Introduction to Macroeconomics Gross Domestic Product

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					     Introduction to Macroeconomics

             Chapter 4
Measuring Output of the Macroeconomy
Chapter 4. Measuring the Macroeconomy


     1.    Measuring Total Output
     2.    How to Measure GDP
     3.    GDP Accounting Complications
     4.    Nominal and Real GDP
     5.    Measuring Price Changes
     6.    Empirical Applications



Introduction to Macroeconomics
1. Measuring Total Output



     • Monetary Measure of Value
     • GDP versus GNP
     • Omissions from GDP - does not
       measure social welfare




Introduction to Macroeconomics
1. Measuring Total Output
   Monetary Measure of Value

        Quantity times Price equals Market Value

  Cars        1,000 x $20,000 = $20,000,000
  Dolls 10,000 x $               10 = $   100,000

  Total Value of Output            = $20,100,000




Introduction to Macroeconomics
1. Measuring Total Output
   GDP versus GNP

• Nominal Gross Domestic Product (GDP) -
   the market value of final goods and services (i.e.,
   sold to final consumers) produced by a nation
   during a specific period, usually 1 year.

• Nominal Gross National Product (GNP) -
   the market value of final goods and services
   produced by labor and property supplied by the
   residents of a nation during a specific period,
   usually 1 year.



Introduction to Macroeconomics
1. Measuring Total Output
   Omissions from GDP

GDP is a poor measure of social welfare:
• Leisure
• Home and volunteer labor
   (non market production)
• Depletion of nonrenewable resources
• Unregulated pollution
• Distribution of income
• Differences in preferences


Introduction to Macroeconomics
2. How to Measure GDP



 • Circular Flow
 • Expenditure Approach
 • Income Approach




Introduction to Macroeconomics
2. How to Measure GDP
   Circular Flow of Income and Expenditures

                             Income

                           Resources

                                         Business
   Households
                                          Firms

                    Goods and Services

                          Expenditures

Solid Lines - Flow of Money
Dashed lines - Flow of Goods and Services
Introduction to Macroeconomics
2. How to Measure GDP
   Expenditure Approach

• GDP = Consumption Spending (C)
       + Private Domestic Investment (I)
       + Government Spending (G)
       + Exports - Imports (net exports, NX)

• GDP = C + I + G + NX




Introduction to Macroeconomics
 2. How to Measure GDP
    Expenditure Approach: Expenditure Shares

       2002 U.S. Nominal Gross Domestic Product

Government Spending
      18.8 %


                                              Consumption
 Investment                                     69.9 %
   15.2 %




 Net Exports = - 4.1 % (not shown in slide)
 Introduction to Macroeconomics
2. How to Measure GDP
   Expenditure Approach: Consumption
                 75%
                 70%
                                          U.S.
Percent of GDP



                 65%
                                           Japan
                 60%
                 55%
                                            1999
                 50%                    U.S. 68.2 %
                                        Japan 60.1 %
                 45%
                 40%
                   1959   1969   1979   1989       1999


Introduction to Macroeconomics
2. How to Measure GDP
   Expenditure Approach: Government

                   35%
                   30%
  Percent of GDP



                   25%
                                                  U.S.
                   20%
                                          Japan
                   15%
                                                1999
                   10%                      U.S. 17.6 %
                                            Japan 18.4 %
                   5%
                   0%
                     1959   1969   1979       1989         1999


Introduction to Macroeconomics
2. How to Measure GDP
   Expenditure Approach: Investment

                   35%
                   30%
                                      Japan
  Percent of GDP



                   25%
                   20%
                   15%
                                      U.S.
                                                   1999
                   10%                         U.S. 17.9 %
                                               Japan 20.0 %
                   5%
                   0%
                     1959   1969   1979       1989      1999


Introduction to Macroeconomics
2. How to Measure GDP
   Expenditure Approach: Net Exports

                   6%

                   4%
                                   Japan
  Percent of GDP



                   2%

                   0%

                   -2%
                                     U.S.
                                                1999
                   -4%                      U.S. - 3.7 %
                                            Japan 1.5 %
                   -6%
                     1959   1969   1979     1989       1999

Introduction to Macroeconomics
2. How to Measure GDP
   Income Approach
• National Income = GDP (with corrections)
• Personal Income = National Income
                                 (with corrections)

•     Personal Income
    - Personal income taxes
    - Social Security withholding
    = Disposable Personal Income


Introduction to Macroeconomics
3. GDP Accounting Complications



 • Double Counting

 • Depreciation




Introduction to Macroeconomics
3. GDP Accounting Complications
   Double Counting


• Intended for “final” use
     – excludes intermediate products

• Value Added
     – excludes used goods




Introduction to Macroeconomics
3. GDP Accounting Complications
   Depreciation

  Gross Investment
- Depreciation
= Net Investment

  Gross Domestic Product (GDP)
- Depreciation
= Net Domestic Product (NDP)


Introduction to Macroeconomics
4. Nominal and Real GDP



    • Definitions

    • Sample Problem

    • GDP Growth




Introduction to Macroeconomics
4. Nominal and Real GDP
   Definitions

• Nominal GDP
    – Value of output measured at actual prices
      (current dollar output)
    – Does not correct for inflation

