CHAPTER 1.

MACROECONOMIC
FOUNDATIONS

1.1 Introduction to macroeconomics

1.2 Other macroeconomic indicators
1.3 National accounting
1.4 GDP components
1.5 Labour market indicators
1.6 Inequality and climate issues in macroeconomics
 Chapter 1.2. -
Other macroeconomic
indicators

 Nominal Vs Real GDP

 Inflation
 Further topics on inflation
 Inflation nowadays
 Measuring GDP changes over
time: Nominal Vs Real GDP (I)
• What if in this definition of GDP, there is a permanent increase in
Prices? Or a decrease in X? How can we asses GDP changes over
time?

𝐺𝐷𝑃 = 𝑃 𝑋

• GDP could be higher as a result of price changes even when no

more goods nor services are produced!!

• This definition of the GDP is the Nominal GDP or GDP at current

prices.
 Measuring GDP changes over
time: Nominal Vs Real GDP (II)
2010 2016 2022
Production 1,000*10= 1,200*13= 1,500*15=
Good X 10,000 15,600 22,500

Production 1,000*2= 1,050*2= 900 *3=

Good Y 2,000 2,100 2,700
Nominal GDP 10,000+2,000 15,600+2,100 22,500+2,700
=12,000 =17,700 =25,200

• Note that price levels are going up or down while quantities are
not drastically moving.
• The continuous increase (changes) in prices is called inflation.
 Measuring GDP changes over
time: Nominal Vs Real GDP (III)
• Price effects could create illusory effects by which GDP is growing
(or decreasing) while it could be stagnated (or even decreasing).

• We need to account for these price effects to make comparable GDP

comparisons in time.

• To do this, we fix a base year (2010) for prices and allow quantities
(X) to change.

𝐺𝐷𝑃 = 𝑃 𝑋

• This definition of the GDP is the Real GDP or GDP at constant

prices (This is the one you should be looking at over time).
 Measuring GDP changes over
time: Nominal Vs Real GDP (IV)
2010 2016 2022
(Base year)
Production 1,000*10= 1,200*10= 1,500*10=
Good X 10,000 12,000 15,000

Production 1,000*2= 1,050*2= 900*2=

Good Y 2,000 2,100 1,800
Real GDP 10,000+2,000 15,600+2,100 15,000+1,800
(at constant =12,000 =14,100 =16,800
prices 2010)

• Now, all the years are comparable across them.

 Measuring GDP changes over
time: Nominal Vs Real GDP (V)

2010 2016 2022

Nominal 12,000 17,700 (∆= 25,200
GDP 5,700) (∆=7,500)
47,5% 42,4%
Real GDP 12,000 14,100 16,800
(∆=2,100) (∆=2,700)
17,5% 19,1%

• The “real” changes in production are now much lower, but actually,
they give us information on the capacity for a country to produce.
 Measuring GDP changes over
time: Nominal Vs Real GDP (VI)

• We can define this Real GDP as the actual quantity of goods and
services produced (using base year prices).

• We can, therefore, set a direct relationship between nominal GDP

and real GDP through the price levels, such as:

• Nominal GDP = Price level x Real GDP

• Alternatively, where now GDP is indicated as Y

Source: Jones (2017)

 Measuring GDP changes over
time: Nominal Vs Real GDP (VII)

• What if in this definition of GDP, there is a permanent increase in P?

Nominal GDP at
current prices

Price effect

Real GDP at
constant prices
 Measuring GDP changes over
time: Nominal Vs Real GDP (VIII)
• Thanks to the use of real GDP measures, we can analyze longer
time-series using the growth rates (we just saw)
• Spain in the long run, now we can (correctly) compare the economic
episodes or even the whole world.
Real GDP growth rates - Spain

Source: El Pais
 Measuring GDP changes over
time: Nominal Vs Real GDP (IX)
• One important remark is that real GDP might be calculated fixing
prices at the beginning of my period and allow quantities to
change – Laspeyres Index.

• But we can, alternatively, fix prices at the end of my period of

analysis whereas quantities evolve in the usual way - Paasche
Index.

• Depending on which prices we are fixing, real GDP changes would

be different, specially in longer time series.

• This is crucial because, in long time series, goods and services might
reduce their prices as a result of technological improvements
(example: laptops). If we use (old) prices at the beginning of my
period, we will not be capturing these improvements (productivity) in
our final GDP estimate.
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 Measuring GDP changes over
time: Nominal Vs Real GDP (X)
• Nominal and real GDPs can also be calculated in growth rates:

Growth rate (%) of Nominal GDP ≈ Growth rate (%) of production

+ Growth rate (%) of prices

Growth rate (%) of Real GDP ≈ Growth rate (%) of production

Growth rate (%) of Nominal GDP- Growth rate (%) of Real

GDP ≈ Growth rate (%) of prices.

• Note that if the growth rate of prices is higher than 0, Nominal GDP
will be higher than Real GDP.

• The Growth rate (%) of prices is known as inflation rate.

 Measuring GDP changes over
time: Nominal Vs Real GDP (XI)
• This is the growth rate of prices (inflation) for the US Economy:

Source: FRED.
 Inflation (I)
• The price level is the average level of prices of an economy.

• The average level of prices might be rising, falling, or remaining

stable.

• Inflation occurs when the price level persistently rises. The

inflation rate is the percentage change in the price level.

• Deflation occurs when the price level persistently falls.

• Disinflation refers to a (marginal) slowing process of the

inflation rate.

• Inflation is not the price level. Inflation equals change rate not
(level) prices!
 Inflation (II)

• Inflation refers to price (in)stability – it directly affects to the

(purchasing) value of money.

• Inflation reduces the (purchasing) value of money.

• Inflation could be anticipated (expectations) or unexpected.

 Inflation (III)
• There are three channels through which price changes might lead
to inflationary processes in a closed economy (We will analyse
them in due time):

Goods and services markets (demand inflation).

The markets of (inputs) production factors (supply inflation

of inputs’ costs).

The money market (monetary inflation related to the

monetary supply, explained later in the course)
 Inflation (IV)

• A common misperception is that inflation is bad for everyone

(who likes more expensive stuff?).

• A very common misperception is that inflation should always be

avoided.

• But this is not always and in any circumstance the case.

• As said, inflation reduces the value of money, so those winners

and losers from inflationary changes will depend on the situation
we are having

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 Inflation (V)

• Inflation has different impacts on employers and workers.

• Employers benefit from increases in prices of selling goods

(higher mark-ups) while they are hurt by increases in input prices
(higher costs).

• Workers lose from a fall in their real wage but they benefit from
lower real debts.

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 Inflation (VI)
• Inflation has different impacts on lenders and borrowers.
 Lenders are hurt by unanticipated inflation because the money
they get paid back has less purchasing power than the money
they loaned out.

 Borrowers benefit from unanticipated inflation because the

money they pay back is worth less than the money they
borrowed.

• Because of that, people who have borrowed money benefit from a

higher inflation rate when they pay the money back.

• The interest rate that a borrower pays is effectively lower thanks to

inflation – this is called the real interest rate.

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 Inflation (VII)

But…what is a real interest rate?

