measuring aggregate economic activity. 7-2 national income accounting why measure? national income...
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MEASURING AGGREGATE ECONOMIC ACTIVITY
7-2
National Income Accounting
• Why measure?
• National income accounting – A way of measuring total, or aggregate production.
• Gross Domestic Product (GDP)– The total value of all final goods and services produced
in an economy in a one-year period.
7-3
Calculating GDP• Adding together millions of goods and services.
• Adding apples and oranges– All of the quantities of goods and services produced
are multiplied (weighted) by their market price per unit to determine a value measure of that good or service.
• The sum of all of these values is GDP.
7-4
The Expenditure Approach• GDP is the sum of four categories of
expenditures. GDP = C + I + G + (X – M)• Consumption• Investment– Includes inventories
• Government Spending– Valued at cost– Excludes transfer payments
• Net exports
7-5
CALCULATING GDPSuppose that consumption is $1150, investment is $400, and government purchases are $500. Exports are $100 and imports are $150. How much isGross Domestic Product?
GDP = C + I + G + (X – M) by substitution, GDP = 1150 + 400 + 500 + (100-150) GDP = $2000
GDP IN THE U.S. vs. BELGIUM
GDP = C + I + G + Exports - Imports
U.S. $14,000 B = 70% + 17% + 19% + 11% - 17%Belgium $365 B = 53% + 21% + 23% + 87% - 84%
7-7
Flows vs. Stocks
• Flows– Involves a time period– GDP is reported on an annualized basis– About $14 Trillion ($14,000,000,000,000)
• Stocks– An amount at a point in time– Wealth accounts—assets minus liabilities – About $50 Trillion ($50,000,000,000,0000)
7-8
GDP Measures Final Output• Final vs. Intermediate goods and services– Final output – goods and services purchased for final use.– Intermediate products are used as an input in the
production of some other product.
• GDP counts only final goods and services
• Counting both final and intermediate goods would result in double counting.
7-9
Two Ways of Eliminating Double Counting
• Calculate only final output.– A firm would report how much it sold to consumers and how
much it sold to producers (intermediate goods).
• Follow the value added approach.– Value added is the increase in value that a firm contributes
to a product or service.– It is calculated by subtracting intermediate goods (the cost of
materials that a firm uses to produce a good or service) from the value of its sales.
7-10
Value Added Approach
Participants Cost ofMaterials
Value ofSales
Value Added
Farmer $ 0 $ 100 $ 100Cone factoryand iceCream maker
100 250 150
Middleperson 250 400 150Vendor 400 500 100Totals $ 750 $1,250 $500
7-11
What is Counted in GDP?
• Not counted– Value of resold goods– Government transfer payments– Sales of stocks or bonds– Non-market transactions---e.g., work of
housespouses• Counted– Value added by a used car dealer– Commissions of stock brokers
7-12
GDP and NDP
• Net domestic product is GDP adjusted for depreciation – the amount of capital used up in producing that year’s GDP.
NDP = C + (I – depreciation) + G + (X-M)
• NDP measures output available for purchase.
7-13
GDP AND GNP • Gross Domestic Product (GDP) – Total value of all final goods and services produced in
country in a one-year period.
• Gross National Product (GNP)– Total value of all final goods and services produce by the
citizens and businesses of a country in a one- year.
• When is the difference important?
7-14
The Income Approach
• Aggregate income is the total income earned by citizens and businesses in a country in a year.
• Aggregate income consists of:– employee compensation– rent paid to households (But not to businesses)– interest paid to households (But not to businesses) – profits
The Income Approach
• United States Aggregate Income $14 Trillion
Employee compensation 70% Rents 1% Interest 5% Profits 24%
7-16
Income = Expenditures• Whenever a good or service is produced
(output), somebody receives income for producing it.
• Aggregate Income = Aggregate Production
• Profit is a residual that makes income and expenditures equal.
7-17
Comparing GDP Among Countries
• Per capita GDP – Used to compare relative standards of living among various
countries.– Because of differences in nonmarket activities and
difference in product prices, per capita GDP may be a misleading measure of living standards.
• Purchasing power parity – Adjusts for relative price differences before making
comparisons.
7-18
Economic Welfare Over Time
• If increases in GDP are due to increases in prices, then welfare does not increase.
• Changes in welfare over time are best indicated by changes in real GDP, nominal GDP adjusted for inflation.
• And % ∆ in Nominal GDP = % ∆ in Real GDP + inflation
100deflator GDP
GDP Nominal GDP Real
7-19
CALCULATING REAL GDPSuppose that in year 1 nominal GDP is $1200; in year 2, $1300. The GDP deflator is 110 and 115, respectively. Find the change in nominal GDP. How much of the change is due to a real increase in output and how much is due to price changes?
%3.81001200
1200-1300 GDP nominal%
%5.4100110
110-115price%
3.8% GDP real%
4.5% GDP real% 8.3%
nflationi GDP real%GDP nominal%
7-20
Limitations of National Income Accounting
• GDP measures economic activity, not welfare.– GDP does not measure happiness, nor does it measure
economic welfare.– Non-market activities are not included
• Subcategories are often interdependent.– For example, the line between consumption and investment
may be unclear.
• Measurement problems exist.
7-21
Genuine Progress Indicator
• The genuine progress indicator (GPI) makes a variety of adjustments to GDP to better measure the progress of society rather than just economic activity.
• The GPI includes social goals such as pollution reduction, education, and health.