I just stumbled over a very nice figure from Destatis, Germany’s statistical office. It shows GDP and how you arrive at the correct number using the production, expenditure and income approaches.econoblog 101
Under a job guarantee, there would be a standing job offer at a living wage for anyone who wanted such a position. Anyone without employment in the broader economy, or unhappy with their present employment, could opt for a position in the job-guarantee program. Similarly, anyone with less hours of employment than desired could top up their hours by working part-time in the job-guarantee program. In principle, the program might be locally or centrally administered. But, irrespective of administrative details, it will be assumed that a currency-issuing government funds the program.heteconomist
One interesting aspect of a job guarantee, from an analytical perspective, is that it introduces an endogenous element to government spending. The government’s spending on the program will adjust automatically to variations in the number of people who accept the standing offer of a job. These variations will reflect employment fluctuations in the broader economy. Government spending will respond directly to employment fluctuations, and only indirectly to variations in income....
It is easy to represent the ‘income-expenditure model’ in a graph. Some people find this helpful as a visual aid to understanding; others, not so much. For those who find graphs confusing, this post can safely be ignored. In terms of economic meaning, it does not add much to what has already been explained. But for those who are comfortable with graphs, they can be a handy tool for illustrating or thinking through the logic of a model....heteconomist
We have seen that the ‘income-expenditure model’ combines key macro identities (introduced in parts 7 and 15) with particular behavioral assumptions to provide a theory of income determination (considered in parts 16 and 18). The behavioral assumptions relate to causation. The causation envisaged in the income-expenditure model has implications for the sectoral balances, some of which are the focus of the present post....heteconomist
In this and upcoming parts of the series, we will look in a little more detail at the ‘income-expenditure model’. The foundations of the model have been introduced in the previous two parts (here and here)….heteconomist
In part 7, we arrived at a fundamental National Accounting identity:
This identity suggests various ways of measuring GDP.
The income method takes advantage of the fact that GDP is defined to be equal to total income. By adding up the various categories of income – most notably, wage income and profit income – it is possible to arrive at a measure of GDP.
The value added approach adds up the new output that is created at each stage of production. This works because GDP is also defined to be equal to total output. In this method, it is necessary to subtract the value of ‘intermediate goods’ from the value of output at each stage of production. This is to avoid double counting. For example, flour is used to make bread, and so is an intermediate good in the production of bread. When bread output is added to total output, the value of flour used in its production is subtracted, since it is counted as part of flour output.
Here, we will focus on the expenditure method of measuring GDP. This makes use of the fact that GDP is defined, in a third way, as being equal to total spending.
This method involves adding up all the spending on domestically produced goods and services that has occurred over the year:
GDP = Domestic Private Spending + Domestic Government Spending + Foreign Spending on Domestically Produced Goods and Servicesheteconomist
As I told my undergraduates yesterday:
Y = μ[co + Io + NX] + μG - μIrr
where:And as I am going to tell them next Monday, real GDP Y will be equal to potential output Y* whenever "the" interest rate r is equal to the Wicksellian neutral rate r*, which by simple algebra is:
- Y is real GDP
- μ = 1/(1-cy) is the Keynesian multiplier
- co is consumer confidence
- cy is the marginal propensity to consume
- C = co + cyY is the consumption function--how households' spending on consumption goods and services varies with consumer confidence, with their income which is equal to real GDP Y, and with the marginal propensity to consume
- Io is businesses' and banks' "animal spirits"--their confidence in enterprise
- r is "the" long-term risky real interest rate r
- Ir is the sensitivity of business investment to r
- NX is foreigners' net demand for our exports
- And G is government purchases. Read MOAR
r* = [co + Io + NX]/Ir + G/Ir - Y*/μIr
If interest rates are low and inflation is not rising it is not because monetary policy is too easy, but because r* is low--and r* can be low because:
Grasping RealityThe central bank's task in the long run is to try to do what it can to stabilize psychology and so reduce fluctuations in r*. The central bank's task in the short run is to adjust the short-term safe nominal interest rate it controls i in such a way as to match the market rate of interest r to r*. For only then will Say's Law, false in theory, be true in practice….
- consumers are terrified (co low)
- investors' animal spirits are depressed (Io low)
- foreigners' demand for our exports inadequate (NX low)
- or fiscal policy too contractionary (G low)
- for the economy's productive potential Y*.
A monetary economy needs spending for production and employment to occur. This is a truism. Spending equals income, by definition. One person’s purchase of a good or service is another person’s income. But it is also clear that causation, ultimately, runs from spending to income. More specifically, the creation of income requires a prior decision to spend. In a monetary economy, to paraphrase Michal Kalecki, each of us in isolation can decide how much to spend but we cannot choose the size of our income. Our personal income will depend not on our own spending but on the spending decisions of others acting somewhat independently of ourselves. Total income, of course, will depend on spending in aggregate – our own spending and the spending of others.…heteconomist
This is a follow-up to a recent post on the income-expenditure (IE) model. It is at a similar introductory level except that some knowledge is assumed from the earlier post. Those unfamiliar with the model might find it helpful to read the earlier post before this one. This post has two purposes. The first is to graph the IE model. The second is to relate the IE model to the sectoral financial balances (SFB) model and illustrate its applications. The SFB model has been discussed in the blogosphere by a number of modern monetary theorists, including Bill Mitchell, Robert Parenteau, Eric Tymoigne,Daniel Conceicao and Scott Fullwiler, prompted by a post of Paul Krugman's which contained a useful diagram.