• Imagine you have 100€ and have to decide whether to put them
on a bank account or to buy something today.
• In the case you put the 100€ in the bank account, you will be
rewarded with a 2% of nominal interest (a year), getting 102€
at the end of the year.
• Imagine now that inflation rate increased by 5%, it means your
original 100€ would reduce in real terms to 95€ by the end of the
year.
• However, if you decide to go to the bank account, your original
100€ will increase 2% and then diminished 5%, giving you a total
reduction of 3%, which equals 97€, somehow the nominal
interest rate reduces the negative impact of inflation.

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 Inflation (VIII)

• The difference between nominal and real interest rates is the inflation
rate

Source: Jones (2017)

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 Inflation (IX)
• Nominal interest rate in period t: 𝑖 . If the nominal interest rate for period t is
𝑖 . , borrowing 1 dollar this year requires you to pay 1 + 𝑖 . dollars next period.
• Real interest rate in
period t: 𝑟 . If we denote
the real interest rate for
year t by 𝑟 , then, by
definition, borrowing the
equivalent of one basket
of goods this period
requires you to pay the
equivalent of 1 + 𝑟
baskets of goods next
period.

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 Inflation (X)
• Expected inflation in period t+1: π = −1

• Hence: 1 + 𝑟 = ; Fisher equation: 𝒓𝒕 ≈ 𝒊𝒕 − π𝒆𝒕

1+ π 𝟏

Source: Blanchard (2020)

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 Inflation (XI)
• To sum up, is inflation bad? It depends.

• In general, it’s bad if you CANNOT accurately forecast it (and

protect against it), as some people will lose out whilst some will
win.

• Unexpected and unstable inflation IS a problem for society

because they redistribute income and wealth.

• Unexpected and unstable inflation provokes people to divert

resources from producing goods and services to forecasting and
protecting themselves from the inflation or deflation.

 Extreme case – Hyperinflation

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 Inflation (XII)

• Another common misperception is that disinflation and deflation are

good for everyone (who does not enjoy cheaper stuff?).

• Deflation increases the purchasing power of money. People who

have borrowed money are paying back that loan with money that is
effectively worth more than the money they borrowed. Deflation
effectively increases the interest rate that a borrower pays.

• Also deflation delays purchases (consumers) and reduces mark-

ups (firms)

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 Inflation (XIII)
• Indeed, deflation has such a destructive impact on an economy
that most policymakers agree that avoiding deflation is a far more
important objective.

• Question: Would you buy a new mobile phone today if you knew
that in a month it would be 10% cheaper?
• If the whole economy is doing the same, the economy would go into
recession very quickly.
• As consumption falls massively which puts further downward
pressure on prices so deflation falls further so people further delay
purchases.
• Unexpected deflation hurts businesses and households that are in
debt (borrowers) who in turn cut their spending. A fall in total
spending brings a recession and rising unemployment.

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 Inflation (XIV)

• As a result, the goal of policymakers is not zero inflation, but

small and predictable inflation rates.

“The ECB’s primary objective is to maintain price stability, that is, to preserve
the purchasing power of the euro. We do this by making sure that inflation –
the rate at which the overall prices for goods and services change over time
– remains low, stable and predictable.[…] The ECB’s Governing Council […]
considers that price stability is best maintained by aiming for 2% inflation
over the medium term.”

• The Federal Reserve and other major central banks have similar
targets, although not identical (Fed dual approach).

• Sometimes, central bank allow the inflation rate to go a bit above

2%, delaying their interventions.

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 Calculating inflation (I)
• To assess the level of prices plus their evolution, we have some price
indicators.

• The Consumer Price Index (CPI) is a measure of the average level

of the prices paid by a representative household for a representative
“basket” of consumer goods and services.
• The CPI is calculated monthly by the INE (data obtained from surveys).
The CPI is defined to equal 100 for a period called the reference base
period – That is, it is transposed into an index number.
• Then, the inflation rate is measured as the change in the CPI between
the reference period and the actual period.
 Calculating inflation (II)
• Suppose the initial survey shows
that the CPI basket is 2 books and
20 coffees (initial base period). In
this base period, say 2005, the
cost of the CPI basket is $100.

• Suppose that the survey taken one

month in 2015 reveals that the
price of a book is $35 and the price
of a coffee is $3.

• The CPI equals ($130  $100) 

100, or 130. So between the base
period and the current period, the
CPI has risen by 30 percent.

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 Calculating inflation (III)

• Representative basket from INE (actual base year 2016)

30
 Calculating inflation (IV)
• The CPI does not include the price of housing (and housing rents)

Source: INE
31
 Calculating inflation (V)

• The Spanish CPI does includes the (alquileres) housing rents

(subgroup within the housing group).

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 Calculating inflation (VI)

• It is highly important to measure correctly the CPI.

• It directly affects Wages, Pensions, Unemployment benefits, Bonds…

• Any bias in the CPI matters because many contracts and payments
are indexed to the CPI, including Social Security.

• So if you estimate inflation is 0.1% higher than it actually is could end

up paying millions more in wages and benefits the next month.

• Paying people more than they needs (wages) might even trigger
further increases in prices.

33
 Calculating inflation (VII)
• The CPI might present a series of problems. One of them relates
with its compositional bias such that:

• New Goods Bias: New goods are often more expensive than the
goods they replace. Iphones!

• Quality Change Bias: Sometimes price increases reflect quality

improvements (safer cars, improved health care) and should not be
counted as part of inflation. Housing!

• Commodity Substitution Bias: Consumers substitute away from

goods and services with large relative price increases. Nutella.

34
 Calculating inflation (VIII)
• Because of its internal composition the CPI is disaggregated.
• Core (subyacente) inflation vs General inflation
• The core inflation rate is the CPI inflation rate excluding the
volatile elements (of food and fuel).
• The core inflation rate attempts to reveal the underlying
inflation trend.
6.0

5.0

• In the Spanish 4.0

case: 3.0

2.0

1.0

0.0

-1.0

-2.0

General Subyacente Source: INE

35
 Calculating inflation (IX)
• Even if the CPI is showing a certain aggregated pattern, goods
incorporated in the same basket could show different trends.
• It leads consumers and households to perceive prices of goods
and services to behave quite differently among them.

36
 Calculating inflation (X)
• Finally, another alternative indicator is the GDP deflator:

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
• The GDP deflator gives a value higher than 1 if Nominal GDP>Real
GDP. It can also be normalized to 100.
• The difference between the GDP deflator and regular CPI is small,
but the deflator entails all the services and goods in the economy.
• Problem: the GDP deflator comes with year-lags.
• With the GDP deflator we can get data for every year for the whole
set of goods and services.

37
 Calculating inflation (XI)

• The difference between the GDP deflator (price levels) and

inflation rates obtained from the GDP deflator.

38
 Further topics on inflation (I)
• Post-covid era: The inflation revival. “Inflation largely reflected strong
aggregate demand, the product of easy fiscal and monetary policies, excess
savings accumulated during the pandemic, and the reopening of locked-down
economies” (Bernanke & Blanchard, 2023) + supply chain disruptions
(including war).

Source: World Bank

 Further topics on inflation (II)

• Inflationary is also an indicator of future long-term demand.

• It helps anticipating the evolution of the economy.

