6...i mean just these sixteen accomplishments or whatever: i mean, we've got a major rapport -...
TRANSCRIPT
6“...I mean just these sixteen
accomplishments or whatever: I mean, we've got a
major rapport - relationship of
economics, major in the security, and all
of that, we should not lose sight of.”
George W. Bush
Measuring Domestic Output and National Income
Chapter Objectives
How GDP is Defined and Measured
Circular Flow
The Nature and Function of a GDP Price Index
The Difference Between Nominal GDP and Real GDP
Some Limitations of the GDP Measure
2
Gross Domestic Product
GDP, or gross domestic product, is the market value of all final goods and services produced in a country in a given time period.
US GDP, 2nd quarter 2008 ($ billions) : (Chg from previous period)
Nominal GDP $14,497.8 (+3.5%)Real GDP (2005 dollars) $13,415.3
(+1.5%) US GDP, 2nd quarter 2009 ($ billions) :
Nominal GDP $14,143.3 (- 1.0%)Real GDP (2005 dollars) $12,892.5 (-
1.0%)
Source: www.BEA.gov 3
Gross Domestic ProductMarket Value
GDP is a market value -- goods and services are valued at their market prices.
To add sofas and computers, we add the market values so we have a total value of output in dollars.
Output in 2009 is greater than output in 2008.
Year Annual Output Market Value
20083 sofas
2 computers(3) ($500) + (2) ($2,000) =
$5,500
20092 sofas
3 computers(2) ($500) + (3) ($2,000) =
$7,000
4
Gross Domestic ProductFinal Goods and Services
A final good (or service), is an item bought by its final user during a specified time period.
Only value added is considered in GDP. Excluding intermediate goods and services avoids double counting.Sales
ValueValue Added
Sheep Ranch $120 $120
Wool $180 $60
Suit Maker $220 $40
Macy's Department Store
$350 $130
Total $870 $350
Sales Value
Sheep Ranch $120
Wool $180
Suit Maker $220
Macy's Department Store
$350
Total $870
5
Gross Domestic ProductProduced Within a Country
GDP measures production within a nation’s borders – domestic production – no matter who owns the resources.Cars produced in a Japanese-owned factory in the
US counts in US GDP.Cars produced in a US-owned factory in Mexico
counts in Mexico’s GDP.
How is this different from GNP (Gross National Product)?
6
Gross Domestic ProductIn a Given Time Period
GDP measures production during a specific time period, normally a year or a quarter of a year.
$0
$5,000
$10,000
$15,000
1988 1993 1998 2003 2008
Ann
ual G
DP
($B)
Nominal GDP
Real GDP
7
NOT Counted in GDPNon- Production Transactions
Financial:Public transfer payments (payments
made by US government to households for which nothing is required in return):
Social Security/MedicareWelfare benefitsVeteran’s benefits
Private transfer payments such as cash gifts
8
NOT Counted in GDP Non- Production Transactions
Financial:Stock market transactions:
Buying/selling stock certificates or bonds transfers of pieces of paper; it is not producing goods or services.
Second-hand sales or sales of used goodsCount production in GDP for the year it is new. Buying a used car or a house built in 1995 will
NOT count in GDP for this year (counted in the year it was produced).
9
Measuring GDPTwo Approaches
The Expenditure Approach Measures GDP as the sum of consumption
expenditure, investment, government purchases of goods and services, and net exports.
Final-Product or Value-Added The sum of the money spent to buy the output.
The Income Approach Measures GDP by summing the incomes that firms
pay households for the factors of production they hire. Wages (return to labor) Interest (return to
capital) Rent (return to land) Profits (return to
enterprise)10
Expenditure ApproachC = Personal Consumption
Personal Consumption Expenditures, C Durable Consumer Goods (expected life of 3+
years): Cars, Appliances, TV’s . . .
Nondurable Consumer Goods (expected life less than 3 years): Groceries, pencils, toothpaste . . .
Consumer Expenditures for Services Legal advice, healthcare, manicures,
education . . .
