Lesson 1:

Analytical and empirical framework.

Outline

1.1. The data: overview of national income accounts and financial transactions and balances
sheets
1.1.1. National income accounts (NIA)
1.1.2. Financial transactions (flows of funds) and balance sheets
1.1.3. Appendix 1. Official statistics (in Moodle)
1.2. The theory: overview of the post-Keynesian (PK) model and its major contributions to
growth theory
1.2.1. Main traits of PK economics
1.2.2. Main traits of the PK growth model

1. The Data

The “economy” refers to the process of production, distribution, demand and finance.

Economics (as a science) studies the laws (regularities or forces) that rule the process of
production, distribution, demand and finance.

National accounts gather the relevant data regarding the processes of production, distribution,
demand and finance.

1.1 Nacional income and production accounts (NIPA)

Summary of the key ideas:

 National accounts try to compute the net wealth created in a given period (usually a year)
in a given country (or region).
 It computes it from the three basic perspectives: final production or value added, final
demand and income.

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 We can refer them to the nation as whole or to any single institution. The main economic
institutions contemplated by NIA are
o Households and non-profit organizations (H)
o Non-financial corporations, that we translate as “firms” or “corporations” (NFC)
o Financial institutions (commercial and investment banks) (FI)
o Government or public sector (G)
o Rest of the world (we are only interested in the transactions between our country
with the rest of the world, RoW)
 Each perspective has its own aggregates:
(a) Final output: final consumption goods plus final investment goods. It is usually
measured by the value added method. Firms are requested to inform of total sales and
total purchases to other enterprise. The difference is value added.
(b) Income:
a. Primary income: Income of factors of production (labour and capital). Sum of
compensations of employees (wages) + gross surplus (profits). The sum of this
two aggregates amounts to the value added previously computed.
b. Secondary income. Income of institutions (H,NFC, FI, G) after subtracting net
income payments as interest rates, property rents...
c. Disposable income: Income of institutions available to be consumed (or saved).
After adding net transfers and subtracting taxes
i. Notice that if we are referring to the nation as a whole all these
movements cancel out are only left with rents, transfers and taxes to
the rest of the world
(c) Final demand. It is the sum of final consumption (private and public), final investment
(private and public) and net exports (exports – inputs). Alternatively we can add:
household consumption + private investment (firms in equipment and buildings and
households in houses) + public real expenditure (public consumption and public
investment) + net exports.
 Methods. We can present the aggregates in two alternative ways that we illustrate below:
o Circuit (economic or real circuit)
o Sequential presentation: a succession of balances from total output to final output,
disposable income, savings and net lending position.
o The final item of the national accounts is the net lending position that equals the
balance of payments (or “the current balance of the nation”, in a simplified version)

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Below we reproduce some illustrations referred to the Spanish Economy. Data are elaborated
by the INE. Although it is the Bank of Spain the first to present them. The accounts and
balances with the rest of the world (RW) are presented also by the Ministry of Economy
following the method of “Balance of Payments”

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Detail and Illustrations

(a) Circuit: the circular flow of income

Ventana 7.1
El circuito de la renta en la economía española
España 2016. En % del PIBpm = 1.113.851 M€ ( 1 billón euros)

AP
CF: 77
Agricultura 2 RDP= 17 SAL:

Industria 16 FC: 20 S:20 S=22 47

Construc. 5 TRP’
IF
Serv priv. 50 CFN:+2 EBE:
X’=+3 RM (+2) TRM’-1
Serv Pub. 17 43
.
(TP’ 11) RDpr: 82 (TP’=11)

VA ramas
Oferta Final Ag: Demanda final agregada: (TP: 11)
Renta primaria (factores):
VAB =100 =CF+FC+X’+TP’=100 SAL+EBE+TP’ =100
SOC NO FINAN
CF=Cpr+CP=58+19=77 Renta disponible
FC=FCpr+FCP=18+2=20 (instituciones):
X’=X-M=33-30=+3 RD = RDpr+RDP+TRM’=100
factores
S=Spr+SP=24-2=+22 HOGARES
CapFin (pr+P)=+6-4=+2