• As it incorporates (households and firms) expectations.

• If inflation remains low for many years, it could be a sign of

economic stagnation due to the lack of demand.
 Further topics on inflation (III)

• Low inflation was a phenomenon in advanced and emerging

economies.

• It was a signal that world

demand is weak but also
That expectations were
also going down.
• There is supply inflation
effect by which prices of
many goods are decreasing
as a result of new
technologies and the increasing world competition.
 Further topics on inflation (IV)

• In commodity-oriented
economies, prices are key in
determining future economic
performance.

• These economies could suffer

from rapid falls in prices.

• And they can also experience

economic booms related to
these prices.

Source: IMF( October 2020)

 For a decade, inflation

Video

Let’s see the inflation patterns before the energy crisis…(this video
is from The Economist).
 Inflation nowadays (I)
• There has been a sudden
and an unexpected increase
in prices, leading a quick
inflation process.

• The hard task is how to

handle with this increase in
inflation.

• It has affected advances

economies, specially to the
USA, and it was pointing out
to a (mild) global
recession… after a recovery
from the Covid-shock.

Source: IMF(July 2022)

 Inflation nowadays (II)

Source: IMF( January 2022)

• The main increase in inflation is coming from goods instead of

services.
• It is because of the global production chains – Intermediate inputs
coming from emerging economies are becoming more expensive.
• Also there are mismatches between demand and supply worldwide.
 Inflation nowadays (III)

• In the case of the US, inflation is also being driven by an increase in

demand because of the strong recovery from the Covid shock.
• Therefore, the US inflation is a bit “easier” to handle than in Europe.

Source: IMF
 Inflation nowadays (IV)
• But in any case, the main
increase in inflation was led by
energy prices & supply chain
disruptions - supply shock.
• It affects firms’ production costs
which increase prices
subsequently.
• To the extent war is not over –
energy prices will continue
increasing…
• …And in the case of food prices
it is now creating scarcity and
famine worldwide (!).
Source: IMF(July 2022)
Inflation nowadays (V) in Europe

Source: Gonçalves and Koester (2022, ECB).

 Inflation nowadays (VI) in USA
Supply-driven and demand-driven contributions to year-over-year PCE inflation

Source: Shapiro (2022, Fed).

 To recap: Key concepts

 Nominal vs Real GDP.

 Inflation vs deflation vs disinflation.

 Inflation vs core inflation.

 Supply-driven vs demand-driven vs monetary driven inflation.

 CPI vs GDP deflator.

 Low inflation era vs post-Covid inflation.

 CHAPTER 1.
MACROECONOMIC
FOUNDATIONS

1.1 Introduction to macroeconomics

1.2 Other macroeconomic indicators
1.3 National accounts
1.4 GDP components
1.5 Labour market indicators
1.6 Inequality and climate issues in macroeconomics
 Chapter 1.6 -
Inequality and climate issues
in macroeconomics

 Poverty
 Inequality
 Measuring inequality
 Inequality in macroeconomics
 Climate change
 Poverty definition and
concepts (I)
 Poverty exists in all countries of the world; but it is most severe in
low and middle income countries. Poverty rates are highest in
countries that generally have: i) weak economies, ii) weak
industrialization, and iii) high rates of population growth.

 Amartya Sen’s definition of poverty: “deprivation of basic capabilities

rather than merely a lowness of incomes”. The Human
Development Index (UN), makes more sense according to this
definition:

https://hdr.undp.org/
data-center/human-
development-
index#/indicies/HDI

3
Poverty definition and concepts
(II): Poverty trap

4
 Poverty definition and
concepts (III)
 Absolute poverty: less than 1.9 $/day per capita income (M.
Ravillion, World Bank).
• refers to basic necessities a person faces: the prospect of hunger and
disease on a daily basis. This is a life-threatening level of poverty.

 Relative poverty: a level of poverty in which a person lacks

resources that other members of the society has access to (%
of income related to country’s average income):
• refers to standard of living & income distribution
The relative poverty rate gives the proportion of households
whose income falls below a certain level (the poverty line)
within a defined geographical area.
Although absolute poverty has declined, relative poverty is
increasing.

5
 Inequality
Why is inequality bad?
• Extreme inequality leads to economic inefficiency and curtails
growth.
• Extreme inequality undermines social stability and solidarity.
What can be done?
• Pre-inequality interventions: guarantee equal opportunities.
• Post-inequality interventions: tax redistribution.

Escaping poverty: Economic growth is needed.

• But when you look more closely, you see that there are other
factors involved, most notably inequalities in human
development (basic health and education) and access to credit
for financing investment.
OECD Better Life index: https://www.oecdbetterlifeindex.org/#/00050515555

6
 Measuring inequality (I): The
Gini Index
Gini coefficient:
• is country-level indicator based on the differences in incomes,
wealth or some other measure between people. The Gini
coefficient has the advantage that it includes information about
everyone, not just the rich and the poor, but those ‘in the
middle’ too.
• The Gini coefficient is equal to 1 (extreme inequality) if a single
person owns all the income, and 0 (perfect equality) if
everyone has the same income.
• The more unequally resources are distributed amongst the
members of the population, the larger is the Gini coefficient.
• For further details you can go to the CORE-ECON book in this
link.
• OECD Income inequality data.

7
 Measuring inequality (II): The
Lorenz curve
• It indicates how much disparity there is in income, or any other
measure, across the population.

• The Lorenz curve shows the entire population lined up along the
horizontal axis from the poorest to the richest. The height of the
curve at any point on the horizontal axis indicates the fraction of
total income received by the fraction of the population given by
that point on the horizontal axis.

• For further details you can go to the CORE-ECON book in this

link

8
Measuring inequality (III): The
Lorenz curve
The Lorenz Curve (the actual
distribution of income curve),
a graphical distribution of
wealth/income developed
by Max Lorenz in 1906,
shows the proportion of
income earned by any given
percentage of the population.

The line at the 45º angle

shows perfectly equal income
distribution, while the other
line shows the actual
distribution of income.

9
 Lorenz curve and Gini
coefficient together (I)
• The gross Market
income is more
unequally distributed
than Disposible
Income.

• It means that fiscal

redistributive tools
(subsidies and taxes)
are corrrectly operating
– getting a more equal
distribution of income.

Source: CORE-ECON

10
Lorenz curve and Gini
coefficient together (II)

11
Income distribution worldwide

Source: CORE-ECON

12
There are different concepts
of inequality

Source: CORE-ECON

13
 We can also use the share of
income hosted by the richest
top 1% individuals in a country
• When looking at
the history, we
can appreciate
that, in the past,
the richest
population
concentrates too
much income,
then this share
reduces to
increase in the
last decades.

Source: CORE-ECON

14
 Inequality is related to GDP
performance

Fuente: CORE-ECON

• More unequal countries are showing lower GDP dynamics than more equal ones.

