macroeconomics and the global business environment the language of macroeconomics: the national...
Post on 19-Dec-2015
218 views
TRANSCRIPT
MACROECONOMICSAND THE GLOBAL BUSINESS ENVIRONMENT
The Language of Macroeconomics:The National Income Accounts
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. PowerPoint by Beth IngramUniversity of Iowa
2-2
Key Concepts
Gross Domestic Product (GDP) Gross National Income Real and Nominal Measures National Income Accounts GDP and Human Welfare
2-3
Gross Domestic Product
Total market value of final goods and services produced in a country during a given period
Need to know How much was produced (quantity) What the production was worth (price)
Why do we need to know the price?
Price provides a common unit in which to value quantities Important when you have more than one type
of good
2-4
Example -- Company X
Production in 2002 200 washers at $500 100 dryers at $400
Production in 2004 200 washers at $600 100 dryers at $450
Nominal Production = 200 x $500 + 100 x $400
= $140,000
Nominal Production = 200 x $600 + 100 x $450
= $165,000
Problem: dollar value of output higher, but real output the same
2-5
Nominal GDP vs. Real GDP
Important Distinction
Nominal GDP: measure output in current prices = py Real GDP (y): accounts for price change
---measure output in constant prices ---use prices from a base year ---is an index
Difference between Nominal GDP and Real GDP is the change in prices Nominal GDP/Real GDP = GDP Deflator => tells
change in prices => price index (py)/p = y
2-6
By how much has production increased between 2002 and 2005? (using 2002 as base year for prices)
Production in 2002 200 washers at $500 100 dryers at $400
Production in 2005 300 washers at $600 100 dryers at $450
Real Production (2005) = 300 x $500 + 100 x $400 = $190,000Real Production (2002) = 200 x $500 + 100 x $400 = $140,000Growth Rate = ($190,000-$140,000)/$140,000 = 35.71%
2-7
By how much has production increased between 2002 and 2005? (using 2005 as base year for prices)
Production in 2002 200 washers at $500 100 dryers at $400
Production in 2005 300 washers at $600 100 dryers at $450
Real Production (2005) = 300 x $600 + 100 x $450 = $225,000Real Production (2002) = 200 x $600 + 100 x $450 = $165,000Growth Rate = ($225,000-$165,000)/$165,000 = 36.36%
2-8
Chain Weighted Prices
Problems with fixed prices Different growth rates dependent on which
base year for price is used Fixed price assumes fixed fundamental value
society places on good Chain weighting as “averaging” of prices
Chain-weighted growth of 36.03%
2-9
GDP Annual Percent Growth
Indonesia, Real and Nominal GDP growth
Nominal GDP growth Real GDP GrowthSource: EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02
Percent
-20
-10
0
10
20
30
40
50
60
2-10
A Closer Look at GDP
GDP = (1) total market value of (2) final goods and services produced in a (3) country during a (4) given period (1) Total market value
Prices reflect value placed on good/service by society
Ignores non-market economic activity (2) Final goods & services
No intermediate goods…avoid double counting (3) In a country/region…domestically produced (4) Given period
No used sales counted Services rendered on used sales is counted
2-11
GDP as Value-Added Measure (Bread Example)
Company Revenues – Cost of purchased inputs = Value added
ABC Grain $0.50 $0.00 $0.50
General Flour $1.20 $0.50 $0.70
Hot’n’Fresh $2.00 $1.20 $0.80
Total $2.00
GDP equals final goods sold = $2.00
Or
GDP equals valued added = $0.50 + $0.70 + $0.80 = $2.00
2-12
Measures of Output
product (output) approach: The market value of the final goods and services produced in a country during a given period
expenditure approach: how much households, firms, government, and foreigners spend on GDP
Income approach: the income generated from making GDP Payments to labor and capital
2-13
Three Measures GDP are Equal
= =
Market Market value of value of
final final goods goods
and and servicesservices
Production Expenditure Income
InvestmentInvestment
ConsumptionConsumption
GovernmentGovernment
purchasespurchases
Net exportsNet exports
Capital Capital IncomeIncome
Labor IncomeLabor Income
= =
Market Market value of value of
final final goods goods
and and servicesservices
Production Expenditure Income
InvestmentInvestment
ConsumptionConsumption
GovernmentGovernment
purchasespurchases
Net exportsNet exports
Capital Capital IncomeIncome
Labor IncomeLabor Income
Product Expenditure Income
= =
2-14
Product Approach: Sectors as a % of GDP (2001)
0
10
20
30
40
50
60
70
80
Low Income Middle Income High Income
Agriculture Industry Service
U.S.
