1. THE DATA OF MACROECONOMICS
III
THE DATA OF MACROECONOMICS

2. Measuring a Nation’s Income5
Measuring a Nation’s Income

3. Microeconomics and Macroeconomics
Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets
Macroeconomics is the study of the economy as a whole
Its goal is to explain the economic changes that affect many households, firms, and markets at once
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4. Macroeconomics Macroeconomics answers questions like these:
Why is average income high in some countries and low in others?
Why do prices rise rapidly in some time periods while they are more stable in others?
Why do production and employment expand in some years and contract in others?
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5. The Importance of Data In macroeconomics, data is crucial
Data helps policy makers see what problems, if any, need to be addressed
Data helps macroeconomists identify the theories that make correct predictions and the theories that make incorrect predictions
Data often reveals interesting puzzles that macroeconomic theories need to solve
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6. Total Income
When judging whether an economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning
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7. Total Income
We can temporarily boost our standard of living by borrowing from others.
But in the long run we can’t keep borrowing indefinitely
This is why a nation’s standard of living depends heavily on its total income
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8. Income = Expenditure
We could measure either total income or total expenditure
We will get the same number either way
For an economy as a whole, income must equal expenditure because:
Every transaction has a buyer and a seller.
Every dollar of spending by some buyer is a dollar of income for some seller.
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9. But what about saving?
Q: People typically save part of what they earn. How then is income equal to expenditure for the economy as a whole?
A: What people save tends to be loaned to businesses who then spend what they borrowed.
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10. International Trade
We buy foreign-made goods and foreigners buy goods made by us
Q: In that case, how can our total income be equal to our total expenditure?
A: Very good point! It is better to say that total income equals the total expenditure on domestically produced goods (GDP)
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11. Gross Domestic Product
Gross Domestic Product (GDP) is one measure of a country’s total income
There are other measures
GDP is the total market value of all final goods and services produced within a country in a given period of time.
For example, the GDP of the United States was nearly seventeen trillion dollars in 2013
$16,803.0 billion, according to the U.S. Department of Commerce
GDP data from National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2013 (advance estimate) released on January 30, 2014.
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12. Gross Domestic Product
We just saw that GDP is the total market value of all final goods and services produced
Therefore, GDP is also the total expenditure on all final goods and services produced
As expenditure is equal to income, GDP is also total income
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14. GDP is the Market Value …
In GDP, all output is valued at market prices.
The market value of all sandwiches produced is both the total expenditure of the buyers of those sandwiches and the total income of the makers of those sandwiches
As our goal is to measure total income, it therefore makes sense to measure the market values of the various produced goods and add them up
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15. … Of All Final Goods …
GDP records only the value of final goods, not intermediate goods
Intermediate goods are those goods that disappear inside other goods that are produced for sale
Final goods are goods that are not intermed iate goods
This way, the value of intermediate goods is counted only once, not twice or thrice.
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16. … Of All Final Goods …
Intermediate goods are sold by their producers to producers of other goods
Examples: milk sold by a dairy to an ice-cream company, grapes sold by a vineyard to a winemaker, printer paper sold to Kinko’s
Final goods are goods that are sold to the final users of those goods
Examples: milk you buy at the supermarket, table grapes you buy at the farmer’s market, printer paper you buy for your computer printer
All goods made this year but not sold by year’s end are regarded as final goods (inventories)
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17. … Of All Final Goods …
Suppose a dairy farmer sells milk worth $50,000 to an ice-cream company.
The farmer does not buy anything from any other firm.
The total income of the dairy farmer and her employees is, therefore, $50,000
The ice-cream company uses the milk to produce ice-cream which it sells for $75,000.
The ice-cream company does not buy anything from any firm other than the dairy.
Therefore, the total income of the owners and employees of the ice-cream firm is $25,000.
Therefore, the total income of this country is $75,000
This is accurately measured by the value of the ice-cream (the final good) alone
Had we also counted milk, the intermediate good, we would have calculated total income to be $125,000, which would have been an exaggeration.
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18. … and Services … GDP includes both
tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor visits, legal consultations).
Trade in assets does not affect GDP.
Such trade does not require new productive activity, it is merely the transfer of ownership of an asset from one person to another
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19. … Produced Within a Country …
GDP measures the value of all production within the geographic boundaries of a country.
The citizenship of the owners of the resources used in production is not the key issue
Production by foreigners living in a country is counted in the country’s GDP
Production by a country’s citizens working in other countries is not counted
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20. … In a given period of time
GDP measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).
GDP includes goods and services currently produced, not transactions involving goods produced in the past.
Transactions involving used cars or buildings that were constructed in the past are not counted
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21. What’s not counted in GDP?
GDP includes all items produced in the economy and sold legally in markets.
It excludes items produced and sold illicitly, such as illegal drugs.
GDP excludes most items that are produced and consumed at home and that never enter the marketplace.
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22. Real Versus Nominal GDP
Nominal GDP values the production of goods and services at current prices.
Real GDP values the production of goods and services at constant prices.
I tend to say that the current prices are the prices that prevailed at the time of production.
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23. CHAPTER 5 MEASURING A NATION’S INCOME