15
 Inequality is explained by
differences in production factors

Fuente: CORE-ECON

Inequality is a dynamic phenomenon meaning that, inequality today may create

inequality in the long run if it is not tackled properly

16
Which societal groups are
favouring or opposing
redistribution?

Source: CORE-ECON

17
Exercise: Lorenz Curve
Cumulative
Income
Cumultative Country Country
Population A B Equality
0 0 0 0
10 5 2 10
20 10 5 20
30 20 10 30
40 30 15 40
50 40 20 50
60 50 25 60
70 60 30 70
80 70 35 80
90 80 45 90
100 100 100 100

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 Exercise: Lorenz Curve

Lorenz Curve
100
90
80
Cumulative Population

70
60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
Cumulative share of income

19
 Inequality in macroeconomics
Do macroeconomists ignore heterogeneity and inequality?
• In this course, we are not following a modern macro approach with a
representative agent model (no microfoundations, no utility
maximization and budget constrains).
• But those representative agent models do not represent the reality.
Popular unfair criticisms of macroeconomics: “macroeconomists
ignore heterogeneity and inequality”
• Macroeconomics research of the last 20 or 30 years is all about
heterogeneity and inequality  heterogeneous agent models.
First models (introducing incomplete markets): Imrohoruglu (1989), Huggett (1993),
Aiyagari (1994), and others.

Recently, HANK models (Heterogeneous Agents New-Keynesian models): Kaplan et al.

(2018).
Based on Moll’s intermediate macro course.
Some interesting readings: https://www.mercatus.org/economic-insights/expert-
commentary/ben-moll-basics-hank-models-and-how-they-can-be-applied

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 Climate change and the
macroeconomy (I)
 Climate change may shift economic activity within, across, and
between countries.
 Economic literature shows that extreme weather events tend to
have a predominantly negative effect on economic growth, in
some cases up to several years.
 Extreme weather events can also affect inflation, at least
temporarily.
 There are also adaption costs to the new situation and…
macroeconomic impacts of mitigation policies.
 Both physical impacts from climate change and the transition to
net zero economy may affect the long-run trend equilibrium
interest rate (R*).

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 Climate change and the
macroeconomy (II)
 William Nordhaus (Nobel prize, 2018) pioneered the field by
modeling of the interrelation between (macro)economic activity
and climate change (DICE models).
 At a high level, he wrote structural models of the
macroeconomy that incorporate the “climate externality”:
production yields emissions that affect temperature, and
temperatures induce climate change that damages the
economy.
 Original focus on optimal policy: what is the optimal path of
production and emissions that maximizes welfare.
 DICE model combines a set of equations that describe: The
representative agent’s consumption problem + production side
of the economy + climate equations.
Based on Giglio (2023,
https://macfinancesociety.files.wordpress.com/2023/08/mfs_day5_sg.pdf).
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 To recap: Key concepts

 Human development index and poverty trap.

 Absolute poverty vs. relative poverty.

 Inequality indicators: Gini index vs. Lorenz curve.

 Inequality in macroeconomics: introducing heterogeneous

agent models.

 The importance of climate change.

 CHAPTER 1.
MACROECONOMIC
FOUNDATIONS

1.1 Introduction to macroeconomics

1.2 Other macroeconomic indicators
1.3 National accounts
1.4 GDP components
1.5 Labour market indicators
1.6 Inequality and climate issues in macroeconomics
 Chapter 1.5 -
Labour market indicators

 Introduction
 Labour market indicators
 Unemployment
 What might affect (natural) unemployment
levels?
 Phillips curve
 Why do we care about the
labor market? (I)

• Employment is at the core of each macroeconomic policy, and

even more in macroeconomic models.

• Similar to price stabilization, economic policies care a lot about

employment stabilization.

• Indeed, it aims to achieve full employment.

• On the contrary, unemployment occurs when someone who

wants a job cannot find one. To be counted as unemployed, a
person must be available for working.

3
 Why do we care about the
labor market? (II)
• There is a direct relation
between GDP growth and
unemployment rates.

• The graph refers to the UK

economy.

• They tend to fluctuate in

an inverse manner.

• That is why we need to

study (un)employment.

Source:Core-ECON
4
 Why do we care about the
labor market? (III)

• More specifically, unemployment is related to a loss of personal

wellbeing.

Source:Core-ECON
5
 Why do we care about the
labor market? (IV)
• The relationship between
unemployment rates and
GDP is known as Okun’s
law.

• Okun’s law: The empirical

regularity that changes in
the rate of growth of GDP
are negatively correlated
with the rate of
unemployment.

• It changes across
countries, meaning that
the responses of the labor
market to changes in GDP
are determined in different
ways.
Source:Core-ECON

6
 Labor market indicators (I)

How to measure employment and unemployment?

 First, we have total population.

 Working-age-population: those individuals between

16-64 (67) years old.

 Non-working-age-population (young + retired people).

7
 Labor market indicators (II)

Working-age-population :

 Active population: Those in working age population that

want and are able to work.

 Occupied: Active people actually working.

o Self-employed (Por cuenta propia).
o Hired by someone else (Por cuenta ajena).

 Unemployed: Those that want to work but are not able to

do so.

 Inactive population: those that do not actively look for a job

(also desanimados).

8
 Labor market indicators (III)

 Working-age-population (those
between 16-64 years old).
Working-age-population =
Employed + unemployed +
inactive population

 Labor force (Población Activa)=

employed+unemployed.

 Employed: actively working.

9
 Labor market indicators (IV):

The Unemployment Rate is the ratio between the number of

Unemployed people and the number of Active people.

Unemployment Rate = (Nº Unemployed People / Nº of Active

People) * 100

10
 Labor market indicators (V):

The Employment rate is the ratio between the total number of

employed people and the working age population

Employment Rate = (Nº Employed People / Working-age-

population) * 100

Be cautious with the denominator!!

11
 Labor market indicators (VI):

• The Labor force participation (or Economic activity rate) is

the ratio between the labor force (active pop.) and the working-
age population

Economic activity rate = (Active Population / WAP) * 100

12
 Labor market indicators (VII):
In Spain
• In Spain, there are two sources for data for assessing the
performance of the labor market. These two sources are
complementary, but they can be misleading.

• Survey of Active Population (Encuesta de Población

Activa, EPA), created by the INE.

• “Se trata de una investigación continua y de periodicidad

trimestral dirigida a las familias, cuya finalidad principal es
obtener datos de la fuerza de trabajo y de sus diversas
categorías (ocupados, parados), así como de la población
ajena al mercado laboral (inactivos).

• La muestra inicial es de unas 65.000 familias al trimestre que

equivalen aproximadamente a 160.000 personas.”

13
 Labor market indicators (VIII):
In Spain
• Employment records (Registros de Empleo), created by the
SEPE (Servicio Público de Empleo Español).

• They register every month those hiring and firing processes.

That is, they measure changes in the number of occupied and
unemployed people.

• However, they do not capture does individuals that are actively

looking for a job.

• This is the reason why, in the news, there are always different
measures of unemployment rates.

14
 Labor market indicators (IX):
In Spain
• Because labour market statistics are confusing, the INE
created this infography which is very useful to understand:

• https://www.ine.es/infografias/tasasepa/desktop/index.html
?lang=es

15
 Why unemployment exist? (I)

• Caution! Full employment does not mean 0% of

unemployment rate, as there are many types of unemployment
rates!

