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Chapter 2 -- Measuring Output and The Price Level zData complied at the National Income and Product Accounts (NIPA)

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Presentation on theme: "Chapter 2 -- Measuring Output and The Price Level zData complied at the National Income and Product Accounts (NIPA)"— Presentation transcript:

1 Chapter 2 -- Measuring Output and The Price Level zData complied at the National Income and Product Accounts (NIPA)

2 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.

3 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

4 zMarket 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 zExample -- Production of a pair of shoes.

6 GDP and Making Shoes Step Value Value Added Farmer 3 3 Packing Plant 7 4 Tannery 13 6 Shoe Manufacturer Wholesaler Retailer Total

7 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

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

9 Consumption (C) zDefined as consumer purchases of final goods and services zcomponents of consumption -- nondurable goods -- durable goods -- services zlargest component of GDP

10 Investment (I) zBusiness Purchases of New Plant and Equipment zNew Residential Housing zChanges 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 -$18 $0 $0 $0

12 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?

13 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.

14 Net Exports (NX) zNX = Exports - Imports zexports are all final goods and services zGNP versus GDP -- the accounting of multinational firms

15 Real GDP and Quality of Life zReal 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 (S P ) S P = 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 zMeasures of the Price Level (P) -- GDP Deflator -- Personal Consumption Expenditure (PCE) Deflator

23 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).

24 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).

25 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

26 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.

27 Sources to Obtain Macroeconomic Data zThe Economic Report of the President (Historical Data) zEconomic Indicators (Recent) index.htmlwww.gpoaccess.gov/indicators/

28 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)


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