gdp by hedongchenchen

VIEWS: 12 PAGES: 28

									       Measuring a nation’s output
   Having a number that summarizes the
    level of economic activity is clearly
    convenient

   Alternative would be to see how much of
    each type of good is available

   But then it is hard to compare
    – One year output is 2 apples, 2 bananas
    – Next year 3.5 apples, 1 banana
    – Did output go up or down? Not clear!!
How would you measure
  a nation’s output?
     Gross domestic product
 Mostfrequently used measure of an
 economy’s output

 Definition: GDP is the market value
 of the final goods and services
 produced in a country during a given
 period
   Computing GDP (Example)
The GDP produced in a typical night in
 SoBe
 100  people go to a nightclub (cover
  is $20 each)
 100 go to the new world orchestra
  ($40 dlls per ticket)
 300 rolls of sushi are prepared ($15
  per roll)
 50 gallons of orange juice are
  consumed ($5 per gallon)
     Computing GDP (Example)
 A typical night at southbeach
  100 nightclub (times $20)       $2000
  100 orchestra (times $40)      +$4000
  300 rolls of sushi (times $15) +$4500

  50 gallons of OJ (times $5)    +$ 250

                                     GDP=$10750

Remark: GDP is a sum of quantities weighted by price
           Important remarks
 When computing GDP more
 expensive items receive a higher
 weight than cheaper ones

 Is   that reasonable?
  – Idea behind it: Amount people are
    willing to pay is an indication of the
    benefit they receive
         Important remarks (2)
 Only   final goods are counted in GDP

 We   did not include (to name a few)
  – The DJ wages paid by the nightclub
  – The wages of the musicians of the
    orchestra
  – The ingredients needed for sushi: Fish,
    rice, wasabi
  – Oranges purchased to prepare OJ
Definitions: Final vs intermediate goods

 A  final good is the end product of a
   process and it is the good or service
   that consumers actually use



  The goods or services produced on
   the way towards making the final
   product are called intermediate
   Why GDP includes only final
           goods?
 Ifwe computed GDP by adding
  market value of final + intermediate
  goods we would be double counting
  – Oranges (intermediate good) are
    purchased to produce juice (final good)
    and the final good price includes the
    cost of the necessary inputs to produce
    it
        Computing GDP is rather
         complicated and costly!
A  list of each final good produced
  during the year is required (together
  with prices).

 Itis mathematically simple, but the
  amount of information required is
  huge

 Is   there any alternative way?
    The expenditure method for
         measuring GDP
 Any good or service that is produced
 will also be purchased and used by
 some economic agent

 The4 economic agents considered in
 national accounts are:
  – Households
  – Firms
  – Government
  – Foreign sector
  Expenditure method (contd)
 Note:Amounts that purchasers
 spend on various goods and services
 is equal to the market value of those
 goods
     GDP can be measured with equal
     accuracy by either of two methods:
   Adding up the market value of all goods and
    services that are domestically produced

   Adding up the total amount spent by each of
    the four groups on final goods and services,
    and subtracting spending on imported goods &
    services

(output) GDP=C+I+G+X-M (total expenditure)
What economists mean by investment
    Investment is spending by firms on new
     factories, office buildings, machinery, and
     inventories and spending by households
     on new houses. Improvements on
     existing structures are also included.

    Buying stocks only changes ownership and
     does not add to GDP (this type of financial
     expenditure is not investment in
     economics)
The need for computing “real” GDP
 Economistslike making time
 comparisons of aggregate data to
 see “how the economy is performing”

 Nearelections a president would like
 saying that the economy grew during
 her/his term
     Measured by GDP Mexico and Angola grow
             much faster than the US

                                 GDP, annual growth (% rate)
40                                                                                                                700
35                                                                                                                600
30
                                                                                                                  500
25
                                                                                                                  400
20
                                                                                                                  300
15
                                                                                                                  200
10
5                                                                                                                 100
0                                                                                                                 0
     year



