Presentation on theme: "Ch. 5 : MEASURING GDP AND ECONOMIC GROWTH"— Presentation transcript:
1 Ch. 5 : MEASURING GDP AND ECONOMIC GROWTH Define GDPCircular flow modelRelationship between aggregate expenditure and aggregate income.Measurement of real GDP and the GDP deflatorReal GDP as a measure of economic growth and the limitations of our measure
2 Gross Domestic Product GDP: gross domestic productthe market value of all final goods and services produced in a country by domestically located resources in a given time period.This definition has four parts:Market valueFinal goods and servicessales of intermediate goods not countedProduced within a country by domestically located resourcesIn a given time periodInventory changes between periods for partially completed products
3 Gross Domestic Product GDP and the Circular Flow of Expenditure and IncomeGDP measures the value of productionequals total expenditure on final goodsequals total income from production.The circular flow diagram illustrates the equality of income, expenditure, and the value of production.
4 Produced in 2008 were not sold in 2008 Suppose that inventories are $20 billion at the end of 2008 and $24 billion at the end of 2009, this means that $4 billion of goods :Produced in 2008 were not sold in 2008Produced in 2009 were not sold in 2009Produced in 2008 were sold in 200920
5 Sold in 2008 were produced prior to 2008 Suppose that inventories are $20 billion at the end of 2008 and $15 billion at the end of 2009, this means that $5 billion of goods :Sold in 2008 were produced prior to 2008Sold in 2009 were produced prior to 2009Produced in 2009 were unsold in 200920
8 Circular Flow For any given sector, inflows=outflows Household sector: Y=C+S+TFactor marketsY=C+I+G+(X-M)GovernmentT-G=government lending (borrowing)
9 Circular Flow Rest of World Financial markets X-M=U.S. lending (borrowing) with rest of worldFinancial marketsS + government budget surplus (deficit) = lending (borrowing) with rest of world
10 Gross Domestic Product Two ways to measure GDP:Expenditure Approach:Aggregate expenditure = C + I + G + (X-M)Income ApproachAggregate income = Y = Wages + Rent + Interest + ProfitBecause Income and expenditure approach both measure GDP:Y = C + I + G + (X-M)
11 Expenditure Components of US GDP: 2008 (billions of $)
12 Gross Domestic Product Financial FlowsY = C + S + TY = C + I + G + (X-M)S+T = I+G+(X-M)
13 Gross Domestic Product How Investment Is FinancedThe last equation could also be reorganized as:I = S + (T-G) + (M-X)Investment is financed from three sources:Private saving, SGovernment budget surplus, (T – G)S + (T-G) is “national saving”Borrowing from the rest of the world (M – X).
14 Gross Domestic Product Gross vs. Net Domestic Product“Gross” means before accounting for the depreciation of capital.Net Domestic Product = GDP – Capital Consumption Allowance.
15 Stocks versus flows Wealth Saving Capital Investment a stock representing the value of all the things that people ownSavingA flow that is the source of changes in the stock of wealth.CapitalA stock representing the plant, equipment, and inventories of raw and semi-finished materials that are used to produce other goodsInvestmentA flow representing the purchases of new capitalDepreciation (capital consumption)A flow representing the decrease in the capital stock that results from wear and tear, and obsolescence.
16 Stocks vs flowsWealth(t)=Wealth(t-1)+saving Capital(t)=Capital(t-1) + gross investment-depreciation =Capital(t-1) + net investment
17 If wealth is $26 trillion at the end of 2008 and $27 If wealth is $26 trillion at the end of 2008 and $27.3 trillion at the end of 2009, then saving was$1.3 trillion during 2008$1.3 trillion during 2009-$1.3 trillion during 2008-$1.3 trillion during 2009.20
18 If capital is $8 trillion at the end of 2008 and $7 If capital is $8 trillion at the end of 2008 and $7.7 trillion at the end of 2009Gross investment is $.3 trillion in 2009Net investment is $.3 in 2009Net investment is -$.3 trillion in 200920
19 Gross Domestic Product The relationships among capital, gross investment, depreciation, and net investment.
20 Investment and Depreciation Depreciation is included in:GDPGross profitsGross InvestmentDepreciation is removed fromNet National ProductNet profitsNet investmentInvestment plays a central role in the economy.Increases in capital are one source of growth in potential real GDPFluctuations in investment are one source of fluctuations in real GDP.
