ECO105 Lecture 1: Measuring Economic Aggregates

• ECO105: Major Contemporary Economic Issues, Spring 2025, Lecture 1 is an introduction to measuring economic aggregates.
• Jesko Hentschel is the lecturer.

Course Basics

• There are seven lectures, three lab sessions, Q&A sessions, and office hours in the semester.
• The professor and TA jointly lead lab sessions/Q&A. Students present tasks/short oral presentations in these sessions.
• The syllabus contains required reading for each session and the CANVAS has other course materials.
• Jesko Hentschel's office hours are Wednesdays, 15h00 to 16h30, in office A-C1-11. You should send an email beforehand.
• There is a mid-term exam in week 7 and a final exam.
• The mid-term is worth 30%, the final is worth 30%, attendance and active participation is 20%, and presentations in lab sessions are 20%.
• M. Mahmoud Yassine El Mesnaoui is the Teaching Assistant

Key Concepts

• Macroeconomics studies aggregate activity and its core outcomes such as economic activity, growth, inflation, unemployment, and employment.
• National income accounting provides the framework for calculating gross domestic product (GDP) as a measure of aggregate economic output.
• Gross Domestic Product (GDP) measures the market value of final goods and services produced in a country over a specified period, and can be measured as production = expenditure = income.
• GDP measure has limitations.
• Prices are measured to distinguish nominal from real GDP.
• GDP of a country (total income) divided by total population is how income per capita is measured
• Countries are arranged from poorest to richest when looking at global income distribution.
• What a given amount of money can buy is the same and adjusted for prices, or purchasing power parity (PPP).

Introduction – Histories Hockey Stick Income

• In some countries the History's hockey stick is more pronounced than in others.
• Britain started growth around 1650.

Introduction – Climate

• Consequences of climate change include melting of polar ice caps; rising sea levels/destruction of coastal areas; strong changes in climate and rain patterns causing both droughts and floods; destruction of growing areas for food; and uninhabitable zones.

Introduction - Poverty and Inequality

• Extreme poverty is the share of the world population living in poverty.

Poverty and Inequality

• The global income distribution in 2019 shows the average daily income distribution by country
• One way to measure income inequality across countries is average income per day in each country
• Measured so that what a given amount of money can buy is the same (adjusted for prices – purchasing power parity (PPP)
• Countries are ranked by income per capita from left to right.
• Heights of bars show average income for decile groups of the population, from poorest 10 percent (front) to richest 10 percent (back).
• There is not only between-country income inequality but also within-country income inequality.

Introduction - Continuous Technological Revolution

• A stick-part of the curve represents sustained rapid growth in GDP per capita experienced by countries worldwide.
• Technological revolutions spurred and drove this.
• Huge numbers of scientific and technological advances coincided with the upward kink in Britain’s hockey stick during the mid-18th century.
• New technologies emerged in textiles, transport, and energy, which quickly became obsolete.
• The Industrial Revolution is the term for this period of cumulative innovation.
• Technology is a process that takes a set of inputs and creates an output

Introduction – Population Explosion; Another Hockey Stick

• UN demographers expect the world population to peak at 10.4 billion in 2086 and to decline thereafter.
• The Black Death pandemic killed between a quarter and half of all people in Europe in the mid-14th century.
• The world population in the year 0 was around 190 million.
• The world population was around 4 million in 10,000 BCE.
• The average growth rate from 10,000 BCE to 1700 was 0.04% annually.
• Global life expectancy before 1800 was less than 30 years, up to 73 years in 2023.

The Wealth of Nations – Measuring Macroeconomic Aggregates

• Key macroeconomic topics include figuring out what the income per capita of a country is and measuring it, as well as what causes GDP to sometimes grow and sometimes decline

• Economies, like firms/households, do not always experience an increase in income and this can be due to policies, conflicts, or crises.

• A recession is a period lasting at least two quarters in which the aggregate economic output falls.

• A person is unemployed if available to work and looking for work during a specific period of time.

• The unemployment rate is the percentage of all persons unemployed within the active population.

• In Morocco, the unemployment rate has been on a rising trend over the past fifteen years, and the activity rate has declined

• GDP can be measured in three different ways, imagine a small country that makes only automobiles, producing 5 million each year that sell for $30,000

  • In this example, the Production is the total market value of annual production in a nation: $30,000 (price) times 5 million automobiles = $150 billion(important to count final goods & services (not counting the intermediate products)
  • Expenditure accounting is those buying the cars (domestic or from abroad) are paying the exact amount of money, this is hence production accounting=expenditure accounting.
  • Income is when the $150 billion gets distributed between workers (salaries) and those owning the company, so, hence, $X (salaries) + ($150 billion - $X) = $150 billion

• Factors of production are the inputs that consist of labor and capital.

• Key is the connection between households and firms, as Households demand goods and services, but supply labor and capital.

• Value added: production method measures this of each enterprise in the production process.

• Value added is the value of the total production minus what inputs cost the firm.

• A new washing machine for the household counts as consumption expenditure.

• Investment is physical capital bought by households or firms, such as new residential housing and business equipment, but should not include financial investments.