            1989

                   1990

                          1991

                                  1992

                                           1993

                                                  1994

                                                          1995

                                                                 1996

                                                                        1997

                                                                               1998

                                                                                      1999

                                                                                             2000

                                                                                                    2001

                                                                                                           2002
                                         Mexico          USA       Angola
           What is going on then?
      Consider the following hypothetical
                  economy
   Year: 2002                   Year: 2003

Goods produced                Goods produced
 10 Microsoft office 2000     10 Microsoft office 2000
  ($100 each)                   ($200 each)
 2 Pentium 4 ($2000           2 Pentium 4 ($4000
  each)                         each)
GDP =                         GDP =
  10*100+2*2000=$5000           10*200+2*4000=$10,000

    The quantities of goods and services produced are the
    same, yet, GDP doubled. Why?
 We need to exclude the effects of
       price changes!!!!!
 How   to do it?
 – Standard approach is to use a common
   set of prices to value quantities
   produced in different years

 – One picks a particular year, called base
   year, and uses the prices for that year
   to calculate the market value of output
   for all other years
    Compute Real GDP for our example
   Step 1. Set the base year

   Year: 2002                     Year: 2003

   Goods produced              Goods produced
   10 Microsoft office 2000     10 Microsoft office 2000
    ($100 each)                   ($200 each)
   2 Pentium 4 ($2000           2 Pentium 4 ($4000
    each)                         each)
   Real GDP =                  Real GDP =
One problem with real
GDP: New goods bias
      How to make cross-country
        income comparisons?
• Each country reports GDP in terms of their
  local currency

• How can we compare incomes across
  countries?
            Illustrative Example

Suppose all countries produce, each year, one good:
a big-mac

If GDP measures the quantity of goods and services
produced by each given country, any sensible
measure of GDP in this example should say all
countries have the same GDP
  GDP in dollars is extremely different
          across countries!!!
 Country               Big mac price (local In US dollars
                       currency, april
                       2003)
 US                    2.71                 2.71

 China                 Yuan 9.90            1.20

 Mexico                Peso 23.00           2.18

 Argentina             Peso 4.10            1.43

 Switzerland           S Franc 6.30         4.59
Source: The economist’s big mac index
    What is going on?, How to
construct comparable GDP figures?
• A dollar has very different purchasing power
  across countries
• In other words, relative prices vary a lot
  across the world
• When making cross country comparisons
  use PPP adjusted measures
• Method (in simple terms): Use one country’s
  prices to compute the GDP of all other
  countries
            REAL GDP growth in Angola,
               Mexico and the US

                                  Real GDP, annual growth (% rate)
8                                                                                                                 16
6                                                                                                                 14
4                                                                                                                 12
2                                                                                                                 10
0                                                                                                                 8
-2                                                                                                                6
-4                                                                                                                4
-6                                                                                                                2
-8                                                                                                                0
     year



             1989

                    1990

                           1991

                                  1992

                                         1993

                                                  1994

                                                          1995

                                                                 1996

                                                                        1997

                                                                               1998

                                                                                      1999

                                                                                             2000

                                                                                                    2001

                                                                                                           2002
                                         Mexico          USA     Angola
Measuring Economic Growth

The economic growth rate is the percentage change in
the quantity of goods and services produced from one
year to the next.


Growth year 2004: (GDP2004-GDP2003)/GDP2003 - 1
GDP vs Welfare

Real GDP is not a perfect measure of economic welfare
because:
1. Quality improvements tend to be neglected in calculating
real GDP so the inflation rate is overstated and real GDP
understated.
2. Real GDP does not include household production, that
is, productive activities done in and around the house by
members of the household.
GDP vs Welfare

3. Real GDP, as measured, omits the underground
economy, which is illegal economic activity or legal
economic activity that goes unreported for tax avoidance
reasons.
4. Health and life expectancy are not directly included in
real GDP.
5. Leisure time, a valuable component of an individual’s
welfare, is not included in real GDP.
6. Environmental damage is not deducted from real GDP.
7. Political freedom and social justice are not included in
real GDP.

								
To top