First seminar European economics

What is the economy?

1930’s discovery of the economy
 Whole concept did not exist

Tracking the economy

Measuring the economy is not easy
- Problems of aggregation
- What is ‘the economy’?
- Imagining the economy
- Different models

Gross domestic product (GDP)

- Total market value of final goods and services produced within a country in a year

- By far the most important statistic

- Used for growth, recessions, living standards, international comparisons

‘’ economic growth’’ or ‘’growth’’ = growth of GDP

All the transactions, all the purchases we add it all op -> value of the GDP

Problems with GDP

- Bad indicator for happiness or well being
- Doesn’t include environmental damage -> oil damage
- Doesn’t include household production-> green garden own vegetables or other
- Doesn’t include the informal economy-> painting, drugs, unemployed people,
prostitution, they overall do not pay taxes.
- Doesn’t include free internet services->

Blood to hospital-> transaction, voluntary give blood, it is a service, but it is not concluded in
the GDP.

GDP is the most common measure but there are others:

 Gross versus net (depreciations)
 Domestic versus national (produced in NL, of belonging to the dutch)
 Market prices versus factor costs
 Product versus income

Beyond GDP?

3 different ways

Measuring GDP:
measurement of GDP
Bookkeeping at national level = national accounting

Three methods:
- Factor income method
- Expenditure method
- Production method (value added)

!!! in the exam

 Production = income = expenditures

1) Factor income method

Y= wages + interest + rent + profit

- Labour (=wages)
- Capital (=interest)
- Land (=rent)
- Entrepreneurship (=profit)

2) Measuring expenditures

All spending in the economy, by different groups

Y= C + I + G + (X-M)

- Consumption
- Investment by firms
- Government expenditures
- Net transaction abroad (export X – import M)

3) Measuring production (=value added)

Value-added = sales – inputs (intermediate goods)

- Danger of double counting

Two important corrections for nominal GDP

Correction for population growth/differences
- GDP per capita
- The biggest economy (USA) vs. the highest income per capita (Luxembourg)

Correction for inflation

- Nominal vs real GDP
- More money (nominal) vs. more purchasing power (real)

Nominal = in name only

Real GDP= total value of all final goods and services produced in the economy during a given
year, calculated using the prices of a selected base-year

w/p

two important corrections for nominal GDP

nominal GDP = x amount of euros
real GDP = GDP /p

Car industry economy

First method was asked in the exam last year ->
All the factors payments

The Philips curve.

Unemployment and inflation

Less wages, producers are not going to sell their product as consequence -> the prices go
down.

Overheated economy, tight label market, half a million unemployed people, wages get
higher.