Nota: Las flechas indican el destino de los flujos monetarios. (a) Las flechas continuas
corresponden a operaciones con bienes y servicios. (b) Las flechas discontinuas corresponden
a transferencias y otras operaciones redistributivas, sin contraprestación. (TRP’= rentas y
transferencias netas hacia el SP; TRM’ = rentas y transferencias netas hacia el RM). (c) Las
flechas punteadas corresponden a operaciones financieras (la primera “S” se refiere al ahorro
nacional; la segunda (sin letra) al ahorro prestado por el RM. TP’: impuestos netos a la
producción.
En Óscar Dejuán: Economía, Pirámide, Madrid, 2017

(b) Sequential presentation

Total gross output (= total sales)

- Intermediate consumption (= total purchases among firms)

Gross final output = gross income = gross value added = wages + gross operating surplus

+ net current transfers

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 - Taxes
Disposable income

- Final consumption
Gross Savings

+ Capital net transfers

- Gross investment
Net financial position (net lending position if +; net borrowing position if -)

National Accounts
(Sequence of accounts)

Spanish reference: www.bde.es (see publications/financial accounts of the Spanish economy/economic

accounts/financial accounts/complementary statistics)
National accounts can be computed for a nation as a whole, and for each institution within the nation (e.g. NFC, FI,
H, G, RoW). There are some differences in terminology and in the type of transfers included (internal transfers are
cancelled out).
 USES RESOURCES 

CURRENT ACCOUNTS (I, II)

I - PRODUCTION ACCOUNT
Intermediate consumption Production of goods and services
Net taxes on production and imports
Gross Value Added
(GDP at market prices)

II - DISTRIBUTION AND USE OF INCOME ACCOUNTS (A, B, C)

A. GENERATION OF INCOME ACCOUNT
Primary distribution (to factors of production)
Compensation of employees Gross Value Added
Gross operating surplus

B. INCOME ACCOUNT
Secondary distribution (to institutions) and redistribution of income
Compensation of employees Gross Value Added
Distributed profits
Interest payments and other property
incomes
Current transfers and taxes (payable) Current transfers (receivable)
(Included direct taxation that is an
expenditure for all agents except for
government)
Disposable income

C. USE OF INCOME
Final consumption Disposable income

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 Savings

ACCUMULATION ACCOUNTS (D, E)

D. CAPITAL ACCOUNT
Gross fixed capital formation Savings
Net changes in inventories
Capital transfers (payable) Capital transfers (receivable)
Net lending
(Net borrowing if negative)

E. FINANCIAL ACCOUNT
Net financial transactions Net lending
(acquisition of financial assets)

External Accounts (Balance of Payments)

USES of RoW RESOURCES of RoW BALANCES

(Entry currency in our country) (Exit of Currency) (If positive entry of foreign
currency in our country)

Exports of goods and Imports of goods and

services services

Final consumption of non Final consumption of

residents in the country residents in RoW
(tourism in our country)
External account of goods
and services
Primary incomes from RoW Primary incomes to RoW
Current transfers from RoW Current transfers to RoW
(External) Current Account
Capital transfers from RoW Capital transfers to RoW (External) Capital Account
Acquisition of financial Acquisition of financial (External) Financial Account
assets by non residents in assets by residents in RoW
our country

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Key variables and parameters
US, 2014, WIOD, million $

Total Output =
Gross Value Added Q 13475213
Intermediate
Consumption Cim 6053906
Net output = VA Y 7421307

Wages
(compensation
employees) W 4464096
Profits (capital
compensation) R 2957212

Final consumption C 5074738

Investment (gross
fixed capital
formation) I 1214135
Real Public
Expenditure G 1350417
Exports X 1015315
Imports M 1233299

Stock de capital
(real fixed capital
stock, 1995 prices) K 18820739
Employment (total
hours worked by
employees,
millions) L 4464096

key parameters in our simulations models

=W/Y 0.60
=R/Y 0.40
c=C/Y 0.68
h=I/Y 0.16
G/Y 0.18
X/Y 0.14
M/Y 0.17
k=K/Y 2.54
l=L/Y 0.60

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Banco de España, Cuentas Económicas de la Nación, cuadro 1.8

