1. Measuring the Economy’s Output SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE Macroeconomics, Chapter 5

2. In this chapter you will learn 5.1 What gross domestic product (GDP) is and how to measure it 5.2 Other measures of a nation’s production of goods and services 5.3 The distinction between nominal GDP and real GDP 5.4 The shortcomings of GDP as a measure of domestic output and well-being Macroeconomics, Chapter 5

3. Chapter 5 Topics 5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP Macroeconomics, Chapter 5

4. Measuring the Economy’s Performance National income accounting is useful • to assess the health of the economy Macroeconomics, Chapter 5

5. Measuring the Economy’s Performance National income accounting is useful • to assess the health of the economy • to track the long-run course over time Macroeconomics, Chapter 5

6. Measuring the Economy’s Performance National income accounting is useful • to assess the health of the economy • to track the long-run course over time • as a basis for policy formation Macroeconomics, Chapter 5

7. Gross Domestic Product • the total market value of all final goods and services produced in a given year in a country • A Monetary Measure Macroeconomics, Chapter 5

8. Gross Domestic Product • the total market value of all final goods and services produced in a given year in a country • A Monetary Measure • Avoiding Multiple Counting illustrated… Macroeconomics, Chapter 5

9. Value Added in a Five-Stage Production Process Table 5-2 Production StageSales Value Sheep Ranch $120 Wool Processor $180 Suit Manufacturer $220 Wholesaler $270 Retailer$350 Total $1140 Value Added $120 $ 60 $ 40 $ 50 $ 80 $350 Macroeconomics, Chapter 5

10. Value Added in a Five-Stage Production Process Table 5-2 Production StageSales Value Sheep Ranch $120 Wool Processor $180 Suit Manufacturer $220 Wholesaler $270 Retailer$350 Total $1140 Value Added $120 $ 60 intermediate good $ 40 $ 50 $ 80 $350 Macroeconomics, Chapter 5

11. Value Added in a Five-Stage Production Process Table 5-2 Production StageSales Value Sheep Ranch $120 Wool Processor $180 Suit Manufacturer $220 Wholesaler $270 Retailer$350 Total $1140 Value Added $120 $ 60 $ 40 final good $ 50 $ 80 $350 Macroeconomics, Chapter 5

12. Gross Domestic Product • the total market value of all final goods and services produced in a given year in a country • A Monetary Measure • Avoiding Multiple Counting • GDP Excludes Non-Production Transactions • Financial Transactions • public & private transfer payments • stock market transactions • Second-Hand Sales Macroeconomics, Chapter 5

13. Two Ways of Calculating GDP: Spending & Income • The Expenditures Approach • the sum of all the money spent in buying final goods & services • The Income Approach • the income derived or created from producing final goods & services • Buying (spending money) & selling (receiving income) are two aspects of the same transaction Macroeconomics, Chapter 5

14. The Expenditures Approach • includes several types of spending: • Personal Consumption Expenditures (C) • durables • non-durables • services Macroeconomics, Chapter 5

15. The Expenditures Approach • includes several types of spending: • Gross Investment (Ig) • machinery, equipment, tools • construction • changes in inventories • must include increases in inventories with this year’s production • must subtract decreases in inventories (production from previous years) Macroeconomics, Chapter 5

16. Gross Investment, Depreciation, Net Investment & the Stock of Capital Figure 5-1 gross investment depreciation stock of capital January 1 Macroeconomics, Chapter 5

17. Gross Investment, Depreciation, Net Investment & the Stock of Capital Figure 5-1 net investment depreciation depreciation stock of capital January 1 Macroeconomics, Chapter 5

18. Gross Investment, Depreciation, Net Investment & the Stock of Capital Figure 5-1 net investment stock of depreciation depreciation stock of capital capital January 1 December 31 Macroeconomics, Chapter 5

19. The Expenditures Approach • includes several types of spending: • Personal Consumption Expenditures (C) • Gross Investment (Ig) • Government Purchases (G) • not transfer payments Macroeconomics, Chapter 5

20. The Expenditures Approach • includes several types of spending: • Personal Consumption Expenditures (C) • Gross Investment (Ig) • Government Purchases (G) • Net Exports (Xn) • must subtract spending on imports • must add sales abroad Macroeconomics, Chapter 5

21. Putting It All Together GDP=C+Ig+G+Xn Macroeconomics, Chapter 5

22. The Income Approach • Wages, Salaries & Supplementary Labour Income • Profits of Corporations & Government Enterprises before Taxes • profits can be divided into three categories: • corporate income taxes • dividends • undistributed corporate profits • Interest & Investment Income • Net Income from Farms & Unincorporated Businesses Macroeconomics, Chapter 5

23. Adding Up Domestic Income but GDP was $1,154.9 billion!! Macroeconomics, Chapter 5

24. Adding Up Domestic Income • Adjustments: • Indirect Taxes • Depreciation: Capital Consumption Allowance Macroeconomics, Chapter 5

25. Adding Up Domestic Income Macroeconomics, Chapter 5

26. GLOBAL PERSPECTIVE 5.1 Macroeconomics, Chapter 5

27. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP Macroeconomics, Chapter 5

28. Other National Accounts • Gross National Product (GNP) • Net Domestic Product (NDP) • Net National Income at Basic Prices (NNI) • Personal Income (PI) • Disposable Income (DI) Macroeconomics, Chapter 5

29. Macroeconomics, Chapter 5

30. The Circular Flow Revisited Macroeconomics, Chapter 5

31. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP  Macroeconomics, Chapter 5

32. Nominal GDP Versus Real GDP • GDP = real quantities X prices • what is really changing? • price? • quantity? • both? • get around this by: • deflating GDP when prices rise • inflating GDP when prices fall Macroeconomics, Chapter 5

33. Nominal GDP Versus Real GDP • nominal GDP is based on prices when output was produced • real GDP is based on prices in some reference (base) year Macroeconomics, Chapter 5

34. Adjustment Process in a One-Product Economy Method 1 • find nominal GDP for each year • index numbers tell us whether prices are rising or falling Macroeconomics, Chapter 5

35. Adjustment Process in a One-Product Economy Method 2 • gather separate data on physical outputs • determine market value with base year prices • leads to the implicit price index, as follows: Macroeconomics, Chapter 5

36. Calculating Real GDPTable 5-6  X 300 300 100 X X  280 308 110 Macroeconomics, Chapter 5

37. Table 5-8 2000 1970 1,075.6 90.4 1,020.8 378.6 1995 1980 810.5 315.2 54.7 97.4 Year NominalGDP Real GDP GDP Price Index 23.9 576.2 832.1 105.4 Macroeconomics, Chapter 5

38. Chain Weighted Index • up to 2001, Stats Canada established weights, based on price, for a base year for 380 categories of goods & services • fixed based price index method • as of May 2001, Stats Canada has used a chain weighted index (Fisher index), adjusted annually to better reflect weights of each category • alleviates underweighting of categories where prices have fallen rapidly (e.g., computers) Macroeconomics, Chapter 5

39. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP   Macroeconomics, Chapter 5

40. Shortcomings of GDP • GDP has several shortcomings, both • as a measure of total output • as a measure of well-being Macroeconomics, Chapter 5

41. Shortcomings of GDP • Measurement Shortcomings • Non-Market Transactions • The Underground Economy • Leisure • Improved Product Quality • Well-Being Measure Shortcomings • GDP & the Environment • Composition & Distribution of Output • Non-Material Sources of Well-Being Macroeconomics, Chapter 5

42. GLOBAL PERSPECTIVE 5.2 Macroeconomics, Chapter 5

43. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP    Macroeconomics, Chapter 5