Understanding Macroeconomic Aggregates and National Accounts
Macroeconomic Aggregates
Macroeconomic aggregates allow the measurement of a country’s economic activity. When we speak of macroeconomic aggregates, we are referring to the set of macroeconomic variables, which can be classified into three types: aggregate quantities, aggregate prices, and monetary aggregates.
System of National Accounts (SNA)
The national accounting system aims to quantify economic activity by making use of aggregate economic variables of the macroeconomic aggregates systematically. The SNA basically seeks to reflect the basic features and services flow that are produced and exchanged over time.
GDP and the Circular Flow of Expenditure and Income
National income accounting is not only a conceptual, measurement, and classification system, but also a registration system and generation of periodic reports on economic events made by certain operators and based on different accounts. The collection and recording of this information is part of economic transactions or entities perform, such as businesses, families, government, and the rest of the world.
The System of National Accounts: Transaction Representation
A transaction, as discussed in the previous section, can also be represented by a set of accounts that comprise the system of national accounts. There are five accounts that define this system:
- Product and expenditure account
- Family account
- Capital account
- Government account
- Rest of the world account
Product and Expenditure Account
This account shows the value of the product on the income side and the expenditure side. The GDP on the spending side is equal to the sum of consumption expenditures, government expenditures, investment spending, and net exports (exports minus imports).
Capital Account
This account reflects investment spending and the total savings in the economy. It demonstrates that, in accounting terms, saving always equals investment. Gross capital formation and net investment abroad are recorded as debit items. Household savings, corporate savings, and government savings are recorded as credit items.
Family Account
This account shows receipts and payments or running costs of the family. Private consumption, direct taxes on family income, and household savings are recorded here.
Government Account
This account shows all deposits or payments from the government sector flows. Among the debit items are government spending, transfers to households, and government saving.
Rest of the World Account
This account holds the rest of the economies as a whole; it is a consolidated account of all the countries with which the country in question interacts.
Purchasing Power Parity (PPP)
Purchasing power parity suggests that, in the long term, the value of assets is equal in all parts of the world. For example, a block of goods in Peru should have the same prices as in the U.S.
Basic Solow Model
Empirical evidence shows that poorer countries grow faster than richer countries, and countries that save more grow more.
Business Cycles
The theory of business cycles attempts to explain the fluctuations observed in the aggregate economy.
Prices of Goods and Services
The price of goods is equal to its cost of production plus a profit margin. The percentage change in the Consumer Price Index (CPI) measures inflation in the economy.
Real and Nominal Prices
The nominal price of a good is simply its absolute price.
Consumer Price Index (CPI)
The CPI is a weighted index, where each good and service is given a representative weight in the structure of family expenditure.