Economics for Policy Makers

A Guide for Non-Economists

Gustavo Rinaldi

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429754654
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Certain key economic decisions taken by organizations and indeed countries are often not made by economists but by businessmen, trade unionists, politicians and policy-makers. Those who employ people, those who represent workers, those who make laws and those who elect them need economics but may have little time or desire to study it.

This book makes economics easily available to everyone. The author's use of simple language and avoidance of technical jargon provides non-economists with a better understanding of economic reasoning and the tools "to know and to decide". The author achieves this through introducing key concepts in short presentations and arming the reader with selected press articles and recent research using these concepts. An analysis of these demonstrates how a general concept can be derived from a specific context and highlighted questions provide the basis for further debate. The reader can then focus on the parts most relevant to their own needs.

This book will have great appeal to employers, trade unionists and public officials attending courses organized by international institutions, professional training providers, as well as graduate students of courses where economics is an important element, especially in relation to its policy implications. Finally, it is invaluable for anybody who has wanted to learn the basics of practical economics but has been deterred by its technicalities.

Macroeconomics

The decisions of policy makers, those of companies and those of trade unions should take into account the economic context in which firms operate: the economy of the region, of the country and of the planet. In this context there is interaction between the private sector, government authorities and foreign entities. All these actors handle both real goods and financial assets. Macroeconomics covers these topics, i.e. the economic environment in which firms and families operate.

Part IV
Introduction to macroeconomics

In this part we introduce the key words that those contributing to the making of the economic policy of a country should know. Firstly, we describe the main types of goods and financial assets.

Goods (food, clothes, raw materials, houses, equipment, health care, semi-finished goods, bridges, school buildings, educational services, among others) have inherent value and are able to provide direct utility to their users.

Financial assets (money, bonds and shares, among others) also have a huge influence on our everyday life. They have no inherent value and are only useful because they represent claims against real assets, i.e. goods. However, they can be used as units of account, means of exchange, stores of value, instruments for taking risks (and potentially receive compensation for this) or for protection against risks.

We present first of all the key words of national accounts, describing the market for goods, then we introduce the most important financial asset: money and its relationship with prices.

8
Key words of national accounts

Some key words appear in any negotiation concerning employment and public policies. Participants in such negotiations cannot afford to ignore them. For this reason, this section introduces the key terms concerning the market of goods in national accounts. The discipline, which defines and measures macroeconomic variables is called “National Accounting”. It defines the key concepts and how to measure them. Just as financial accounting (income statement, profit and losses account, and balance sheet) enables us to measure the activity of a firm, national accounting enables us to measure the activity of a country or region.

The System of National Accounts (SNA)

The System of National Accounts (SNA) is the internationally agreed standard set of recommendations on how to compile measures of economic activity. The SNA describes a coherent, consistent and integrated set of macroeconomic accounts in the context of a set of internationally agreed concepts, definitions, classifications and accounting rules.

In addition, the SNA provides an overview of economic processes, recording how production is distributed between consumers, businesses, government and foreign nations. It shows how income originating in production, modified by taxes and transfers, flows to these groups and how they allocate these flows to consumption, saving and investment. In consequence, the national accounts are one of the building blocks of macroeconomic statistics, forming a basis for economic analysis and policy formulation.¹

We start by considering the source of the goods that a country uses, and then the possible uses of what is available.

8.1 Supply (sources) of goods: production (GDP) and imports

The goods that we need may be produced domestically or abroad. If they are bought abroad, they are imported. They represent the imports of a country. They come from foreign organizations which are not usually accountable to the authorities of our country. They may or may not wish to trade with our country.

Domestic firms produce either intermediate or final goods. Intermediate goods constitute the “Inter-Industry Use” or intermediate consumption of firms (see Section 2.1). Intermediate goods are purchased by the firm and are used up in the firm’s production process. They usually do not remain with the firm for more than one production cycle. Their value is embodied in the products that the firms produce. Metal rolls, transformed into components of cars, or electric power used to light a theatre or a classroom, are examples of intermediate goods.