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1.2 Financial transactions and balance sheets
They are produced by central banks using the information provides by banks and other
financial intermediaries. They contemplate the same agents as the national accounts, but they
disaggregate financial institutions in the following way

1. Monetary Financial Institutions. They include the central bank and commercial banks
and other assimilated financial institutions. As financial intermediaries they meet agents
with a net lending position (capacidad de financiación) and agents with a net borrowing
position (necesidad de financiación). Their typical liability are deposits and their typical
assets are credits. In performing such function, they create money. Any credit implies
money creation i.e. purchasing power that will be registered in a deposit elwewhere.
Total money creation in a year t will be the difference between loans granted minus
loans paid back.
2. Non Monetary Financial Institutions. It includes investment funds, pension funds,
insurances companies and the like. The traditional name in the USA is “investment
banks”. To the big investment banks such as Lehman Brother or Goldman Sachs, we
have to add the small and unregulated institutions known as “shadow banking”. They
have been a key part of the securitization process during the years before the financial
crash 2007-08. They key point that tells apart MFI and NMFI is that the last ones do not
create money by the typical process of granting credits and capturing deposits. Instead
they capture the existing liquidity issuing different types of bonds (for instance,
“participaciones”, “polizas de seguros”, …) They offer in exchange “parcels” of assets
that yield a variable rent (it will depend on the behaviour of financial markets).

Financial information is presented as the transaction in a given period (flow (a)) and the
outstanding assets in the last day of this period (stock of accumulated assets (b).

(a) Financial transactions

Agents that spend less that they earn (or invest in equipment and houses less than they save)
present a net lending position. They will have to decide how they “invest” or “install” their
financial wealth among given instruments or “vehicles”

Agents that spend more that they earn (or invest more than they have saved) present a net
borrowing position. They have to decide the instruments through which the fill the gap.

Financial accounts explain the types of financial investment (instalments) and borrowing. They
distinguish seven categories:

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 1. Monetary gold and SDRs. Only central banks (CB) hold assets in gold. Only government
hold the liquid liabilities of the international monetary fund, IMF)
2. Currency and deposits
3. Securities (no shares) (renta fija: letras (cp), bonos (lp))
4. Loans
5. Shares and other equities (renta variable: acciones de empresas SA, participaciones de
fondos de inversión)
6. Insurance
7. Other (pendientes de pago o cobro)
In deposits, loans, securities we distinguish between short term and long term.

(b) The balance sheet

It shows the accumulated assets and liabilities at a given moment (say 31 December year t).

Financial transaction are a flow in a given period (usually a year). Value of bonds issued in t by
government to fill its borrowing requirements

The balance is a stock: Amount of outstanding (=alive) public debt at 31 December year t. It
includes the public bonds issued in t plus the bonds issued in t-1, t-2 … and still alive.
Amortization of debt enters with a minus sign.

The balance has a similar structure than the transactions account both in the types of agents-
institutions and in the type of instruments. Actually, each cell of the balance in year t results
from adding to the balance of year t-1 the financial transactions registered in year t

The official definition of money (provided by CB) looks at the most liquid part of bank
liabilities. M1 = notes issued by the CB in the hands of households and firms plus sight deposits
in commercial banks (or transferable deposits with a check)

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 Esquema simplificado de la cuenta financiera.

Leyenda de símbolos: AF = incremento de activos financieros. PF: incremento de pasivos

financieros. BM= base monetaria o dinero legal = Rs + Ef; Rs = reservas líquidas de los bancos; Ef
= efectivo en circulación; Cr = créditos; Dp= depósitos; RF= renta fija; RV= renta variable; Cro
créditos del BC a la banca comercial; Dpo= depósito primario (efectuado por quienes han vendido
deuda pública al BC en operaciones de mercado abierto, OMA).