• Government Expenditure includes the market value of government goods and services (hospital, medical services etc), it does not include transfer payments or interest on government debt because those are the incomes of others.

• Exports are all goods and services that are being exported to other countries, which are produced domestically but sold abroad and need to be included as another category.

• Imports overlap with consumption, investment, and government expenditure, so one needs to subtract the value added of imports from the expenditure side of national income accounting.

• GDP equation: the market value of domestic production is equal to the total expenditure of domestic economic agents (C+I+G) plus the expenditure of foreign agents on exports from the domestic economy (X) minus the value of domestic expenditure that was imported (M), or GDP = C + I + G + (X-M).

• GDP has its limitations

  • Doesn't measure depreciation of capital & destruction through conflict of machinery or buildings/infrastructure in conflict.
  • Externalities are negative, with activities that has a spillover cost that is not directly paid for by the party conducting the activity.
  • Home production like meals.
  • Poverty and inequality.
  • Doesn't measure the informal or underground economy.

• Total value of production of final goods & services using current market prices to determine the value of each unit is nominal GDP.

• Total value of production(final goods and services)using market prices from a specific year to determine the value of each unit that is produced (so implying valuing the production of one year (ie 2020) in the prices of another year (ie 2019)) is real GDP.

• This is hence a measure of the real value of production (quantity), excluding the effect of changing prices over time.

GDP Deflator

• It is 100 times the ratio of nominal GDP to real GDP for the same year and measures how much a country's prices have risen since the base year.
• The difference between nominal and real GDP is important because the "quantity change" related to economic output, so this is important to distinguish from price.
• Some countries undergo run-away inflation which has distressful effects, so real GDP abstracts from inflation.

Aggregate Incomes

• Key ideas include:
• Large differences across countries in GDP per capita exist
• Comparisons can happen across countries using GDP per capita at current exchange rates, or at purchasing power parity
• In the aggregate production function, a country's GDP to its capital stock, its total efficiency units of labor, and its technology are linked.
• Cross-country differences in GDP per capita result partly from differences in physical capital per worker or human capital of workers, but even more so than technology and the efficiency of production between the different countries.
• GDP per capita can be used in comparing income and living standards around the world, but its use is limited.
• GDP per capita is defined as GDP / total population.
• Compare nominal exchange rates that express all countries GDP per capita in US dollars.
• In Morocco: GDP in US$: GDP Morocco dirhams (1,463.3 billion dirhams) x exchange rate dirham per US$ (10.2) = US$144 billion
• GDP per capita Morocco in US$=GDP in US$ (144 billion)/population(37.7 million) = US$3805.
• GDP per capita measures compare economic development without taking into effect prices and how much it would cost to purchase a basket of goods.
• Purchasing Power Parity (PPP), constructs the cost of a basket of commodities in each country and uses these relative costs for comparing income across countries.
• Morocco GDP per capita in PPP$ = Moroccan GDP per capita in dirhams x $/dirhams PPP rate
• MAD 1,463.3 billion/37.7 million x .226 = US$8782 (data source is Trading Economies).
• GDP per capita measures cannot capture diverse dimensions of general wellbeing in an entire population.
• In the US, the top 1% earns 22% of the income, whereas in Norway the top 1 % earns 7.8% of the income.
• Extreme poverty is measured as income per person of less than $1.90 US$ per day (or around $2.15 now) within purchasing power parity. It originates from the World Bank.
• It was originally developed by looking at extreme poverty lines from the poorest countries and taking the average. There is strong but not perfect correlation.
• There is strong correlation between richer countries and increased life expentancy.
• Human Development Index(from UNDP) combines info on GDP per capita, life expectancy, average years of schooling for those above 25 and enrollment of children in school.
• Productivity differences across countries stems from differences in
• Human capital: the stock of skills to produce output or economic value
• Physical capital: stock of machines and building used for production
• Technology: A variety of devices and practices that determine the degree to which an economy efficiently uses labor and capital

Aggregate Production Function

• Describes relationship between aggregate GDP of a nation and its factor of production
• Total efficiency units of labour (H) as a product of total number of all the worker (L) in the economy and the average human capital of the all the workers average
• This shows that H= L x h
• A variety of natural resources and physical capital can also be utilized.
• Also, technology determines how efficiency, capital, labor, and land will be used

Aggregate Porduction

Subject to Law of Dimishing Marginal Product

• The marginal contribution of a factor of production to GDP (increase value total production / economy output) will diminish, as as you increase quantity used with that factor of production to grow

Role and Detriments of Technology

• As technology improves, the aggregate production function shifts upward, increasing the amount that can be produced
• More can be produced with the same amount of physical capital stock and efficiency units of labor.

Dimensions of Technology

• It has two components:
  • The knowledge to produce certain goods and to produce them more efficiently changes over time.
• Research and development is an important driver of knowledge generation: Total R&D expenditure in Morocco in 2022 was estimated at about $2 billion US(Statista), around 1.4% of the GDP
• In 2001 -2019 contributions increased to 3 factors of production (in percent)
• Also for Morocco,
  • efficiency of protection.
  • the means of production and knowledge matters for efficiency
• Entrepreneurship: efficiency is also closely linked to the skills of entrepreneurs, with both technical and soft skills.