• Real GDP
    – Value of output based on prices of some base
      period (“constant” dollar output)
    – eliminates effect of inflation



Introduction to Macroeconomics
4. Real GDP
   Sample Problem


                          Average Prices       Quantity Sold
                   1992          1994 % Change 1992   1994
Food                $ 12         $ 14   17 %     4      5
Housing               9          10     11 %     3      3
Fun                   4           5     25 %     3      4
Machines             20          20     0%       2      2




Introduction to Macroeconomics
4. Real GDP
   Definition of Nominal GDP


    Nominal GDP
     = Current year Quantities
       x Current year Prices




Introduction to Macroeconomics
4. Real GDP
   Sample Problem: 1992 Nominal GDP

    = 1992 Quantities x 1992 Prices
    = 1992 Spending on
         Food             Housing   Fun   Machines

    = 4 • $12 + 3 • $9 + 3 • $4 + 2 • $20
    = $48 + $27 + $12 + $40
    = $127


Introduction to Macroeconomics
4. Real GDP
   Sample Problem: 1994 Nominal GDP

    = 1994 Quantities x 1994 Prices
    = 1994 Spending on
         Food              Housing   Fun   Machines

    = 5 • $14 + 3 • $10 + 4 • $5 + 2 • $20
    = $70 + $30 + $20 + $40
    = $160


Introduction to Macroeconomics
4. Real GDP
   Definition of Real GDP


    Real GDP
     = Current year Quantities
       x Base year Prices




Introduction to Macroeconomics
4. Real GDP
   Sample Problem: 1992 Real GDP

    = 1992 Quantities x 1992 Prices
         Food             Housing   Fun   Machines

    = 4 • $12 + 3 • $9 + 3 • $4 + 2 • $20
    = $48 + $27 + $12 + $40
    = $127



Introduction to Macroeconomics
4. Real GDP
   Sample Problem: 1994 Real GDP

    = 1994 Quantities x 1992 Prices
         Food             Housing   Fun   Machines

    = 5 • $12 + 3 • $9 + 4 • $4 + 2 • $20
    = $60 + $27 + $16 + $40
    = $143



Introduction to Macroeconomics
4. Real GDP
   Sample Problem: GDP Growth

• Growth in Nominal GDP
     = (160 - 127) • 100 = 26%
           127

• Growth in Real GDP
     = (143 - 127) • 100 = 13%
           127



Introduction to Macroeconomics
5. Measuring Price Changes



•   Price index
•   GDP deflator
•   Consumer price index
•   Problems with price indexes




Introduction to Macroeconomics
5. Measuring Price Changes
   Price indexes

 • Price Index: a measure of the change in
   the average level of prices
 • GDP Deflator
      – Base-year prices
      – Quantities variable
      – Imports excluded
 • Consumer Price Index
      – Base year quantities
      – Prices variable
      – Imports included


Introduction to Macroeconomics
5. Measuring Price Changes
   GDP deflator

GDP Deflator = Nominal GDP • 100
                Real GDP

1992 GDP Deflator = 127• 100 = 100.0
                    127

1994 GDP Deflator = 160 • 100 = 111.9
                    143


Introduction to Macroeconomics
5. Measuring Price Changes
   Inflation

Change in Average Level of Prices
 = Percent Change in GDP Deflator

Inflation from 1992 to 1994

    = (1994 Deflator - 1992 Deflator) • 100
             1992 Deflator

    = (111.9 - 100.0) • 100 = 11.9%
           100.0
Introduction to Macroeconomics
 5. Measuring Price Changes
    Problems with price indexes

• Substitution bias - changes in relative
  prices
   – between goods (butter vs margarine)
   – between stores (small vs large discounters)
• Quality changes and new products
• Chain-weighted indexes




 Introduction to Macroeconomics
6. Empirical Applications

• Use Real rather than Nominal values
• Compare Per Capita rather than
  Aggregates
• Compare Growth Rates rather than
  Levels




Introduction to Macroeconomics
6. Empirical Applications
   Compare Per Capita rather than Aggregates
                                   Real GDP Per Capita, 1929 - 2002
                         $35,000
  Chained 1996 Dollars


                         $30,000
                         $25,000
                         $20,000

                         $15,000
                         $10,000
                          $5,000
                             $0
                               1929 1939 1949 1959 1969 1979 1989 1999

                                   Source: Bureau of Economic Analysis (www.bea.doc.gov)


Introduction to Macroeconomics
6. Empirical Applications
   Compare growth rates rather than levels
  Annual Average Percent Change         10-year Changes in Real GDP Per Capita
                                  5%            4.59%

                                  4%
                                                                  3.03%
                                  3%
                                                         2.39%
                                                                           2.19%     2.05%
                                  2%                                                           1.78%


                                  1%   0.59%

                                  0%
                                       1930-   1940-     1950-    1960- 1970-       1980-      1990-
                                       1939    1949      1959     1969 1979         1989       1999
                                       Source: Bureau of Economic Analysis (www.bea.doc.gov)



Introduction to Macroeconomics

				
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