24. Real and Nominal GDP of USA
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25. The GDP Deflator
The GDP deflator is a measure of the overall level of the prices of the final goods and services produced within a country during a given period of time
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26. The GDP Deflator
It tells us what part of the rise in nominal GDP over a period of time is attributable to a rise in prices rather than a rise in the quantities produced.
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27. The GDP Deflator
The GDP Deflator is calculated as follows: GDP Deflator 𝑦𝑦𝑦𝑦 = Nominal GDP 𝑦𝑦𝑦𝑦 Real GDP 𝑦𝑦𝑦𝑦 ×100
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28. Example: 2013 US Nominal GDP was $16,803.0 billion
US Real GDP was $15,767.1 billion (chained 2009 dollars)
US GDP Deflator = (16,803.0/15,767.1) × 100 =
This means that, roughly, final goods and services were on average 6.57% pricier in 2013 compared with 2009
GDP data from National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2013 (advance estimate) released on January 30, 2014.
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29. The GDP Deflator Why call it a deflator?
Nominal GDP changes from one year to the next partly because of inflation
Real GDP, on the other hand, changes because of changes in production alone
The GDP Deflator can convert Nominal GDP to Real GDP by deflating the effect of inflation in Nominal GDP
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30. Converting Nominal GDP to Real GDP
We just saw that GDP Deflator 𝑌𝑌𝑌𝑌 = Nominal GDP 𝑌𝑌𝑌𝑌 Real GDP 𝑌𝑌𝑌𝑌 ×100
Therefore, Real GDP 𝑦𝑦𝑦𝑦 = Nominal GDP 𝑦𝑦𝑦𝑦 GDP Deflator 𝑦𝑦𝑦𝑦 ×100
Therefore, if you know the Nominal GDP and the GDP Deflator, you can calculate the Real GDP
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31. The Components of GDP
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32. The Components of GDP
We have seen that GDP is the total expenditure on domestically-produced final goods and services
Knowing the total expenditure is not enough, however
We also need to know the components of the total expenditure
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33. The Components of GDP
If total expenditure falls, total income will fall too …
… which is not good!
To figure out why total expenditure is falling, policy makers need to find out whether some particular component of expenditure is chiefly responsible for the fall in total spending
If the chief culprit is identified, policy makers would have a better chance of fixing the problem

