Basic macroeconomic identities: description, features and formulas

Economics is the science of the fundamentals of efficient production of goods and services, their competent distribution and consumption. Its study allows us not only to better understand the processes that we face in everyday life, but also to change the surrounding reality. The basic macroeconomic identities characterize key processes in the national and world economy. They clearly from the point of view of mathematics describe what we already observe every day. The following basic macroeconomic identities can be singled out: the equality of incomes and costs, savings and investments, and the state budget.

Introduction to Macroeconomics

Every enterprise is a closed system. It is part of the national and even world economy. Therefore, any enterprise, although it works for its own benefit, but also benefits the whole of society. His work is studied by microeconomics. She studies the production, distribution and consumer activities of individual business entities. Microeconomics does not give an idea of the overall state of affairs. But it allows you to assess the strengths and weaknesses of an individual subject, its capabilities and complexity of functioning.

The economy as a whole is studying macroeconomics. Its goal is to ensure sustainable development is no longer an enterprise, but of countries or their groups. Historically, it was born later than microeconomics. Its formation is inseparably linked with the name of John Maynard Keynes, thanks to the hard methods of which the US managed to recover after the Great Depression. In his works he considered the relationship between the level of employment, interest rates and the supply of money. Macroeconomics is characterized by the operation of aggregated indicators. The object of studying this section is not just the volume of output of a separate commercial enterprise, but the gross product, not the dynamics of prices for one product, but the level of inflation. This approach was first widely used by Keynes in the 1930s. It should be noted that the founder of macroeconomics rejected the postulate of the "classics" about the ability for self-regulation inherent in the market system. He advocated strict state regulation of all key indicators.

National economy as a system

According to Keynes, unemployment is an essential characteristic of the market system. To reduce its level, the state should increase aggregate demand. However, equilibrium is possible even with large unemployment. Keynes attached great importance to the interest rate. With its help, the state can also regulate the amount of money in circulation. Keynes considered the national economy as a system. And its existence is associated with certain goals. The basic macroeconomic identities reflect those key areas that can be regulated. Among the goals of the functioning of the national economy are the following:

• Ensuring GDP growth in absolute terms and per capita terms.
• Creation of jobs and support of citizens in the period of change of positions.
• Providing stable prices.
• Balancing the distribution of income.
• Development of the country's foreign economic sector, but not to the detriment of its own citizens, but to improve their welfare.

Basic macroeconomic identities (briefly)

To carry out a competent policy, the state needs to rely on some models. Aggregated indicators such as gross domestic product make it possible to assess progress, but practically do not give an idea of what methods should be applied to change the current situation. And here the basic macroeconomic identities come to the rescue. These models allow a deeper assessment of the situation, see the weak points of the national economy. Among them the following are the main ones:

• Income and expenses.
• Savings and investments.
• Of the State Budget.

Equity of income and expenditure

This is the basic macroeconomic identity. It simplifies the components of the gross domestic product. The equality of incomes and expenses does not take into account indirect taxes, the difference between types of investments, transfers of the business sector. The basic macroeconomic identity offers a method for calculating the gross domestic product by the size of expenditures of different groups of subjects. For a deeper analysis, there are a number of other indicators that are determined on the basis of GDP. Among them, for example, is national income.

To understand the identity, let's denote the letter Y - the value of the total output. The costs of the consumer, business and public sectors are C, I and G, respectively. Since our national economy is not a closed system, it is necessary to introduce another indicator in the formula. This is net exports. We denote it by the letters NX. It will be equal to the difference between the country's exports and imports. Thus, the macroeconomic identity of incomes and costs can be reduced to the following formula: Y = C + I + G + NX.

Savings and investments

All the basic macroeconomic identities reflect the real state of affairs, but make a significant simplification. The equality of savings and investments considers the national economy apart from the outside world. It also excludes the public sector from the field of study. Then Y = C + I. This is the formula for calculating GDP for costs in the absence of state and external sectors.

Now consider the gross domestic product from the point of view of entrepreneurs. All that they earned can be spent or saved for investment in future periods. Thus, Y = C + S, where C is consumption, and S is savings.

We combine both equations. We get: C + I = S + C. From the basic macroeconomic identity it follows that, by reducing the same indicators on both sides, we can see the equality of investments and savings.

Formation of the state budget

The basic macroeconomic identity implies that in the long term any country strives to increase its own production and presence in the sales markets, including abroad. But first you need to be able to balance the state budget. We have already considered that all incomes of the public sector can be used for consumption and savings. The latter can be aimed at investing in real or financial assets.

Simplify the model even more. Under financial assets, we will only understand money and government bonds. We introduce the notation. Sg - public sector savings, ΔM and ΔB - changes in the money supply and the value of bonds in circulation. Let's make one more appeal. Let all the savings the state can spend either to increase (reduce) the money supply or change the value of bonds issued by it. Thus, Sg = - (ΔM + ΔB). This is the identity of the state budget. It shows that the deficit can be financed only by increasing the supply of money or issuing government bonds.

Neo-Keynesian models

The national economy is an extremely complex system. And its functioning is associated with a significant share of uncertainty. The basic macroeconomic indicators of identity are characterized by a 100% probability. This is the strength and weakness of all deterministic models. Representatives of the neo-Keynesian trend seek to expand the set of indicators. However, in most of their models, the only growth factor is investment.

The Neoclassical view

Models of representatives of this direction are much more dynamic. Most of them allow state interference in the functioning of the national economy, however, only in times of crisis. Neoclassics in their models take into account such factors as the change in technology, the qualification of labor resources, the efficiency of the organization of production processes.

Use in solving problems

The formula of the basic macroeconomic identity allows to calculate the gross domestic product. It takes into account the costs of various sectors of the economy. Common in the initial stages of studying the economy as a discipline in a school or university is a comparison of the results of calculating GDP by the first and second formula. Ideally, the gross domestic product, determined by cost, should correspond to the indicator that resulted from the summation of income.