21 Measuring U.S. GDPThe National Income and Product Accounts divide net national income into five categoriesCompensation of employeesNet interest (paid by business)Rental incomeCorporate profits.Proprietors’ income.
22 Measuring U.S. GDPTwo items must be added to net domestic income to get GDPIndirect taxes minus subsidies are added to get from factor cost to market prices.Depreciation (or capital consumption) is added to get from net domestic product to gross domestic product.
23 Real GDP and the Price Level Nominal GDP is the value of final goods and services produced in a given year when valued at the same year’s pricesReal GDP is the value of final goods and services produced in a given year when valued at constant (base year) prices.
24 Real GDP and the Price Level ItemQuant.Price2002Balls100$1.00Bats20$5.00200316022$10.002002 NGDP ________2003 NGDP ________Growth rate ________Base year of 20022002 RDGP ________2003 RGDP ________Base year of 2003
25 For your answers to the next several slides, give your estimates of GDP to the nearest dollar, do not include decimals, and do not include $ signs.
28 Real GDP in 2002 using 2002 as base year is ______.
29 Real GDP in 2003 using 2002 as base year is ______.
30 Real GDP in 2002 using 2003 as base year is ______.
31 Real GDP in 2003 using 2003 as base year is ______.
32 Chain-weighted method for real GDP Calculate growth rate in real GDP using last year’s prices. ______Calculate growth rate in real GDP using this year’s prices. ______Calculate the average of the two growth rates. This average growth rate is the growth rate of real GDP from last year to this year.average growth rate _______RGDP (using 2002 as base) _________4. Repeat steps 1, 2, and 3 for each pair of adjacent years to link real GDP back to the base year’s prices.
33 Real GDP and the Price Level GDP deflatorAvg. of the prices of the goods in GDP in the current year expressed as a % of the base year prices.
34 Interpreting the GDP-deflator The GDP-deflator provides a comparison of current year prices with base year prices.If deflator =100, prices are, on average, the same.If deflator=150, current year prices are, on average, 1.5 times those in base year (50 percent higher)If deflator=75, current year prices are, on average .75 times those in base year. (25 percent lower)
36 Nominal and Real GDPDateReal GDP(2000 $)Nominal GDP19805161.72786.619907112.55716.420009629.42007
37 The GDP-deflator in 2007 is _____ (give answer rounded to 1 decimal point – e.g. 103.2)
38 The prices in 2007 are ____ percent higher than in 2000 The prices in 2007 are ____ percent higher than in (Give answer rounded to 1 decimal point and exclude % sign – e.g. 5.2 is 5.2%)20
39 The prices in 2007 are ____ percent higher than in 1990 The prices in 2007 are ____ percent higher than in (Give answer rounded to 1 decimal point and exclude % sign – e.g. 5.2 is 5.2%)20
40 Measuring Economic Growth The economic growth rate is the percentage change in real GDP from one year to the next.
41 R-GDP as a measure of economic welfare. Quality improvementsHousehold productionUnderground economyHealth and life expectancyLeisure timeEnvironmentPolitical freedom and social justiceExchange rate in comparing across countries.
42 If environmental quality worsens, the growth rate in real GDP will _____ the growth rate in the standard of livingOver-stateUnder-state20
43 If more people begin to hire someone to take care of home projects instead of doing it themselves, the growth rate in real GDP will _____ the growth rate in the standard of livingOver-stateUnder-state20
44 Overstatement Understatement Suppose U.S. GDP per capita is higher than that in Japan. If people in the U.S. average less hours of work per week than people in Japan, the extra GDP per capita in the U.S. will be an ____ of how much better off people in the U.S are compared to those in Japan.OverstatementUnderstatement20
45 Exchange rates and comparisons across countries. Using actual exchange rate, U.S. real GDP per capita = 69* Chinese real GDP per capitaUsing PPP exchange rate, U.S. real GDP = 12*Chinese real GDP per capita.What does this say about actual versus PPP exchange rate?