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Macroeconomy Investigation of the economic outcomes affecting every…

- - - - The income approach
        The added value generated by a production process will be used so as to pay the factors of production : the GDP is also a measure of total income generated within an economy. An output which generates an added value:
        -has been sold at a value that is superior to the costs pertaining to the purchase of intermediate inputs...
        -...which means this output has generated revenues for the firm
        Primary revenues are revenues that are generated by the creation of added value
        
        Among which economic agents are those primary revenues shared ?
        
        The production factors :
        (a) Labour : the share of added value allocated to the firm’s employees (taxes included) is referred to as “payroll”
        (b) Capital : the share of added value allocated to a firm’s capital inputs is referred to as “gross operating surplus”
        Physical capital : machinery, buildings
        Financial capital : owner’s equity, borrowed funds
        
        Public administrations : a share of the added value accrues to the State through input taxes :
        Indirect taxation (VAT)
        All the other taxes pertaining to the output process : land value tax, royalty payment (blueprints), etc.
        
        As defined above, the primary revenues encompass all the revenues generated by the creation of added value
        Secondary revenues : all the revenues generated by the redistribution of the different taxes (social security, labor taxes, capital gains taxes, etc.) levered at the primary revenues→ unemployment benefits, child benefits, retirement benefits, etc.
        Those secondary revenues are not counted when computing the GDP, since
        they are not the result of the creation of added value (transfer revenues)
      - The expenditure approach
        The added value generated by a firm’s output results from the purchase of the firm’s output
        → The GDP can also be measured by adding up all the expenditures pertaining to the purchase of an economy’s final output
        National accounting identity present in almost all macroeconomic models : Y=C+I+G+X−M
        Y = an economy’s total output, economy’s total expenditures, economy’s total income
        C = Consumption, i.e. household’s purchases of final goods and services
        I = Investment, i.e. firm’s purchases of new equipment goods > IMPORTANT : the stock variations are also accounted for in the “investment” category.
        Volkswagen produces a car in November 2000, but only sells it in march 2001, for a total value of 7000 euros.> added value” approach : the car is included in the GDP measure for the year during which it was produced, i.e. 2000
        “Income” approach : the remuneration of the production factors that were used for the production of this car will occur in 2000 “Expenditure” approach : the car was finally bought in 2001, meaning that its purchase will appear in the “C” category in 2001 ! → Compatibility problem between different GDP computation methods
        ⇒ Solution : explicitly account for stock variations ! (as mentioned above, included in category “I”). In 2000 : +7000 in the I category (stock increase). In 2001 : -7000 in the I category (stock decrease) and +7000 in the C category (private consumption expenditure)→ 7000-7000=0 : nullified operation in 2001
        G= Government expenditures, i.e. the final goods and services purchased by the State.
        Includes teachers’ payroll...
        ...but not the social transfers such as unemployment benefits !
        X = eXports, i.e. the domestic final goods and services purchased by foreign economic agents
        M = iMports, i.e. foreign final goods and services purchased by domestic economic agents
        NX = X - M = Net eXports. More precisely, when a household/firm/government buys a foreign product, this purchase appears negatively in -M, but also positively in C, I or G → again, nullified operation
      - The production approach
        The term “added value” is actually more accurate than production/output
        Added value = revenue - purchases of intermediate goods/services
        Indeed, by adding all the domestic firms’ revenues, we end up counting several times the intermediate goods and services supplied by firms to one another ! !
        ⇒ This is why we rather use the added value, which measures the net contribution of a given firm to the total output value
        
        Example:
        We consider two economies, A and B
        The only economic activity in those two economies is the production of bread
        Economy A: 3 transaction stages(farmers→millers →bakers)
        Economy B: 2 transaction stages(farmers→bakers)
        Economy A:Farmers produce 10 tons of wheat, that they sell to the millers for 100e perton;Millers transform the wheat into 8 tons of flour, that they sell to the bakersfor250e perton;Bakers produced 10000 breads, that sell sell for 1e each
        Economy B:Farmers produce 10 tons of wheat, which they themselves transform into 8 tons of flour, that they sell to the bakers for 250e per ton;Bakers produced 10000 breads, that sell sell for 1e each
        f we were to measure the economic activity by counting the value of output as estimated at each transaction stage, we would obtain:
        Economy A: (10∗100)+(8∗250)+ (10000∗1)=13000e
        Economy B: (8∗250)+(10000∗1)= 12000e
        The economic activity seems greater in A than in B, even though the goods produced within the two economies are strictly similar !>>double counting
        Solution : to measure the economic activity by only considering the added value for each production stage
        Economy A :
        (10∗100)+(8∗250−10∗100)+(10.000∗1−8∗250)=10000e
        Economy B: (8∗250)+(10000∗1−8∗250)=10000e
        RQ : a method that would yield strictly equivalent results consists in adding only the revenues of firms producing final goods/services (as opposed to intermediate) > In our example, counting only the value of the final bread production
        The distinction between intermediate and final goods is not made based on the nature of the product, but on its use
        Intermediate good: a good which is used as an input in the production process of another tradable good or service
        Final good: a good that is consumed by the end user and does not require any further processing