 Natural rate of unemployment – this is the difference

between those workers who would like a job and those who are
able to take a job. It is also proxied by the average
unemployment rate in time. It includes:

Frictional unemployment + structural unemployment +

cyclical unemployment + seasonal unemployment

16
 Why unemployment exist? (II)

Frictional Unemployment

• This is the unemployment that arises from standard labour

market turnovers. These workers are searching for jobs. The
unemployment related to this search process is a permanent
phenomenon in a dynamic and growing economy. Frictional
unemployment increases when more people enter the labour
market or when unemployment compensation payments increase.

• This is the unemployment that exists in any economy due to

people being in the continuous process of moving from one job to
another.

• Example: Undergrad looking for a job.

17
 Why unemployment exist? (III)

Structural Unemployment

• Unemployment that arises when changes in technology or

international competition change the skills needed to
perform jobs or change the locations of jobs.
• Sometimes there is a mismatch between skills demanded by firms
and skills provided by workers, especially when there are great
technological changes in an industry.
• Structural unemployment generally lasts longer than frictional
unemployment. Minimum wages and efficiency wages create
structural unemployment.
• Example: An industrial worker in an age of 50 who is having
problems to relocate

18
 Why unemployment exist? (IV)

Note on long-run unemployment

• The very long-term unemployment rate (VLTU) is the share

of the unemployed persons that have been unemployed 24
months or more in the total number of active persons in the
labour market.

• It creates levels of anxiety, depression, and hopelessness

than their employed peers, and these mental health issues
often intensify the longer a person is unemployed.

19
 Why unemployment exist? (V)

There are also other (minor) unemployment definitions:

 Cyclical unemployment: unemployment induced by

changes in the business cycle. Example: Spain’s housing
bubble reduced unemployment much more than expected,
whereas when it burst, cyclical unemployment increased much
more and then stabilized

 Seasonal unemployment: Caused by changes in the hiring

process attached to changes in the season. For instance:
increase in unemployment after the Christmas or summer
season.

20
 What might affect (natural)
unemployment levels? (I)

• The Age Distribution of the Population - An economy with

a young population has a large number of new job seekers
every year and has a high level of frictional unemployment.

• The Scale of Structural Change -The scale of structural

change is sometimes small but in other times there is a
technological upheaval. When the pace and volume of
technological change and when the change driven by
international competition increase, natural unemployment
rises.

21
 What might affect (natural)
unemployment levels? (II)

• The Real Wage Rate - The natural unemployment rate

increases if minimum wage is raised to exceed the
equilibrium wage rate or if more firms use an efficiency wage
(a wage set above the equilibrium real wage to enable the
firm to attract the most productive workers and motivate
them to work hard and discourage them from quitting).

• Unemployment Benefits - Unemployment benefits

increase the natural unemployment rate by lowering the
opportunity cost of job search.

22
 Phillips curve (I)

• The Phillips Curve is one of the most controversial topics in

macroeconomics.

• Originally in 1960, the Phillips curve, defined as the empirical

relationship between unemployment and inflation, illustrates
the trade-off between maintaining price stability and
achieving full capacity utilization (≈ full employment).

• In other words, an inverse relation between inflation and

unemployment rates in a country. The higher the inflation, the
lower the unemployment rate, and the other way around.

• This trade-off gave a menu of economic policies for

policymakers.

23
 Phillips curve (II)

• For an interactive
PC, check this link:

https://ourworldindata
.org/grapher/phillips-
curves-in-the-
us?tab=chart&stackM
ode=absolute&zoomT
oSelection=true&time
=1960&region=World

24
 Phillips curve (III)
• However, this relation fell apart in the decade of the 70s as advanced
economies, spacially the USA, combined high inflation rates with
high unemployment rates. The worst part of this situation was the
feedback process between these two macroeconomic indicators.

• This feedback process was known as stagflation. It opened a new

are of research in macroeconomics that incoporated the analysis of
expectations when economic agents take decisions.

• Nowadays, there is an important debate about the shape of the PC

(≈ reducing inflation is not dramatically causing unemployment in
several economies).

• The Phillips curve may have become steeper (Empirical evidence:

https://www.elibrary.imf.org/view/journals/001/2023/100/article-A001-
en.xml)

25
 To recap: Key concepts

 Okun’s law.
 Working-age-population = Labor force + inactive population
 Labor force = employed+unemployed.
 Unemployment rate vs. employment rate vs. economic activity
rate.
 EPA vs. SEPE unemployment.
 Types of unemployment (frictional, structural, cyclical and
seasonal).
 Phillips curve.
 CHAPTER 1.
MACROECONOMIC
FOUNDATIONS

1.1 Introduction to macroeconomics

1.2 Other macroeconomic indicators
1.3 National accounts
1.4 GDP components
1.5 Labour market indicators
1.6 Inequality and climate issues in macroeconomics
 Chapter 1.4 -
GDP Components

 Introduction
 Consumption
 Investment
 Public Expenditure
 International trade
 Introduction – GDP Components

• One of the potential estimations of the GDP takes the following

expression (Expenditure approach):

GDP = Y = Aggregate Demand = C + I + G + (X – M)

• This definition gives rise to multiple analysis related to the

patterns of each of these subcomponents.

• Studying all of these patterns is extremely helpful for us to

anticipate different responses from economic agents to each
policy.
 Introduction – GDP
Components (II)
In this course, we mainly
focus on two of the most
crucial GDP’s components:

 Consumption

 Investment

Why are they so different

across countries?
What is their dynamics?

Source: CORE-ECON
 Consumption (I)
• Consumption is the backbone of the economy and the largest
part of GDP.

• When consumption falls dramatically, we might expect a

recession (e.g., post 2008, 2020 lockdowns).

• Firms sell products or services to consumers. Consumers pay

for these things with their incomes.

• Which is the main factor explaining consumption?

 Consumption (II)

• Income (rent) is the main explanatory variable of consumption patterns.

 From now onwards, we will refer to income as Y (remember, Y =
income = production in a closed economy)

• But only income? No! it is disposable income – Income after taxes (T)
and transfers (TR) from the governments (subsidies, scholarships…)

𝑌 = 𝑌 − 𝑇𝑎𝑥𝑒𝑠 𝑇 + 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑠 (𝑇𝑅)

𝐶=𝑓 𝑌

• In next chapter, we will take a deep to this consumption function.

 Consumption (III)

• Also, individuals not only consume but save (S) part of their
incomes.

𝑌 =𝐶+𝑆

• In societies where individuals save relatively more, will have

less income to consume, but more savings to invest.

• Consumption and Saving can be aggregated to National

Account measures. This is known as the National Income (NI).
 Investment (I)

• Firms have to invest in things in order to produce the products or

services they sell to consumers.

Starbucks has to invest in shops in order to sell its product - coffee.

Ryanair has to invest in planes in order to sell its service – cheap

flights.

• Investment is highly dependent on the level of production (Y)

and interest rates (i) but, for the moment, we will consider
̅ meaning that investment is
Investment (I) as exogenous ( 𝐼),
given in our models, but we know this is not the case in reality…
 Investment (II)

Investment can be divided into:

 Investment in Physical Capital – Gross Capital Formation

(Formación Bruta de Capital):

 Fixed Gross Capital Formation (Formación bruta de capital fijo). If you

take out depreciation, you get the fixed net capital formation (formación
neta de capital fijo).

