Presentation on theme: "Chapter 2 -- Measuring Output and The Price Level zData complied at the National Income and Product Accounts (NIPA)"— Presentation transcript:
Chapter 2 -- Measuring Output and The Price Level zData complied at the National Income and Product Accounts (NIPA)
Measuring Output -- Gross Domestic Product (GDP) zGross Domestic Product -- The total market value of all currently produced final goods and services over a period of time. zNominal GDP -- GDP in current dollars zReal GDP -- GDP in constant dollars.
Aspects of GDP Definition zOver a Period of Time GDP is a flow measure. zCurrently Produced GDP excludes the following -- sales of used items -- transfer payments -- purchases of stocks, bonds, or land
zMarket Value -- the transaction must be recorded and have a specific dollar figure attached GDP excludes -- illegal purchases -- household production
Final Goods and Services and Measuring GDP zExample -- Production of a pair of shoes.
GDP and Making Shoes Step Value Value Added Farmer 3 3 Packing Plant 7 4 Tannery 13 6 Shoe Manufacturer 25 12 Wholesaler 40 15 Retailer 75 35 Total 163 75
What Real GDP (Y) Signifies zTotal Production or Output of final goods and services zTotal Sales on Final Goods and Services (Approximately) zTotal Income zCorrelated With Total Employment
Computing GDP -- The Expenditure Approach Operative Equation: Y = C + I + G + NX
Consumption (C) zDefined as consumer purchases of final goods and services zcomponents of consumption -- nondurable goods -- durable goods -- services zlargest component of GDP
Investment (I) zBusiness Purchases of New Plant and Equipment zNew Residential Housing zChanges In Inventories
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
Investment Goods Versus Intermediate Goods zThe Similarity -- Transactions between businesses. zThe Conceptual Difference -- Producing Final Goods Versus Being Part of a Final Good zThe Operational Difference -- Is it used repeated times?
Government Purchases of Goods and Services (G) zNot the same as government expenditure (does not include transfer payments) zIn the US, the government is a purchaser, not a producer.
Net Exports (NX) zNX = Exports - Imports zexports are all final goods and services zGNP versus GDP -- the accounting of multinational firms
Real GDP and Quality of Life zReal GDP does not account for the following changes: -- leisure time -- quality differences -- crime -- environmental impacts
More Quality of Life Variables Not in Real GDP -- non-market production activities (I) household production (II) underground economy -- income distribution
Other Measures of Output or Income Gross Domestic Product (GDP) – Depreciation Net Domestic Product (NDP) – Indirect Business Taxes National Income (NI)
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)
Disposable Income and Personal Saving Define -- Personal Saving (S P ) S P = YD - C Define -- Total Private Saving (S), S = Personal Saving + Business Saving
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.
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
Measuring The Price Level zMeasures of the Price Level (P) -- GDP Deflator -- Personal Consumption Expenditure (PCE) Deflator
Measure #1 -- The GDP Deflator zMarket Basket -- set of final goods and services that are used to compute GDP. zChain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).
Measure #2 – The PCE Deflator zMarket Basket -- set of final goods and services that are used to compute Consumption within GDP. zChain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).
Computing the Inflation Rate zInflation Rate = Percentage Change or growth in the Price Index (P), such as the GDP Deflator. zExample: Inflation Rate for 2011 Inflation Rate 2011 = P 2011 – P 2010 P 2010
Converting Nominal GDP to Real GDP zExample -- find Real GDP 2011 Real GDP 2011 = Nominal GDP 2011 GDP Deflator 2011 zReal GDP for other years is computed the same way. zReal GDP Growth = Percentage Change (or growth) in Real GDP.
Sources to Obtain Macroeconomic Data zThe Economic Report of the President (Historical Data) www.gpoaccess.gov/eop/ zEconomic Indicators (Recent) www.gpoaccess.gov/indicators/ index.htmlwww.gpoaccess.gov/indicators/
More Websites for Macro Data and Information zwww.federalreserve.gov (Federal Reserve) zresearch.stlouisfed.org/fred2/ (Federal Reserve Economic Data) zbea.gov (Bureau of Economic Analysis) zwww.bls.gov (Consumer Price Index inflation, unemployment rate, labor productivity growth)