11
Expenditure ApproachGross Private Domestic InvestmentGross Private Domestic Investment, I
Machinery, Equipment, and Tools All Construction (commercial AND
residential) Changes in Inventories (unsold goods,
unconsumed output)
NOT included - Noninvestment Transactions, such as transfer of ownership of assets (like houses, stocks, bonds)
12
Expenditure ApproachGovernment Purchases
Government Purchases, GExpenditures for Goods and Services
Labor, office supplies, uniforms . . .
Expenditures for Social Capital Highways, schools, museums . . .
Remember: G does not include transfer payments
13
Expenditure ApproachNet Exports
Net Exports, XnExports (X=goods sold to other countries)
Dell computers, haircuts for foreign tourists
Imports (M=goods bought from other countries)Toyota Prius made in Japan, haircut you got
in Paris
Xn = Exports (X) – Imports (M)
14
Two Approaches to GDP
GDP
= =
Consumption
by HouseholdsInvestment
by Businesses
Government Purchases
Net Expenditures By Foreigners
Expenditure Approach
Wages
Rents
Interest
Profits
StatisticalAdjustments
Income Approach
15
Expenditure Approach
Putting It All Together: GDP = C + I + G + Xn
Circular Flow of Expenditure and IncomeGDP = production = income =
expendituresThe equality of income and output shows
the link between productivity and living standards.
16
Circular Flow Diagram
The circular flow diagram shows the transactions among households, firms, governments, and the rest of the world.
17
Transactions take place in factor (resource) markets, goods markets, and
financial markets.
18
Firms hire factors of production from households. The blue flow, Y, shows total income paid by firms to households.
Y = income19
Households buy consumer goods and services. The red flow, C, shows consumption expenditures.
C = consumptionY = income20
Households save, S, and pay taxes, T. Firms borrow some of household savings to pay
for investment.
21
Firms buy capital goods from other firms. The red flow I represents this investment
expenditure by firms. (I = investment = creation of capital)
22
Governments buy goods and services, G, and borrow or repay debt if spending exceeds or is less than taxes.
G = government purchases
23
The rest of the world buys goods and services from us, X and sells us goods and services, M:
net exports are X – M. X = exports, M = imports, so X – M = net exports
24
And the rest of the world borrows from us or lends to us depending on whether net exports are positive or negative.
25
The blue and red flows are the circular flow of expenditure and income. The green flows are borrowing and lending.
26
The sum of the red flows (C + I + G +(X-M)) equals the blue flow (Y).
Y = C + I + G + (X-M)
27
Nominal Versus Real GDP
Nominal GDP GDP measured in terms of the price level
at the time of measurement (NOT adjusted for inflation).
Real GDP GDP adjusted for inflation. Nominal GDP is deflated (if prices
increased) or inflated (if prices fell). Only real GDP measures changes in
output accurately, holding price constant.
28
Nominal Versus Real GDP
In 2006:Expenditure on hats $100 = (100 x $1.00)Expenditure on bats $100 = ( 20 x $5.00)Nominal GDP $200
Year Item Quantity
Price
2006 Hats 100 $1.00
Bats 20 $5.00
29
Nominal Versus Real GDP
In 2007:Expenditure on hats $ 80 (160 x $0.50)Expenditure on bats $495 (22 x $22.50)Nominal GDP $575
Year Item Quantity
Price
2007 Hats 160 $0.50
Bats 22 $22.50
30
Nominal Versus Real GDP
Year Item Quantity
Price
2006 Hats 100 $1.00
Bats 20 $5.00
2007 Hats 160 $0.50
Bats 22 $22.50Total spending: 2006 $200
2007 $575
31
Nominal Versus Real GDP
Two Methods for Calculating Real GDP1. GDP Price Index Method2. Base Year Prices Method
1.GDP Price Index MethodPrice index = measure of price of a specific
“market basket” of goods in a specific year compared to price of identical goods in a base, or reference, year.PriceIndexIn GivenYear
= x100Price of Market Basket
In Specific Year
Price of Same BasketIn Base Year
32
Nominal Versus Real GDPGDP Price Index Method
PriceIndexIn GivenYear
= x100Price of Market Basket
In Specific Year
Price of Same BasketIn Base Year
Pizzas Qty Price
2005 75 $12.00
2006 90 $15.00
2007 110 $23.50
Base year
Note: Value of any index in the base year is ALWAYS 100.
