Refresher course

A review of the WinEcon economics learning software, part one

With the eventual aim of undertaking some modest empirical descriptions of the economic transition in eastern Europe and the former Soviet Union over the past 15 years or so, concentrating—though not exclusively—on the topics of economic growth and the economics of labour markets, about a month ago, I took a week off work to study economics again from scratch.

The course I chose was the WinEcon software (version 7.1), which can only be bought and downloaded over the Internet. This process was quite straightforward. By right-clicking on the desktop shortcut icon so installed (a little red-blue-green bar chart), I was able to enlarge the display to fill the whole screen (640 x 460 screen resolution), making on-screen reading easier (mind you, this disables the program's calculator, I think). By right-clicking the “start” button in Windows desktop and then “properties”, it is also possible to prevent the Windows taskbar from intruding over the top of the WinEcon software.

During my study week, I completed about a quarter of an undergraduate economics course—that is, six out of 25 chapters: two on microeconomics (chapters 1 ands 2), two on macroeconomics (chapters 9 ands 10), and two on maths and statistics (chapters 22 ands 24). Later, I read chapters 11 (the circular income-expenditure economic model), 12 (theories of money supply and demand) and 13 (mostly Keynesian short-term macroeconomics).

Although quite standard in terms of content, chapters 1, 2 and 10 were reasonably thorough and lucid, and the bit-by-bit interactive presentational style helped to sustain interest.

Chapter 1 presents definitions of basic economic “oppositional” terms (macro vs micro, nominal vs real, positive vs normative, command vs the market) and develops a familiar definition of economics as the study of rational agents forced to choose between competing resource uses in conditions of scarcity. Some of the rather abstract ideas involved are usefully conveyed by means of concrete examples and game-like illustrations. The most interesting section, however, was the exposition of economic modelling, in which the process is broken down into the following stages:

• statement of the problem;
• whittling down of influences to leave us with a set of simplifying assumptions;
• development of a theory to answer the question(s) posed at the "problem" stage;
• testing the theory against evidence; and
• provisional acceptance of the theory, if it comes through the test.

These stages are then illustrated using two well-known economic theories: the Keynesian consumption function (household consumption is mainly influenced by changing levels of income) and the Fisher hypothesis (interest rates rise and fall with inflation).

What quantity of a good will buyers and sellers purchase and supply at each price? Chapter 2 familiarises the student with the basic tools of supply and demand analysis: how to construct supply and demand curves, and an account of the factors that affect each (for demand: product price, household income, prices of complements and substitutes, consumer tastes, the number of outlets and advertising; for supply: the product price, the price of inputs, the scale of taxes and subsidies, technology, the weather and the number of outlets); the difference between movements along the curves and shifts in the curves; the interaction of the two to produce equilibrium product prices and quantities, and how tools of this kind can be used to predict likely changes in price and quantity under changed market conditions ("comparative statics"; the examples used are polices for the support of domestic agricultural prices and other kinds of government intervention). Lastly, the concept of elasticity is introduced.

At this point, I switched to the macroeconomic sections of the program.

The second of the macro section, Chapter 10 runs through the main conceptual problems of measuring output in a national economy—seen as the level of productive activity overall, or as the total product of that activity. The first pitfall to avoid is to exclude transactions, such as transfer payments to pensioners or the unemployed, that do not represent payments for productive activity, as well as those that denote only changes in ownership of an item, since no new production is implied; the second is to count only new value added at each stage of the production process, from the extraction of raw materials to the sale of final goods—ie to avoid double counting.

The picture of the circular flow of income between households, firms, the government and external actors is built up gradually as the basis for the three alternative measures of national income accounting. (In this model, injections into the economy exactly match withdrawals from it, by definition.) The expenditure method measures the spending of households, government, investors and foreign buyers on goods and services in the domestic economy, to arrive at gross domestic product (GDP) at market prices. The output method measures what firms actually get for their production (and therefore have available to spend on factor services), and differs from the expenditure measure by subtracting indirect takes (those levied on the prices of goods and services themselves, rather than on factor incomes) and adding any production subsidies, to arrive at the gross value added (GVA) at basic prices. The income method aims to total up the payments received for the various factors of production (land, labour and capital); summing together the factor payments from firms to household, subtracting direct taxes on this income—which are siphoned off to the government—but then adding the redistribution to households of some of this tax via transfer payments, we arrive at the measure for personal disposable income (PDI). One of the advantages of having three measures of national income, each gauging monetary flows at different points in the cycle, is that they act as “checks” on one another, helping to reduce errors.

Next, the module details some of the practical problems of data collection and estimation for each of accounting method. Simplified layouts of the tables that are the end result of the data-collection process for each of the methods look something like this:

Expenditure	Output	Income
Consumption	Agriculture	Salaries, wages
households	Production	Firms' profits
non-profit institutions	utilities	non-financial
Government consumption	manufacturing	public firms
Fixed investment	Total production industry	private firms
Change in inventories	Construction	financial firms & other
Acquisitions less disposals	Service industries	Mixed income
Total domestic expenditure	distribution, hotels, repairs	GVA at factor cost
Plus exports	transport & communications	Net product taxes
Total final expenditure	business & finance	GDP at market prices
Minus imports	government & other	-
Statistical discrepancy	Total services	-
GDP at market prices	GVA at basic prices	-

Moving snapshot
Presented sequentially, these structural snapshots of the economy allow us to glimpse something of its changing character over time, to describe broad changes within it—for instance, many Western economies once dominated by manufacturing now predominantly specialise in services. From the information so compiled it is possible to get a picture of the structural features of the national income in the UK in the post-war period, as follows:

• nominal GDP had reached £1.7trn by 2004 (from £1.1trn in 1996);
• close to 60% of national income takes the form of wages (compensation to employees);
• exports make up a growing share of expenditure (19% in 2004)
• investment makes up a falling share (13% in 2004);
• aside from the government, business and distribution services are now the dominant sectors and their share of output is rising; and
• manufacturing, utilities and agriculture accounted between them for only a fifth of the UK productive activity in 2004 and the share of all of them was on a trend of long-term contraction or decline.

The reason that any of this is useful is that an accurate description of a country's economic structure, as well as the changes to its economic structure over time, is an essential basis for sound analysis, as well as for meaningful international comparisons.

Other useful topics in the chapter include instruction in two methods for calculating real output changes from nominal data (the first values output in later years at base-year prices, whereas the second multiplies the change in quantity of goods in later years, compared with the base year, by product weights established in the base year), as well as a brief look at alternative methods of national income calculation—gross national income (GNI; GDP plus net income from abroad) and net national income (NNI; GNI less depreciation)—and the possible grounds for the inadequacies of these measures for capturing accurately economic welfare more broadly.

That’s enough for one day.