has used the income received during the productive process
(GNDI) to pay direct taxes net of transfers and indirect taxes net of subsidies
(T ≡ Td + Ti) and, in addition, make consumption expenditure (C), that is:

S ≡ GNDI - T - C = 1,235,075 - 198,043 - 717,287 = 319,745

We can thus reformulate the last expression of the previous slide as

S + TRk ≡ (I + Is) + (G - T) + Fin. Cap.

Fin. Cap. ≡ [(S + TRk) - (I + Is)] + (T - G)

Thus, we obtain the capacity or need for financing of the entire economy as the
sum of the capacities or financing needs of the private sector, [(S + TRk) - (I +
Is)], and the public sector, (T - G).
 12. The capacity or need for financing
49
Spain's Financing Capacity (2019) as the sum of the private sector's financing
capacity and the public sector's financing need:
28,977 ≡ [(319,745 + 4,072) – (249,259 + 10,386)] + (198,043 –
233,238)

28,977 ≡ 64,172 + (–35,195)

In other words, in 2019 the Spanish economy as a whole had a financing

capacity of 28,977 million Euros, resulting from a private sector financing
capacity of 64,172 million and a public sector financing need of 35,195
million.
Since the amount of net capital transfers is relatively small in relation to the
other items, we can roughly assume that their value is zero and therefore use
the following expression, which we have simplified by simply denote by "I" the
sum of the GFCF and the investment in stocks:
Fin. Cap. ≈ CAB ≈ (S - I) + (T - G)
Fin. Cap. is equivalent to the CAB and is obtained as the sum of the
capacity/need for financing of the private sector (S - I) ) and of the public
sector (T - G).
 12. The capacity or need for financing
50

The more general expression of the Fin. Cap. can be reformulated as:

Fin. Cap. ≡ [S + (T - G) + TRk] - (I + Is)

Let us denote by national savings (NS) the sum of private savings (S) and public
savings (T-G):
NS ≡ S + (T - G).

As S ≡ GNDI - T - C, by substituting we have:

NS ≡ S + (T - G) = (GNDI - T - C) + T - G = GNDI - (C + G) ≡ GNS

In other words, NS is the magnitude previously called Gross National Savings

(GNS), so:

Fin. Cap. ≡ [S + (T - G) + TRk] - (I + Is) ≡ (NS + TRk) - (I + Is)

 12. The capacity or need for financing
51

Fin. Cap. ≡ [S + (T – G) + TRk] – (I + Is) ≡ (NS + TRk) – (I + Is)

Thus, this expression indicates that the financing capacity or need of the entire
economy is equal to national savings [NS ≡ S + (T - G)], plus net capital
transfers (TRk), minus the total investment made (I + Is).
A financing capacity (> 0) indicates that the country saves more than it invests.
A financing need (< 0) indicates that the country invests more than it saves. In
Spain (2019) we find:

28,977 ≡ [319,745 + (198,043 – 233,238) + 4,072] – (249,259 +

10,386)
28,977 ≡ (284,550 + 4,072) – 259,645
Spain had financing capacity in 2019 because national savings plus net capital
transfers received (288,622 millions) exceeded the total investment made
(259,645 millions). Consequently, it was this excess of savings over investment
that allowed the Spanish economy to be a creditor to the rest of the world by
28,977 millions during 2019.
 12. The capacity or need for financing
52

As before, given the relatively small amount of net capital transfers, we

can assume that their value is zero and approximate by the following
expression, which we have simplified again by simply denote by "I" the sum
of the GFCF and the stock investment:

Fin. Cap. ≈ CAB ≈ [S + (T - G)] - I ≈ NS – I

Thus, the financing capacity or need of the entire economy (equivalent to

the current account balance) is the difference between national savings
(NS) and national investment (I). If we divide by the GDPmp (Y), we obtain:

CAB/Y ≈ (NS/Y) - (I/Y) → 2% ≈ 22.8% - 20.8%.

The following graph presents this breakdown with quarterly data on the
Spanish economy since 2014.
 12. The capacity or need for financing
53
 12. The capacity or need for financing
54

We have defined the national demand as ND ≡ C + G + I + Is

As GDPmp ≡ Y ≡ C + G + I + Is + (X - Q), we have:

Y ≡ ND + (X - Q) → X - Q ≡ Y - ND

Therefore, the trade balance, (X - Q), is the difference between GDP and
domestic demand. If GDP is higher (lower) than domestic demand, the trade
balance shows a surplus (deficit). Adding now in both members the primary
income, secondary income and net capital transfers, we find:

(X - Q) + PI + SI + TRk ≡ (Y - ND) + (PI + SI + TRk)

Fin. Cap. ≡ (Y - ND) + (PI + SI + TRk)
 12. The capacity or need for financing
55

Fin. Cap. ≡ (Y – ND) + (PI + SI + TRk)

Fin. Cap. ≡ (1,245,331 – 1,210,170) + (2,473 – 12,729 + 4,072)

Fin. Cap. ≡ 35,161 – 6,184 = 28,177

Thus, an economy's financing capacity or need is the difference between GDP

and domestic demand, plus the sum of primary income, secondary income and
capital transfer balances. Given the relatively small amount of these last three
items in relation to GDP and domestic demand, it can be said (approximately)
that a country has financing capacity vis-à-vis the rest of the world if it
produces (GDP) more than it demands (ND), so that this excess production is
sent abroad and therefore finances the rest of the world. And conversely,
when a country produces less than it demands, then it has a need for financing
and is indebted to the rest of the world.