Do you see why?33
Nominal Versus Real GDPGDP Price Index Method
Price Index
In 2006= x100$15.00
$12.00=125
Price Index
In 2007= x100
$23.50=195.
8$12.00
Pizzas Qty Price
2005 75 $12.00
2006 90 $15.00
2007 110 $23.50
Base year
34
Nominal Versus Real GDP
Base Year Prices Method
Base year
Real GDP= Nominal GDPGDP Price Index/100
GDP price index is also known as “GDP deflator”, because
it “deflates” nominal to real (removes influence of inflation)
Pizzas
Qty Price GDPGDP Price
Index
2005 75 $12.00 $900 100
2006 90 $15.00 $1,350 125
2007 110 $23.50 $2,585 195.8
Base year
35
Nominal Versus Real GDP
Base Year Prices Method
Base year
Pizzas
Qty Price GDPGDP Price
Index
2005 75 $12.00 $900 100
2006 90 $15.00 $1,350 125
2007 110 $23.50 $2,585 195.8
Base year
36
Real GDPIn 2006 =
$1,350
1.25 =$1,08000
Real GDPIn 2007 =
$2,585=$1,32
0221.958
Nominal Versus Real GDPBase Year Prices Method
37
Determine market value of basket in successive years assuming the price has not changed from
the base year.Pizza
Quantity
Price Nominal GDP Real GDP
2005 75 $120
0 75x$1200=$900 75x$1200=$900
2006 90 $1500 90x$1500=$1,350
90x$1200=$1,080
2007 110 $2350 110x$2350=$2,585
110x$1200=$1,320Current
Prices
Base-Year Price
Nominal Versus Real GDPCalculating Percentage Change in GDP
38
Reminder: To calculate % change in anything, (New – Old)/Old
Percentage change in real GDP from 2006 to 2007:($1,320 – $1,080) / $,1080 = 0.222 = 22.2% increase
% change in real GDP from 2005 to 2006 = __________________% change in real GDP from 2005 to 2007 = __________________
PizzaQuantit
yPrice Nominal GDP Real GDP
2005 75 $120
0 75x$1200=$900 75x$1200=$900
2006 90 $1500 90x$1500=$1,350
90x$1200=$1,080
2007 110 $2350 110x$2350=$2,585
110x$1200=$1,320
2008 122 $2600 ____________ ________________
Measuring Economic Growth
39
The economic growth rate is the percentage change in GDP from one year to the next.
We measure economic growth so we can make: Economic welfare comparisons International welfare comparisons Business cycle forecasts
Shortcomings of GDPEconomic Welfare Comparisons
40
Economic welfare measures the nation’s overall state of economic well-being.
Real GDP is not a perfect measure of economic welfare for seven reasons:1. Real GDP does not include household
production (nonmarket activities), that is, productive activities done in and around the house by members of the household.
2. The value of “leisure” (time spent NOT working) is not captured in real GDP.
Shortcomings of GDPEconomic Welfare Comparisons
41
Economic welfare measures the nation’s overall state of economic well-being.
Real GDP is not a perfect measure of economic welfare for seven reasons:3. Real GDP does not capture the value of
improvements in quality. (ex, $200 cell phone today is of much higher quality than $200 cell phone 10 years ago).
4. Real GDP does not account for activity in the illegal underground economy, or legal activity with unreported income.
Shortcomings of GDPEconomic Welfare Comparisons
42
Economic welfare measures the nation’s overall state of economic well-being.
Real GDP is not a perfect measure of economic welfare for seven reasons:5. Environmental damage is not deducted from
real GDP.6. Composition and distribution of output is not
accounted for in real GDP. (ex. an assault rifle and a set of encyclopedias is valued equally if prices are equal).
7. Noneconomic sources of well-being, such as peace time, justice, civility, reduced crime, are not included in real GDP.
Key Terms
GDP (gross domestic product)
intermediate goods final goods value added expenditures
approach income approach government
purchases (G) domestic investment
(I)
consumption expenditures (C)
net exports (Xn) nominal GDP real GDP leisure underground
economy
43
Measuring Output and Income Wrap Up
44
Gross Domestic Product (GDP)
Definition
MeasureReal v.
NominalEvaluate
Expenditure
Income
Circular Flow
Definition
Two Ways to
Calculate
Growth
Shortcomings