Measuring Output and The Price Level

1. Measuring Output and The Price Level • Data complied at the National Income and Product Accounts (NIPA)

2. Measuring Output -- Gross Domestic Product (GDP) • Gross Domestic Product -- The total market value of all currently produced final goods and services over a period of time. • Nominal GDP -- GDP in current dollars • Real GDP -- GDP in constant dollars.

3. Aspects of GDP Definition • “Over a Period of Time”  GDP is a flow measure. • “Currently Produced”  GDP excludes the following -- sales of used items -- transfer payments -- purchases of stocks, bonds, or land

4. “Market Value” -- the transaction must be recorded and have a specific dollar figure attached  GDP excludes -- illegal purchases -- household production

5. Final Goods and Services and Measuring GDP • Example -- Production of a pair of shoes.

6. GDP and Making Shoes Step ValueValue Added Farmer 3 3 Packing Plant 7 4 Tannery 13 6 Shoe Manufacturer 25 12 Wholesaler 40 15 Retailer 75 35 Total 163 75

7. What Real GDP (Y) Signifies • Total Production or Output of final goods and services • Total Sales on Final Goods and Services (Approximately) • Total Income • Correlated With Total Employment

8. Computing GDP -- The Expenditure Approach Operative Equation: Y = C + I + G + NX

9. Consumption (C) • Defined as consumer purchases of final goods and services • components of consumption -- nondurable goods -- durable goods -- services • largest component of GDP

10. Investment (I) • Business Purchases of New Plant and Equipment • New Residential Housing • Changes In Inventories

11. Output Versus Sales -- The Approximation Example -- $18,000 car, produced in 2000, sold in 2001 Year C I G NX Y 2000 $0 $18 $0 $0 $18 2001 $18 -$18 $0 $0 $0

12. Investment Goods Versus Intermediate Goods • The Similarity -- Transactions between businesses. • The Conceptual Difference -- Producing Final Goods Versus Being Part of a Final Good • The Operational Difference -- Is it used repeated times?

13. Government Purchases of Goods and Services (G) • Not the same as government expenditure (does not include transfer payments) • In the US, the government is a purchaser, not a producer.

14. Net Exports (NX) • NX = Exports - Imports • exports are all final goods and services • GNP versus GDP -- the accounting of multinational firms

15. Real GDP and Quality of Life • Real GDP does not account for the following changes: -- leisure time -- quality differences -- crime -- environmental impacts

16. More Quality of Life Variables Not in Real GDP -- non-market production activities (I) household production (II) underground economy -- income distribution

17. Other Measures of Output or Income Gross Domestic Product (GDP) – Depreciation Net Domestic Product (NDP) – Indirect Business Taxes National Income (NI)

18. National Income – Undistributed Corporate Profits (Business Saving) – Social Security and Corporate Taxes + Transfer Payments and Interest Personal Income (PI) – Personal Income Taxes Disposable Income (YD)

19. Disposable Income and Personal Saving Define -- Personal Saving (SP) SP = YD - C Define -- Total Private Saving (S), S = Personal Saving + Business Saving

20. The “Magic Equation” Let T = Net Taxes Net Taxes = Tax Revenues - (Transfer Payments + Interest on the Government Debt) Then the identity is: S = I + (G - T) + NX.

21. Interpreting the Identity: Saving = Investment Identity: S = I + (G-T) + NX Rearrange Identity Into: S + (T - G) + -NX = I Special Case: (T - G) = 0, NX = 0 S = I

22. Measuring The Price Level • Measures of the Price Level (P) -- GDP Deflator -- Personal Consumption Expenditure (PCE) Deflator

23. Measure #1 -- The GDP Deflator • Market Basket -- set of final goods and services that are used to compute GDP. • Chain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).

24. Measure #2 – The PCE Deflator • Market Basket -- set of final goods and services that are used to compute Consumption within GDP. • Chain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).

25. Computing the Inflation Rate • Inflation Rate = Percentage Change or growth in the Price Index (P), such as the GDP Deflator. • Example: Inflation Rate for 2011 Inflation Rate2011 = P2011 – P2010 P2010

26. Converting Nominal GDP to Real GDP • Example -- find Real GDP 2011 Real GDP2011 = Nominal GDP2011 GDP Deflator2011 • Real GDP for other years is computed the same way. • Real GDP Growth = Percentage Change (or growth) in Real GDP.

27. Sources to Obtain Macroeconomic Data • The Economic Report of the President (Historical Data) www.gpoaccess.gov/eop/ • Economic Indicators (Recent) www.gpoaccess.gov/indicators/index.html

28. More Websites for Macro Data and Information • www.federalreserve.gov (Federal Reserve) • research.stlouisfed.org/fred2/ (Federal Reserve Economic Data) • bea.gov (Bureau of Economic Analysis) • www.bls.gov (Consumer Price Index inflation, unemployment rate, labor productivity growth)