 Changes in inventories

 Residential Investment.
 Investment (III)

• Indeed, investment is the most volatile component of the GDP, why is it?

Source: CORE-ECON
 Investment (IV)
• Investment is drastically driven by the current situation of the national
economy but, even more, by expectations on future economic growth

Negative Positive
Expectations Expectations

Source: CORE-ECON
 Investment (V)

• Nowadays, worldwide
investment is below its trend
before the 2008 Financial
Crisis.

• It shows that firms are having

negative expectations for the
economic future, pushing
down the (expected) levels of
investment.

Source: IMF (June 2019)

 Public Expenditure (I)
• Governments buy goods and services but also, they provide public
goods and services. We know it as government (or public)
expenditure (G) - sometimes referred as government/public
spending.

• Public spending enables governments to produce and purchase

goods and services, in order to fulfil their objectives – such as the
provision of public goods or the redistribution of resources.

• Transfer payments (TR) are those already explained in the

consumption section and are included in the Consumption through
the disposable income. They do not buy goods and services for the
government and so are not accounted in the government spending,
however these Transfers are part of all Total Expenses by a
government.
 Public Expenditure (II)
• Government
spending can be
represented as
a ratio over
GDP.

• This way, we
can compare
across
countries.
 Public Expenditure (III)
• Governments are highly dependent on what they get as fiscal
revenues through Taxes (T).

…In order for them to expend (G).

• The balance between fiscal revenues and fiscal expenditures is

named as (Public) Fiscal Balance (FB) (saldo fiscal o saldo público).
𝐹𝐵 = 𝑇 − (𝐺 + 𝑇𝑅)

• If FB < 0 – The government is running into a (Primary) Fiscal Deficit.

• If FB > 0 – The government is having a (Primary) Fiscal Surplus.
The fiscal balances is a flow variable (it is calculated for each year).
 Public Expenditure (IV)
• A government is able to manage either its expenditures (G), or its
fiscal revenues (T) and/or its transfers (TR).

• This ability is known as the fiscal policy, and it affects to the

overall GDP and the consumption through the disposable income
(𝑌 )
𝑌 = 𝑌 − 𝑇𝑎𝑥𝑒𝑠 𝑇 + 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑠 (𝑇𝑅)

• If they increase G, ∆G > 0 or ∆TR > 0 (expend more) it is known

as expansive fiscal policy.

• If they reduce G, ∆G < 0 or ∆TR < 0 (expend less) it is known as

contractive fiscal policy.
 Public Expenditure (V)
• A government can also affect the GDP and the consumption through
Taxes

• If they increase taxes T, ∆T > 0, individuals will have less disposable

income (𝑌 ) to expend and consume affecting GDP. It is known as
contractive fiscal policy.

• If they reduce taxes T, ∆T < 0, individuals will have more disposable

income (𝑌 ) to expend and consume, affecting GDP. It is known as
expansive fiscal policy.
 Further topics on the
Government (I)
• When the government is having a fiscal deficit (fiscal revenues lower
than government expenses), it has to sell bonds (in the money
market) to get resources from the private sector. This way it can
cover its public deficit and continue with its usual activity.

• These bonds represent a liability for a government as it will have to

pay them back to lenders at some point in the future plus an
(nominal) interest rate. These interest rates are extra-costs for any
government (they are higher the higher the interest rates of bonds).

• To pay these bonds, the government will take use of its future fiscal
revenues (coming from taxes).
 Further topics on the
Government (II)
• The stock of these public bonds plus their interests is known as
Public Debt. This a stock variable (it is calculated in a given
moment).

• Public debt can be represented as ratio over the GDP.

• When this public debt ratio reaches high values, governments

might be seen as non-trusty, therefore, private investors and
lenders (using their savings) will ask for higher interest rates to
buy those government bonds.

• If this situation deteriorates in time (for many years), government

will have to dedicate more and more fiscal resources to pay its
debts plus interests, leading the national government to
unsustainability problems.
Further topics on the
Government (III)
 Further topics on the
Government (IV)
• Finally, if we consider all these interest rates as fiscal expenses
for a government, we will be talking about the Total Fiscal
Balance:
𝐹𝐵 = 𝑃𝑟𝑖𝑚𝑎𝑟𝑦 𝐹𝑖𝑠𝑐𝑎𝑙 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠

• The Primary Fiscal Balance (T-G) is the Fiscal Balance after

having into account all the fiscal revenues and expenses of a
government (the one we explained before).

• But if we take into account the interest rates paid for the bonds it
sells, we will be talking about the total fiscal balance, which can
show a deficit or a surplus too. Indeed, a country might have a
surplus or a deficit in the primary balance while having positive
interest rates.
 International Trade
• The difference between Exports (part of the national production
going abroad) and Imports (part of international production
coming to the national economy) is known as Trade Balance
(TB) - Saldo comercial.

• If TB > 0, exports are higher than imports, so there is a Trade

Surplus. It means income (rent) from the rest of the world is
coming into the national economy.

• If TB < 0, exports are smaller than imports, so there is a Trade

Deficit. Income (rent) from the national economy is coming out
to the rest of the world.

• All these flows are registered in the Balance of Payments.

 Everything together (I)
• Let’s take all these accounting expressions

𝐺𝐷𝑃 = 𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀

𝑌 = 𝑌 − 𝑇 + 𝑇𝑅

𝑌 =𝐶+𝑆
• From the last two, we get:

𝐶 + 𝑆 = 𝑌 − 𝑇 + 𝑇𝑅
• Let’s assume TR=0 (transfer usually are very small on aggregate)

𝑌 =𝐶+𝑆+𝑇
 Everything together (II)
• Taking back the GDP expression:

𝐶+𝑆+𝑇 ≡𝑌 ≡𝐶+𝐼+𝐺+𝑋 −𝑀

(𝑆 − 𝐼) ≡ (𝐺 − 𝑇) + (𝑋 − 𝑀)
This is called balance of payments equilibrium.

• We get three balances:

 (𝑆 − 𝐼) --- Private Sector Balance.

 (𝐺 − 𝑇) --- Public Fiscal Balance related to the government.
 (𝑋 − 𝑀) --- Trade balance, only in an open economy.
 Everything together (III)
• In a closed economy:
(𝑆 − 𝐼) ≡ (𝐺 − 𝑇)

• There should be an accounting balance between savings from

private sector (S-I) and savings from the Public Sector (G-T).

• If this equilibrium does not exist, governments and private

sector will have problems to finance their activities, thus, they
will need to open the economy such as:
(𝑆 + 𝑇 − 𝐺) − 𝐼 ≡ (𝑋 − 𝑀)

• Where now, 𝑆 + 𝑇 − 𝐺 is refereed as Total Savings in an

economy.
 Everything together (IV)
Some clarifications, what does it mean that in this closed economy…?

• S > I  S – I > 0; it says that all the savings in an economy are enough to
finance the Investment but also that the excess could finance the Public
Sector. The private sector has financing capacity.