Explicación. A la derecha de cada “cuenta” colocamos los diferentes pasivos financieros que se
han emitido para “cubrir” la necesidad de financiación. A la izquierda, los diferentes activos
financieros adquiridos para “colocar” la capacidad de financiación. La diferencia entre los segundos
y los primeros nos da el “ahorro financiero neto” y coincide con la “capacidad de financiación” de la
institución en el año t. Los hogares suelen tener capacidad de financiación, lo cual no impide que
algunos de ellos se endeuden con créditos hipotecarios para financiar la vivienda. Las empresas y
administraciones públicas suelen tener necesidad de financiación, lo cual no impide que algunas
coloquen sus reservas en algún activo financiero. En la figura adjunta suponemos que no ha
habido ni créditos hipotecarios ni reservas empresariales.

Notas adicionales: en la explicación hemos excluido las instituciones financieras no monetarias

como los fondos de inversión que captan liquidez emitiendo participaciones. A cambio dan unos
“paquetes” que incluyen renta fija y renta variable y que darán una rentabilidad variable
dependiendo de lo que ocurra en los mercados financieros, p.e. que no se repartan dividendos o
suba el tipo de interés

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 Financial Transactions Account through period t
(or Balance Sheet in the last day of period t)

Financial Institutions Government Non Fin Households RoW

Monetary / Non Mon Corportions and NPI
1.Monetary gold and
SDR
2. Currency and
deposits
3.Securities (no
shares)
4. Loans

5.Shares and other

equity
6.Insurance
7.Other accounts rec.
Sum = Net financial
transactions = (-)
Net borrowing
requirements

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Banco de España: Cuentas Financieras,

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Appendix: Financial statistics
See file: Appendix Lesson 1 “Introductory Official Statistics”, by Olusegun Oyediran.

Useful links:

- World Bank (WB): http://data.worldbank.org

- International Monetary Fund (IMF): http://www.imf.org
- Organization for Economic Cooperation and Development (OECD): http://www.oecd-
ilibrary.org/content/datacollection/mei-data-en
- European Union: Eurostat: http://ec.europa.eu/eurostat.
- European Commission: AMECO. https://ec.europa.eu/info/business-economy-
euro/indicators-statistics/economic-databases/macro-economic-database-ameco_en
- European Central Bank (ECB) https://www.ecb.europa.eu/stats/html/index.en.html
- Banco de España (BdE). https://www.bde.es/bde/es/areas/estadis/
- Federal Reserve Economic Data (St Louis, USA). - FRED. https://fred.stlouisfed.org/
(Quite useful to obtain graphs adapted to the specific needs)
- World Input-Output Data Base: www.wiod.org/database. (a) Input-output tables for 43
countries: we are interested in aggregate values: total and final output, final
consumption, investment... (b) Socio Economic Accounts that inform on value added,
wages, profits, employment, real capital stock…

2. PostKeynesian Economics

2.1 General traits of PK economics

The economy refers to the processes of production of net output and the distribution and
expenditure of the resulting incomes. To this we can add financial transactions that relate
agents in need of borrowing with agents with surplus savings. All these activities are recorded
in the national and financial accounts.

Economics as a science studies the “laws” or “forces” that regulate these processes:
production, distribution, demand and finance. In a free market economy it is important to
clarify the formation of relative prices –the signals that lead economic decisions. The theory of
distribution (that explains the determination of the real wage and the rate of profit) is related
to the theory of relative prices. The absolute level of prices refers to the purchasing power of
money. Even if relative prices remain constant it may occur that a given basket of goods is
worth in year twice as many monetary units that in year 1. The inflation rate would be 100%.
The third key topic of Economics is the theory of output: how much output will be produced in
year 1? Will it be enough to absorb the existing labour force i.e. to achieve full employment?

After the marginalist revolution in the late third of the 19th century, neoclassical
economics dominates the academic stage. It can be summarized in the following statements:

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 Individualism. Everything derives from the behaviour of “homo economicus” a rational man
that maximizes something (utility, profits…) subject to certain constraints (budget,
technology)
 Given individual preferences and a range of technical methods, a system of relative prices
emerges that allocates efficiently the resources and clears all the markets. The labour
market is not an exception. The real wage falls until all the labour force is employed.
 The real wage and the rate of profits are prices determined by the same principles (supply
and demand).
 The general level of prices (consumption price index, CPI, or P) depends on the amount of
money launched into circulation. “Inflation is always and everywhere a monetary
phenomenon”, said Milton Friedman.
 The only conceivable equilibrium of output is full employment output. Its rate of growth will
depend on the growth of the labour force (plus technical change).