Final goods are those which are sold to the final user. They are not processed further before reaching their ultimate, final user. The final user may be a firm, which buys durable production goods, i.e. a firm buying investment goods, for example equipment; it may be a family, it may be a public administration or it may be a foreign resident.

We have explained above that any goods not used for intermediate consumption are final goods. The sum of all the values of final goods produced in a country is termed the Gross Domestic Product (GDP).

If we consider the value of the final goods at their current price, we have Nominal GDP or GDP at Current Prices. If we consider the value of the final goods at the prices of a different year (a reference year), we obtain GDP at Constant Prices or Real GDP.

Nominal GDP or GDP at current prices must be used for comparisons with all the economic variables for the same year. Did consumption in 2016 represent a large share of the production of our country? To answer this question, we should compare the consumption in 2016 with the nominal GDP (or GDP at current prices) 2016.

Was the production in 2016 bigger than the production in 2015? To answer this, we should compare the real GDP 2016 (or GDP 2016 at constant prices) with the real GDP 2015. The real GDP or GDP at constant prices is what we use to compare the production in different years.

The sum, or “the aggregate” as economists say, of the value added (see Section 2.1) by all private firms and public administrations operating in a country is an alternative way of defining the GDP of a country. Finally, the production or GDP of a country is also equivalent to the remuneration of all those who have supplied capital (land, buildings, equipment and financial capital, among others) or labour (unskilled, skilled and managerial among others) for the production in the country. It is fair to say that, when we reduce the sum of salaries and profits in a country, we reduce the GDP of that country.

8.2 Uses of goods: household consumption, private investment, government spending and export

The final user of final goods can be a resident family, a firm, a public administration or a foreign resident (family, firm or government). We classify final goods according to their destination.

When resident families purchase goods, we speak of “consumption goods” (C). According to national accounts, families only carry out consumption, with just one exception: families buying new houses or new flats. This is considered “residential investment” and it is the only form of investment that families can carry out.² During the following periods, new houses permit consumption, offering accommodation to families (housing services), virtually without involving any additional labour. Consumption is usually the main destiny of goods in a country and is also the major component of internal demand (the sum of all uses except export). Usually countries are stronger when they can rely on strong internal demand.

When a resident firm purchases final goods, then we speak of “private productive investment”. The general term “Investment” or “Gross Capital Formation” includes not only purchases of buildings, equipment and immaterial assets (licences, brands and patents among others) by firms (fixed productive investments), but also changes in firms’ inventories and purchases of new buildings by families (residential investments). The three components of investment have quite different characteristics.

“Private fixed productive investments” represent intentional increases in the real capital of firms. Usually fixed productive investments entail an increase in the productivity of the firm or the employment of more workers. They increase the production capacity of a country. The growth of private fixed productive investments usually indicates that firms are optimistic about the future and it is often a source of the growth of the country’s income. Making new useful investments is probably one of the major functions of firms.

“Residential investments” denote intentional increases in housing capacity for families; they increase the possibility of future consumption (including housing services), and they employ labour mainly when under construction, but not afterwards. For this reason, they are not “productive” investments. They are carried out by non-professional buyers (families) and are also highly exposed to speculation and “bubbles”, excessive growths of prices. We should be very careful, even suspicious, when most of a country’s development depends on these investments.

“Changes in inventories” are often not intentional; firms have to change their inventories when they sell more or less than they had previously planned. If, after a period of normal economic growth, inventories start to increase abnormally, they often indicate that firms are no longer able to sell their output and may face difficulties. Changes in inventories are a bellwether of the economy, and for this reason, are carefully monitored by policymakers. When final goods are purchased by a part of government (federal, national or local), then we speak of Government Spending (G). This is the sum of government consumption (salaries of public employees and intermediate consumption of the public sector) and government investment, the purchases of equipment and buildings by the public sector. In national accounts, government spending does not include pensions, benefits or interest on the public debt; pensions and benefits are also called “transfers”. It includes all purchases by the public administration, public procurement, and all payments to public employees for their services (army, police, National Health Service, teachers, firefighters and other civil and public servants). Much of the public policy debate...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Foreword
• Acknowledgements
• Author’s note
• Microeconomics
• Macroeconomics
• Index