 For instance, through Loans – “households save in bank accounts

(deposits) and then Banks finance firms”.
 Private savings could also Finance the Public Sector by buying
Public debt bonds. It would allow the Public Sector to get resources
for G.
• S < I  S – I <0; it says that all the savings are not enough to finance the
Investment, therefore, private sector would need savings from the
external sector (through foreign Banks moving foreign savings through
loans) or from the Public Sector (Transfers). The private sector has
financing needs.
 CHAPTER 1.
MACROECONOMIC
FOUNDATIONS

1.1 Introduction to macroeconomics

1.2 Other macroeconomic indicators
1.3 National accounting
1.4 GDP components
1.5 Labour market indicators
1.6 Inequality and climate issues in macroeconomics
 Chapter 1.3 -
National Accounting

Introduction
How to measure the GDP
Alternative macro indicators
 National Accounting
• We began the course defining the GDP in a very simple way that
allows us to differentiate between quantities produced and prices
of final goods and services in a given economy at time T.

• It leads to differences in price dynamics (nominal vs real GDP).

• It is a definition from the production side (GDP as aggregate

supply) – It captures the ability of an economy to produce.

• However, in an economy there are other economic agents whose

activity is able to create GDP to grow.
• When collecting data for the accountability of GDPs, this problem
becomes even crucial, forces us to separate and estimate the
GDP using different methods.
 The basic circular flow model

• Let’s take a very simple economy with only firms and households:

Source: CORE-ECON
 How to measure the GDP (I)
Suppose there is just one firm Y in an economy producing good X
using N workers:

• Production or Value Added approach (método de Producción

o de Valor Añadido):
 GDP is total amount of X produced in a year

• Expenditure approach (método del Gasto):

 GDP is total amount of X sold in a year

• Income approach (método de la Renta):

 GDP is the total income earned by the N workers plus the
“profits” made by firm Y.
• Note: Distinguish economic profits versus accounting profits (!)
 How to measure the GDP (II)

The three methods should give the same GDP (!!)

• It means:

Production = Rents = Expenditure

Goods and services in an economy should be produced by someone

who gets rents for it that allows him/her to expend
 How to measure the GDP (III)
• It improves over the production definition already explained. However,
the sum of final goods could lead to a double accounting
processes. For example: steel finally produced and sold but then
added as an input in a (final) car.

• To avoid this problem, we need to account for how much each firm
(and sector) is adding to the production process. This is known as the
Value Added approach (método del Valor Añadido).

𝐺𝐷𝑃𝑖 = 𝐺𝑉𝐴 + (𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑇𝑎𝑥𝑒𝑠 − 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 )

• Where GVA refers to Gross Value Added, i stands for firm (or sectors).
Then, we clean for indirect taxes (VAT) and subsidies to no get
distortions in the final amounts of € (these are net taxes).
 How to measure the GDP (IV)

• The Value Added is defined as:

𝐺𝑉𝐴

= 𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 − 𝐼𝑛𝑡𝑒𝑟𝑚𝑒𝑑𝑖𝑎𝑡𝑒𝑠 𝑖𝑛𝑝𝑢𝑡𝑠

− (𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑇𝑎𝑥𝑒𝑠 −𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 )

• Where GVA refers to Gross Value Added, i stands for firm (or sectors).
We do NOT include taxes or subsidies when measuring value added.
 How to measure the GDP (V)
• Example:

Sector/firm GDP
(production Intermediate Inputs Output GVA (Sum of
stage) VA)
Stage 1 0 5 5-0=5
Stage 2 5 15 15-5=10
36
Stage 3 15 25 25-15=10
Stage 4 25 36 36-25=11

• Again, GVA is the gross value added not adding taxes and subsidies, if
we include them, we will get the Net Value Added (NVA).
 How to measure the GDP (VI)
• For the Spanish case (INE), this is the sum of the value added of
each sector:

Oferta 2021 (A)

Agricultura, ganadería, silvicultura y pesca 31.516
Industria 184.817
de los cuales: industria manufacturera 139.212
Construcción 60.865
Servicios 813.725
Comercio transporte y hosteleria 240.157
Información y comunicaciones 43.180
Actividades financieras y de seguros 46.400
Actividades inmobiliarias 129.824
Actividades profesionales, científicas y técnicas y otras 99.106
Administración pública, educación y sanidad 209.852
Actividades artísticas, recreativas y otros servicios 45.206
Impuestos menos subvenciones sobre los productos 115.919
PRODUCTO INTERIOR BRUTO A PRECIOS DE MERCADO 1.206.842
 How to measure the GDP (VII)
• In general, for national account indicators, we need to differentiate
between:

• Factor cost prices (basic prices, fc): Prices when accounting only for
the cost of production factors.

• Purchaser prices (mp): Final prices at the selling point (including

taxes and subsidies).

• There is a direct relation between the same variable using these two
type of prices. This relation is based on adding taxes and subsidies.

𝐺𝐷𝑃(𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑟 𝑝𝑟𝑖𝑐𝑒)
= 𝐺𝐷𝑃(𝑓𝑎𝑐𝑡𝑜𝑟 𝑐𝑜𝑠𝑡𝑠) + (𝐼𝑛𝑑 𝑇𝑎𝑥 − 𝑆𝑢𝑏𝑠𝑖𝑑𝑦 )
 How to measure the GDP (VIII)

• Expenditure approach (método de Gasto).

• Everything that is produced in an economy, should be bought

(expenditure) by any of the different economic agents.

• There could be (small) stocks of firms’ inventories, but only for

some specific peaks in production.

• This method is also known as the Demand Approach.

 How to measure the GDP (IX)

We need to expand the analysis and include all the economic

agents as well as their expenditures:

Consumption (C)=Households
 Household final consumption expenditure (Gasto en Consumo Final)
Investment (I)=Firms
Gross fixed capital formation (Formación Bruta de Capital Fijo)
Public Expenditure(G)=Public Sector
Government expenditure (Gasto por las Administraciones Públicas)
International Trade
Expenditure by other countries – Exports (X)
Expenditure to other countries – Imports (M)
 How to measure the GDP (X)
Expanded circular flow model

INCOME
EXPENDITURE
INCOME = EXPENDITURE
 How to measure the GDP (XI)

• According to all these expenditures, we get the Aggregate

Demand (AD) of and economy, therefore, the GDP takes to form:

GDP = Y = Aggregate Demand = C + I + G + (X – M)

• C+ I + G is the corresponding National Aggregate Demand (Close

economies)
• X – M is the corresponding the Net International Demand (Open
economies)
• Remember that Production (Y) has to be equal to Expenditure (AD)
and Income.
 How to measure the GDP (XII)

• For the Spanish case (INE), this is the sum of all the expenditures
made by economic agents:
Demanda 2021 (A)

Gasto en consumo final 937.396

Gasto en consumo final de los hogares 665.502
Gasto en consumo final de las ISFLSH 13.253
Gasto en consumo final de las AAPP 258.641
Formación bruta de capital 251.522
Formación bruta de capital fijo 238.550
Activos fijos materiales 196.108
Viviendas y otros edificios y construcciones 120.405
Maquinaria, bienes de equipo y sistemas de armamento 71.934
Recursos biológicos cultivados 3.769
Productos de la propiedad intelectual 42.442
Variación de existencias 10.229
Adquisiciones menos cesiones de objetos valiosos 2.743
Exportaciones de bienes y servicios 421.592
Exportaciones de bienes 320.767
Exportaciones de servicios 100.825
Gasto de los hogares no residentes en el territorio económico 25.480
Importaciones de bienes y servicios 403.668
Importaciones de bienes 340.472
Importaciones de servicios 63.196
Gasto de los hogares residentes en el resto del mundo 8.752
PRODUCTO INTERIOR BRUTO A PRECIOS DE MERCADO 1.206.842
 How to measure the GDP (XIII)
• We can express each GDP component as a share (%) of total GDP.