This theory was challenged by Keynes and Kalecki in the thirties. After a first refusal of
Keynes’ ideas, some neoclassical economists tried to integrate it into its model. The different
neoclassical-keynesian syntheses accept that Keynes may be right in the short run (where
involuntary unemployment may occur). In the long run, however, the basic neoclassical
principles hold: the economy will grow at the full employment level while CPI will inflate pari
passu with money creation.

PostKeynesian economists try to rescue the revolutionary message of Keynes’

General Theory and Kaleki. At the same time they try to generalize and dynamize the General
Theory. There are different strands of postKeynesian economics. The difference lies mainly on
the partner chosen to complete Keynes’ work.

(a) In the fifties, the First Cambridge school includes the direct disciples of Keynes: R. Harrod,
N. Kaldor, J. Robinson. Under the influence of M. Kalecki they bring onto the stage
distribution and growth. Distribution enters not only on price equations but on demand and
growth equations, too. The tradition continues today with Thirwall and J. McCombie
(“balance of payments constraint”). Other active writers nowadays are: O. Onaram, E
Stochammer, Heinz.

(b) At the end of the century, other European economists tried to complete Keynes’s theory of
output with the Sraffian theory of value and distribution (“prices of production”, for short).
We include here P. Garegnani, J. Eatwell, L. Pasinetti, E. Nell, H. Kurz, A. Stiratti, S.
Cesaratto...

(c) The American school focuses on financial instability. Minsky, Davidson and Kregel show
that “money matters and Wall Street too”. To the liquidity preference they add the
problems derived from over-indebtedness. Minsky highlights the frailty of finance: self-
deteriorating structures of debt.

(d) Institutionalism. In a world of “fundamental uncertainty” people rely on institutions and

conventions. From the old institutionalism (Veblen, Mitchel) to the current one (Geoffrey
Hodgson, Philip Arestis, Palley, Rochon) 1 . Proper institutionalism insists that institutions

1
Do not confuse with neoclassical “new institutionalism” that starts from individual preferences to
explain institutions.

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 evolve until they perform properly their function. Once consolidated, they will channel for
many years the formation of expectations and economic decisions.

To make short the long story we are going to deploy in this curse, let us say a world on the the
main hypothesis of the PK economics.

(a) Methodology: “holism”. Against NC full individualism and full rational behaviour. Problem
of fundamental uncertainty that forces people to rely on institutions and conventions.
(b) The supply side
a. Technology: fixed coefficient of production and constant returns to scale as the norm.
Firms cannot add any amount of labour to a given quantity of capital, as the neoclassical
theory requires to achieve full employment.
b. Distribution and prices: given technology and the historical real wage, we get the rate
of profit or the profit margin. In the same process the prices of production emerge.
(c) The demand side: principle of effective demand. Output adjust to expected demand at
normal prices. If firms are able to produce 100 units using all the capital and labour available
but they expect only a demand for 80 units (at normal prices), they will produce just 80 units.
Full employment is not an equilibrium conditions either in the short run or in the long-run.
NC: scarcity of resources. PK: scarcity of “effective demand” associated .
(d) Money and Finance. We are analysing a monetary theory of production where money and
finance may have an impact on the level of output and its rate of growth. Finance
accelerates economic processes but introduces more risks. The financial fragility of
capitalism is especially dangerous in nowadays financialized economies
(e) Policy. Capitalism is inherently unstable. Some times, markets mechanisms exacerbate the
cycles. Importance of proper institutions and macroeconomic policy to tame such
instability and to fix expectations

2.2 Some traits of the PK growth model.

 Growth of output and employment limited by the growth of demand (NC: growth is limited
by the growth of population).
 Demand may be pushed by financial forces but there is a risk to saw the seeds of a financial
crash: credit explosion  overindebtedness.
 Importance of the balance of payments constraint
 Importance of technical change that usually is embodied in the investment goods, but it
also requires exogenous impetus (I+D)

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 Importance of proper institutions to avoid the type of financial crash we have recently
experienced or to improve labour relations.
 Importance of expectations and of institutions to fix expectations.

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