2-15
Income Approach
Global Rule of Thumb: 70% of income goes to labor, 30% of income goes to capital
U.S. example
1993-2003: Functional Distribution of Income
wages, salaries, benefits, 65.2%
Proprietors Income, 8.1%
Rental Income, 1.8%
Corporate Profits, 10.2%
Interest, 6.0%
Other, 8.8%
2-16
Expenditure (Demand) Approach
Consumption by individuals (C) Consumption and investment by government (G)
Does not include transfer payments Investment by the private sector (I)
Generally presented in two subcategories(1) Gross Capital Formation
(2) Change in Inventories
Net Exports (NX)…exports-imports
Y = C + G + I + NXY = C + G + I + NX
2-17
Expenditure (Demand) Approach
Expenditure approach often used to see what forms of spending are driving economic growth
Calculate contributions to growth
t
t
t ComponenteExpenditurofRateGrowthGDP
ComponenteExpenditur
1
1
2-18
Expenditure (Demand) Approach
Contribution to Growth
-4%
-2%
0%
2%
4%
6%
8%
U.S. GDP Growth RateContribution from Private & Public Consumption, Housing Investment
Source: BEA
2-19
Expenditure (Demand) Approach
U.S. Consumption as a % of GDP
65%
70%
75%
80%
85%
90%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2-20
World GDP
2004 Dollar Size of the World GDP
$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
$35,000.00
$40,000.00
$45,000.00
2-21
World GDP
Value of Economy ($ Billions)
$0.00
$2,000.00
$4,000.00
$6,000.00
$8,000.00
$10,000.00
$12,000.00
$14,000.00
Dollar Value PPP Dollar Value
China U.S.
2-22
GDP Per Capita
GDP Per Capita (Thousands PPP $)
$0.00
$5,000.00
$10,000.00
$15,000.00
$20,000.00
$25,000.00
$30,000.00
$35,000.00
$40,000.00
$45,000.00
China U.S.
2-23
GDP and GNI
GDP Output produced within a geographic location (US,
Italy, etc.) GNI (Gross National Income)
Also called GNP (Gross National Product) Output produced by citizens of a geographic region Value must be remitted back to country
GNI = GDP + NFP (Net Factor Payments) NFP = payments to domestically owned factors (labor
and capital) located abroad minus payments to foreign factors located domestically
Payments: (1) net dividends, interest, rent flows abroad (2) net wage flows abroad
2-24
Example
Joe Canadien, citizen of Canada, works in US and sends wages back to Canada
US GDP includes Joe’s wages Canadian GNI includes Joe’s wages
2-26
GDP Measurement Problems
Underground economic activity Illegal activities Tax avoidance
Non-market transactions Homemaking Leisure
Negative consequences of production pollution
2-27 Does Increased GDP = Improved Human Welfare?
IndicatorAll developing
countries
GDP per person 3,530 1,170 25,860(U.S. dollars)
Life expectancy at 64.5 51.7 78.0birth (years)
Infant mortality rate 61 100 6(per 1,000 live births)
Under-5 mortality rate 89 159 6(per 1,000 live births)
Doctors 78 30 252(per 100,000 people)
Incidence of HIV/Aids 1.3 4.3 0.3(% in 15-49 age group)
Undernourished 18 38 Negligiblepeople (%)
Primary enrollment 85.7 60.4 99.9rate (as % of age group)
Secondary enrollment 60.4 31.2 96.2rate (as % of age group)
Adult literacy rate (%) 72.9 51.7 98.6
Least developed countries
Industrialized countries
2-28
Does Increased GDP = Improved Human Welfare? Is more output better? Human Development Index
Table from UNDP website Animated comparisons HDI calculator Note that as countries get richer, income per
capita plays smaller role
2-29
Summary
Need for consistent set of data Real and Nominal Variables GDP and GNI Value added = Income = Total Expenditure GDP a rough proxy for human welfare
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.