National Accounts I

Concepts and problems in Economics Main Economic Indicators
The Economic System
Luigi Benfratello
Polytechnic of Torino
October 1, 2018
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Outline of the lecture
1 Basic concepts and main problems in Economics
2 Main Macroeconomic indicators
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Some useful distinctions, I
Microeconomics vs Macroeconomics
Microeconomics: Partial equilibrium problems by looking
at individuals’ interactions in specific markets. Focus on
finding the optimal allocation of resources.
Macroeconomics: economics units are handled as
aggregates. Focus on production growth, unemployment and
inflation
Microeconomics and Macroeconomics are related.
Microfoundation of macroeconomics.
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Some useful distinctions, II
Mainstreams in Economics
Classical economists (Smith, Ricardo, Marx), 1750–1850:
mainly macroeconomic theory focussing on growth and wealth
distribution problems
Neoclassical economists, 1850–1920: microeconomic view
centered on the optimal allocation of resources problem
Keynes and postkeynesians, 1930–1960: macroeconomic view
focussing on unemployment and inflation themes
These streams of thouhgt crucially differ in how the system
works and what is the scope for government intervention
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Gross Domestic Product (GDP)
Gross Domestic Product (GDP): Set of all final goods and

services produced within an economics system (usually a country)
during a certain time period. It is used as a measure of the
economic importance of a country but also measure of the
well-being of a country
Goods are heterogeneous so their aggregation is made through

monetary terms (values)
Nominal GDP: YN = ∑ni=1 pi qi

where:
qi are actual quantities
pi are actual prices
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The growth of Nominal GDP can be due either to increase in

quantities or to increase in prices.
Real GDP: Y = ∑ni=1 pi0 qi

where:
qi are actual quantities
pi0 are constant prices of a reference year
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The GDP is only an imperfect measure of the wealth of a country

It only includes the value of what is both produced and sold
It does not include unofficial transactions
It does not take into account quality of life and pollution
Comparisons across countries, regions, and time must be taken

with caution
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GDP Deflator
YN
Suppose only one homogeneous good: YN = Y × p ⇒ p = Y
The GDP Deflator is that average value of prices that transforms

Real GDP into Nominal GDP
YN ∑n p q
p= = ni =1 0i i
Y ∑ i = 1 pi qi
It is an implicit price index

This deflator is a so called “Paasche price index” as it weights
prices with current year quantities.
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Example
1990 2000
p q V p q V
Oranges 2 10 20 4 12 48
Apples 4 5 20 5 10 50
40 98
YN1990 = 40 and p1990 = YNY1990 = 1

1990
YN2000 = 98 and Y2000 = 12 × 2 + 10 × 4 = 64

p2000 = YN 98
Y2000 = 64 = 1.53
2000
The GDP Deflator (or implicit price index) increased from 1 to

1.53. Notice it is an index, not a price level.
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Alternative price indexes
Instead of measuring the change in average prices for all goods, it

might be convenient to focus on subgroups of goods.
Instead of weighting the prices with current quantities, I can use

constant quantities:
V ∑k pi q 0
p= = ki =1 0 i0
Q ∑ i = 1 pi qi
This price index is a so called “Laspeyres price index” as it weights

prices with reference year (constant) quantities.
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Example, ctd.
1990 2000
p q V p q V
Oranges 2 10 20 4 12 48
Apples 4 5 20 5 10 50
40 98
4×10+5×5 4×10+5×5 65
p2000 = 2×10+4×5 = Y1990 = 40 = 1.63 6= 1.53
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Paasche vs. Laspeyres index
Laspeyres index does not consider the actual composition of

GDP. So it can be used for measuring price changes in a short
time period (a month, a quarter, a year)
In the Laspeyres index the bundle of goods is predetermined:

it is easier to be handled with and it is promptly available.
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Consumption deflator in 1999

(1990=100) 147 Weight
foodstuffs, beverages, tobacco, clothing 138 27

and footwear
Housing and related expenses (fuel and
electricity, furniture, household electrical 164 28
appliances)
Means of transport (purchase of goods 143 3

and services and operating costs)
Health services and expenditures 145 13
Leisure time (Communications, radio-TV,

books and magazines, education, 143 29
entertainment, hotels, etc)
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Consumption deflator in 1999
Average inflation in the Nineties is about 50% and is

remarkably higher just for the category “housing and related
expenses”.
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CONSUMPTION PRODUCTION
Prices at the production level transmit to a consumption

level with a delay and with a lower variance
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National Accounts I

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National Accounts I

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Concepts and problems in Economics Main Economic Indicators

The Economic System

Outline of the lecture

1 Basic concepts and main problems in Economics

2 Main Macroeconomic indicators

Some useful distinctions, I

Some useful distinctions, II

Gross Domestic Product (GDP)

Gross Domestic Product (GDP): Set of all final goods and

Goods are heterogeneous so their aggregation is made through

Nominal GDP: YN = ∑ni=1 pi qi

The growth of Nominal GDP can be due either to increase in

Real GDP: Y = ∑ni=1 pi0 qi

The GDP is only an imperfect measure of the wealth of a country

It does not include unofficial transactions

It does not take into account quality of life and pollution

Comparisons across countries, regions, and time must be taken

The GDP Deflator is that average value of prices that transforms

It is an implicit price index

YN1990 = 40 and p1990 = YNY1990 = 1

YN2000 = 98 and Y2000 = 12 × 2 + 10 × 4 = 64

The GDP Deflator (or implicit price index) increased from 1 to

Alternative price indexes

Instead of measuring the change in average prices for all goods, it

Instead of weighting the prices with current quantities, I can use

This price index is a so called “Laspeyres price index” as it weights

Paasche vs. Laspeyres index

Laspeyres index does not consider the actual composition of

In the Laspeyres index the bundle of goods is predetermined:

Consumption deflator in 1999

foodstuffs, beverages, tobacco, clothing 138 27

Means of transport (purchase of goods 143 3

Leisure time (Communications, radio-TV,

Consumption deflator in 1999

Average inflation in the Nineties is about 50% and is

Prices at the production level transmit to a consumption

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