34. Components of GDP
GDP = Consumption Spending Investment Spending Government Spending Exports – Imports
Macroeconomists look not only at total spending (GDP), they also look at the above components of total spending
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35. The Components Of GDP Consumption (C): Investment (I):
The spending by households on goods and services, with the exception of purchases of new housing.
Investment (I):
The spending on capital equipment, inventories, and structures, including new housing.
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36. The Components Of GDP Government Purchases (G): Net Exports (NX):
The spending on goods and services by local, state, and federal governments.
Does not include transfer payments because they are not made in exchange for currently produced goods or services.
Net Exports (NX):
Exports minus imports.
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37. The Components Of Real GDP: 2013
Billions of Chained 2009 Dollars
Percent of GDP
Gross Domestic Product (Y)
15,767.10
100.00
Personal consumption expenditures (C)
10,728.20
68.04
Gross private domestic investment (I)
2,567.90
16.29
Government consumption expenditures and gross investment (G)
2,897.60
18.38
Net exports of goods and services (NX)
-409.1
-2.59
GDP data from National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2013 (advance estimate) released on January 30, For figures in chained 2009 dollars, the components do not add up to the total.
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38. The Components Of Nominal GDP: 2013
Billions of Dollars
Percent of GDP
Gross Domestic Product (Y)
16,803.00
100
Personal consumption expenditures (C)
11,499.30
68.44
Gross private domestic investment (I)
2,672.00
15.90
Government consumption expenditures and gross investment (G)
3,125.50
18.60
Net exports of goods and services (NX)
-493.8
-2.94
GDP data from National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2013 (advance estimate) released on January 30, 2014.
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39. Components of GDP
GDP = Consumption Spending Investment Spending Government Spending Exports – Imports
Q: Why do we subtract imports?
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40. Components of GDP: Why do we subtract imports?
GDP is the total spending on all final “Made in USA” goods.
But consumption, investment, and government spending all include spending on foreign goods.
Therefore, to make the two sides of the equation the same, we must take out all spending on imported goods lurking inside consumption, investment, and government spending
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41. Table 1 GDP and Its Components (2004)
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42. GDP and Its Components (2004)
Government Purchases
15%
Net Exports
-5 %
Investment
16%
Consumption
70%
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43. CHAPTER 5 MEASURING A NATION’S INCOME
Real GDP is GDP at chain-weighted 2000 prices
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44. CHAPTER 5 MEASURING A NATION’S INCOME
Real GDP is GDP at chain-weighted 2000 prices
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45. CHAPTER 5 MEASURING A NATION’S INCOME
Real GDP is GDP at chain-weighted 2000 prices. Government spending includes spending by all levels of government. Transfers not included.
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46. U.S. Exports and Imports, as a percentage of real GDP
Real GDP is GDP at chain-weighted 2000 prices
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47. CHAPTER 5 MEASURING A NATION’S INCOME
Real GDP is GDP at chain-weighted 2000 prices
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48. Nominal GDP (Billions of Dollars)
Growth Rates
To calculate the growth rate of some variable (such as GDP), use the following formula: Growth Rate % = New Value−Old Value Old Value ×100
GDP data from National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2013 (advance estimate) released on January 30, See Table 9.
Nominal GDP (Billions of Dollars)
Growth Rate (%)
2011
2012
[( )/ ]✕100 =
4.58
2013
[( )/ ]✕100 =
3.44

49.
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50. Where to find US data
Bureau of Economic Analysis, U.S. Department of Commerce:
Federal Reserve Bank of St. Louis:
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51. International Comparisons
When the GDP numbers for various countries’ are being compared, the same currency units must be used for all countries
There are two ways of converting from national countries to the US dollar (or some other common currency)
Use market exchange rates
Use a common set of prices (PPP)
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52. GDP per capita, in US dollars
PPP
Market Exchange Rates
United States
United Kingdom
Japan
Uruguay
Ukraine
Albania
China
India
762.14
Bangladesh
417.66
Ethiopia
724.61
202.05
Liberia
333.45
170.88
Source: World Economic Outlook 2008 database, IMF
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53. GDP And Economic Well-being
GDP is the best single measure of the economic well-being of a society.
GDP per person tells us the income and expenditure of the average person in the economy.
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54. Table 3 GDP, Life Expectancy, and Literacy
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55. GDP And Economic Well-being
Some things that contribute to well-being are not included in GDP.
The value of leisure.
The value of a clean environment.
The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
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56. Robert Kennedy on GDP
[Gross Domestic Product] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.
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57. Any questions?
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58. Summary
Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy.
Gross Domestic Product (GDP) measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.
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59. Summary
GDP is the market value of all final goods and services produced within a country in a given period of time.
GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports.
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60. Summary
Nominal GDP uses current prices to value the economy’s production. Real GDP uses constant base-year prices to value the economy’s production of goods and services.
The GDP deflator—calculated from the ratio of nominal to real GDP—measures the level of prices in the economy.
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61. Summary
GDP is a good measure of economic well-being because people prefer higher to lower incomes.
It is not a perfect measure of well-being because some things, such as leisure time and a clean environment, aren’t measured by GDP.
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