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Introduction to Macroeconomics

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 Nominal and Real GDP Measuring Price Changes 6. Empirical Applications.

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Introduction to Macroeconomics

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  1. Introduction to Macroeconomics Chapter 4 Measuring Output of the Macroeconomy

  2. Chapter 4. Measuring the Macroeconomy 1. Measuring Total Output 2. How to Measure GDP 3. GDP Accounting Complications • Nominal and Real GDP • Measuring Price Changes 6. Empirical Applications Introduction to Macroeconomics

  3. 1. Measuring Total Output • Monetary Measure of Value • GDP versus GNP • Omissions from GDP - does not measure social welfare Introduction to Macroeconomics

  4. 1. Measuring Total Output Monetary Measure of Value QuantitytimesPriceequalsMarket 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

  5. 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

  6. 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

  7. 2. How to Measure GDP • Circular Flow • Expenditure Approach • Income Approach Introduction to Macroeconomics

  8. 2. How to Measure GDP Circular Flow of Income and Expenditures Income Resources Business Firms Households Goods and Services Expenditures Solid Lines - Flow of Money Dashed lines - Flow of Goods and Services Introduction to Macroeconomics

  9. 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

  10. 2. How to Measure GDP Expenditure Approach: Expenditure Shares 2002 U.S. Nominal Gross Domestic Product Government Spending 18.8 % Consumption 69.9 % Investment 15.2 % Net Exports = - 4.1 % (not shown in slide) Introduction to Macroeconomics

  11. 2. How to Measure GDP Expenditure Approach: Consumption U.S. Japan 1999 U.S. 68.2 % Japan 60.1 % Introduction to Macroeconomics

  12. 2. How to Measure GDP Expenditure Approach: Government U.S. Japan 1999 U.S. 17.6 % Japan 18.4 % Introduction to Macroeconomics

  13. 2. How to Measure GDP Expenditure Approach: Investment Japan U.S. 1999 U.S. 17.9 % Japan 20.0 % Introduction to Macroeconomics

  14. 2. How to Measure GDP Expenditure Approach: Net Exports Japan U.S. 1999 U.S. - 3.7 % Japan 1.5 % Introduction to Macroeconomics

  15. 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

  16. 3. GDP Accounting Complications • Double Counting • Depreciation Introduction to Macroeconomics

  17. 3. GDP Accounting Complications Double Counting • Intended for “final” use • excludes intermediate products • Value Added • excludes used goods Introduction to Macroeconomics

  18. 3. GDP Accounting Complications Depreciation Gross Investment - Depreciation = Net Investment Gross Domestic Product (GDP) - Depreciation = Net Domestic Product (NDP) Introduction to Macroeconomics

  19. 4. Nominal and Real GDP • Definitions • Sample Problem • GDP Growth Introduction to Macroeconomics

  20. 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

  21. 4. Real GDP Sample Problem Introduction to Macroeconomics

  22. 4. Real GDP Definition of Nominal GDP Nominal GDP = Current year Quantities x Current year Prices Introduction to Macroeconomics

  23. 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

  24. 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

  25. 4. Real GDP Definition of Real GDP Real GDP = Current year Quantities x Base year Prices Introduction to Macroeconomics

  26. 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

  27. 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

  28. 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

  29. 5. Measuring Price Changes • Price index • GDP deflator • Consumer price index • Problems with price indexes Introduction to Macroeconomics

  30. Measuring Price ChangesPrice 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

  31. Measuring Price ChangesGDP 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

  32. Measuring Price ChangesInflation 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

  33. Measuring Price ChangesProblems 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

  34. 6. Empirical Applications • Use Real rather than Nominal values • Compare Per Capita rather than Aggregates • Compare Growth Rates rather than Levels Introduction to Macroeconomics

  35. 6. Empirical Applications Compare Per Capita rather than Aggregates Introduction to Macroeconomics

  36. 6. Empirical Applications Compare growth rates rather than levels Introduction to Macroeconomics

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