• This way, we can see

the relevance of each
component on the GDP
of an economy.

Source: CORE-ECON
 How to measure the GDP (XIV)

USA shows the highest Consumption (Households’ expenditure).

UE-28 has the highest Public Sector Expenditure and is the

biggest trader (in the world).

China has the highest Investment (in physical capital).

…in relation to their corresponding GDPs.

 How to measure the GDP (XVI)
In a temporal perspective in the case of the USA:

Source: Jones (2017)

 How to measure the GDP (XVI)
• Income approach (método de Rentas).

• It considers all type of incomes generated in an economy.

Labor Income/payments (LI) (mostly salaries, renta de asalariados)

 This is conventionally called compensation of employees

Capital Income/Payments (KI), Firms’ profits, Interest, Rents… (Excedente

bruto de explotación).
 This is conventionally called Operating Surplus

Net indirect taxes (taxes-subsidies)

𝐺𝐷𝑃 = 𝐿𝐼 + 𝐾𝐼 + (𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑇𝑎𝑥𝑒𝑠 − 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠 )

Here i stands for country i.
 How to measure the GDP (XVII)

• For the Spanish case (INE), this is the sum of all the rents.

Rentas 2021 (A)

Remuneración de los asalariados 584.966
Excedente de explotación bruto / Renta mixta bruta 496.252
Impuestos menos subvenciones sobre la producción y las importaciones 125.624
PRODUCTO INTERIOR BRUTO A PRECIOS DE MERCADO 1.206.842
PIB per cápita (Euros)
PIB per cápita (*) 25.498
 GDP Summary
GDP Production Side – GDP Income Side – GDP Demand Side –
VA Approach Rents’ Approach Expenditure Approach
+ VA Agriculture + Labor Payments – + Consumption made by
Salaries households
+ VA Manufacturing + Capital Payments + Consumption made by
Public Administrations
+ VA Construction * Firms’ Profits + Gross Capital Formation
+ VA Services * Interests and Rents *Fixed Gross Capital
from production factors Formation
(Excedente Bruto de *Construction and
Explotación) others
= GDP factor prices = GDP factor prices *Changes in inventories
+ Indirect Taxes + Indirect Taxes + Exports of Goods and
Services
- Subsidies - Subsidies - Imports of Good and
Services
= GDP at market Prices = GDP at market Prices = GDP at market Prices
 National Accounts – Alternative
macro indicators (I)
• The Gross National Product (GNP) measures the total
production of goods and services produced by national factors.
• It is based on the nationality of production factors, not on the
geographical location of production factors.

𝐺𝑁𝑃 = 𝐺𝐷𝑃 + 𝑅𝑁𝑅 − 𝑅𝐹𝑅

• Where RNR stands for the Rents of National Residents

obtained abroad. RFR indicates the Rents of Foreign Residents
obtained in the country.
• GNP does not include intermediary goods and services (to
avoid double-counting as in GDP)
• It is also known as the Gross National Income (GNI).
 National Accounts – Alternative
macro indicators (II)
• We can convert the GNP into the Net National Product (NNP) if
we take out the depreciation.

𝑁𝑁𝑃 = 𝐺𝑁𝑃 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

• Have in mind that depreciation is the loss of value suffered by

production factors. Estimates are around 3%-5%.
• If we additionally take out the Net Indirect Taxes (Indirect Taxes –
Subsidies), we get the Net National Income (NNI), such as:

𝑁𝑁𝐼 = 𝐺𝑁𝑃 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝑁𝑒𝑡 𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑇𝑎𝑥𝑒𝑠

 National Accounts – Alternative
indicators (IV)
• In general, we can move from Gross to Net Magnitudes by filtering
out by depreciation and net indirect taxes.

• In this way, we can get for instances the Net Domestic Product
(NDP):

𝑁𝐷𝑃 = 𝐺𝐷𝑃 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

• The NDP is a measure of all the goods and services produced in

an economy net of depreciation.
 Summary National Accounts (I)

To convert MARKET PRICES to FACTOR PRICES - Move indirect Taxes and

Subsidies
GDP at Market Prices = GDP at factor prices + Indirect Taxes - Subsidies
GDP at Factor Prices = GDP at market prices - Indirect Taxes + Subsidies

To convert GROSS MAGNITUDES to NET MAGNITUDES- Take out Depreciation

Net National Product (NNP) = GNP – Depreciation (of physical capital)
Net Domestic Product (NDP) = GDP – Depreciation (of physical capital)
 Summary National Accounts (II)

GDP Obtained from any of the three approaches is GDP at market

prices(*)
(*)If we don’t take out net indirect taxes (-Indirect Taxes+Subsidies), we get
magnitudes at market prices
+ Rents from National Residents in other countries (payments from foreign
countries for factors of production)
- Rents to Foreign Residents in other countries (payments to foreign
countries for factors of production)
= GNP at market prices = Gross National Income (GNI)
- Depreciation
= Net National Product
- Indirect Taxes + Subsidies
= Net National Income
 Summary National Accounts (III)

GDP Obtained from any approach is at market prices

- Indirect Taxes + Subsidies
= GDP at factor Prices
+ Rents from National Residents in other countries (payments from
foreign countries for factors of production)
- Rents to Foreign Residents in other countries (payments to
foreign countries for factors of production)
= GNP at factor prices
- Depreciation
= Net National Income (NNI)
 Further topics on the GDP (I)
• What is not included in the GDP?

Activities not registered in taxes. Not only

illegal activities but activities such as those
from students, housework…

• It is highly related to the underground

economy (informal: black market).

• On the contrary, the GDP includes activities

that explicitly moves resources, example, an
earthquake moves resources even though this
is a natural disaster (it reduces well-being).
 Further topics on the GDP (II)

• Since many years ago, economics is fully aware of the interrelation

of the economic activity with the environmental context in which
it is developed.
• It expands the original circular flow model to incorporate
environmental topics and measures – Green GDP.

Source: CORE-ECON
 Further topics on the GDP (III)
• What if the current worldwide GDP is underestimated?

• Technologies have reduced the cost of many goods a well as

Physical Capital Goods.

• Also, technologies are improving resource efficiencies (more

productivity) in a way that is really difficult to measure and capture
(Example, take google maps every day to come to ICADE).

• It could be leading the GDP to be underestimated, showing results

below the “real” GDP – Hot topic in academic debate now

• IMF video:
https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-
Basics/gross-domestic-product-GDP
 To recap: Key concepts

 Three ways of estimating the GDP:

 Value Added approach
 Expenditure approach
 Income approach.

 GDP factor prices vs. GDP market prices.

 Gross National Product (Gross National Income) vs. Net

National Product vs. Net National Income

 Issues with the current GDP estimation and Green GDP.