It's Wednesday, and as usual I scout around various issues that I have been thinking…
Still on holidays
My blog is still on holiday until Wednesday, December 30, 2020. All the best from my local beach (Bar Beach today). I have started to read the EU-UK agreement. Not very enlightening I can tell you. Music to follow …
Music – Fu Man Chu from Rico Rodriguez and Don Drummond
This is what I have been listening to today while working.
It is one of my favourite trombone players – Emmanuel ‘Rico’ Rodriguez – who sadly died in September 2015 at the age of 80.
He was born in Cuba but made his name in Jamaica after being taught by none other than – Don Drummond – one of the all-time best brass players from Kingston.
The undoubted best jazz, reggae trombone player of all time.
Rico played devotional music (rasta) with Jamaican hand drummer – Count Ossie in the 1950s and later with Winston Rodney aka Burning Spear.
He then moved to the UK and started playing jazz reggae before joining The Specials and playing ska.
His best album was in 1976 – Man from Wareika – which is one of my all-time favourites.
This track – Fu Man Chu – was written by Rico Rodriguez and was on the 2000 album he recorded with Don Drummond – Reggae Jazz Attack (Charly Records, Germany).
The Rico Rodriguez All Stars are the other musicians and comprise some of the best studio musicians in Jamaica.
The album travels with me everywhere on my iPhone.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
Wait until you get to about page 921, Bill. Good luck.
Subject : S=I confusion
I purchased your Macroeconomics text this week and thought it a good time to ask for assistance to help me grasp the correct meaning of the S = I result that so often appears in textbooks.
Here is my thought experiment that leaves me painted in a corner: Say a large engineering firm borrows $1 billion to pay engineering wages for 11 months to build a industrial machine. The engineers during the year spend the $1 billion on their usual ham and cheese sandwiches (consumption). At the end of the 11 months the machine is sold to a capitalist who borrowed $1 billion to make the purchase of this machine for his new factory.
In short, I cannot seem to apply the S=I identity to this situation. In fact, I seem to have convince myself that there is now double counting going ($1 billion of engineer’s consumption , and $1 billion investment). I’m do not see any ‘savings’ , perhaps due to my failure to fully grasp the correct definition of S.
Any clarification would be appreciated.
thank you and best regards
Dear Ernst (at 2021/01/04 at 7:33 am)
Thanks for your enquiry.
First, GDP is the market value of all FINAL goods and services produced in a period (in your case, one year).
Second, by trying to find the S and I equality, you are operating in a closed economy with no government sector (which begs the question of how the currency enters the economy in the first place). That is the way most mainstream macroeconomics textbooks start because it is simple and they do not privilege government over any other spending sector. Modern Monetary Theory (MMT) starts with government as the currency-issuer. But we can side-step that point here.
Third, in this simple economy with just a household sector (consuming) and a firm sector (investing in productive capacity), GDP = Consumption (C) + Investment (I).
So after the end of the spending period (12 months), total spending is $1 billion on cheese sandwiches (noting this is a vegetarian community) as final consumption goods, and $1 billion on capital goods (the machine), which is the investment in the economy.
GDP = C + I = $2 billion = National Income.
With no taxes, disposal income equals national income equals $2 billion. Remember, the consumption goods shops that are selling the cheese sandwiches are earning income as well as the factory that sells the final investment machine.
So, saving equals GDP minus C, = $1 billion.
S = I.
It would be a very strange economy to have consumption so low. What does the sandwich maker spend his/her income on?
I hope that helps.
best wishes
bill
Off the topic here, I won’t mind if it gets deleted.
“(noting this is a vegetarian community)”, I pleased to hear, may be Bill is a vegetarian?
But eating cheese which I do (while being an almost full-time vegetarian, solely out of compassion), I often wonder if I should.
Because cheese comes from milk (unless one buys substitute cheese). Then, this involves captivity, and at the end of productive life cycle, I believe the cows will not see their old ages (my assumption, as I live in the land of only imported cheese).
This goes for eggs as well – when I pick up free-range grass-fed eggs, the same question pops up every time.
It a moral struggle, may be it is time to try to halt the aforementioned consumptions…