1. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 2 Measurement

2. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-2 Chapter 2 Topics Measuring GDP Nominal and real GDP and price indices Labor market measurement

3. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-3 GDP The dollar value of final outputs produced during a given period of time within the borders of a country. Example: published in the National Income and Product Accounts (NIPA) in U.S.

4. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-4 Measuring GDP: The National Income and Product Accounts GDP Measured Using: (i) the product approach; (ii) the expenditure approach; (iii) the income approach. Three approaches yield the same value of GDP.

5. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-5 National Income Accounting Example Fictional Island Economy Coconut Producer, Restaurant, Consumers, Government

6. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-6 Table 2.1 Coconut Producer

7. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-7 Table 2.2 Restaurant

8. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-8 Table 2.3 After-Tax Profits

9. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-9 Table 2.4 Government

10. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-10 Table 2.5 Consumers

11. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-11 Measuring GDP Using the Product (Value-added) Approach Sum of value added to goods and service in production across all productive units in economy. Add the value of all goods and service, and subtract the value of all intermediate goods and service used in production.

12. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-12 Table 2.6 GDP Using the Product Approach

13. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-13 Expenditure Approach Total spending on all final goods and service in economy. Total expenditure = C + I + G + NX I: expenditure on goods that are produced, but not consumed as consumption goods. For example, machinery in plants. NX=Exports – Imports. Exports are produced within a country, while imports are produced abroad.

14. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-14 Table 2.7 GDP Using the Expenditure Approach

15. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-15 Income Approach Add up all incomes received by all economic agents contributing to production in an economy. Income includes: –Wage incomes –Interest incomes –Corporate incomes (profits) –Taxes net of subsidies on products or factors of production

16. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-16 Table 2.8 GDP Using the Income Approach

17. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-17 Inventory Investment Def: goods produced in the current period, but not consumed. Components: –Finished goods –Goods in process –Raw materials.

18. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-18 Inventory Investment Back to coconut economy: –If harvest 13M instead of 10M coconuts, and put 3M in warehouse as inventory, how is GDP affected? –Product approach: 3M*2 – value added in coconut production. –Expenditure approach: I = 3M*2 –Income approach: 3M*2 - after-tax profits received by coconut producers increase since assets rise.

19. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-19 GNP (gross national product) The value of outputs produced by domestic factors of production, no matter whether or not the production takes place within a country. Difference from GDP: –Within a country for GDP, no matter who owns the production unit. –Chinese plants in the U.S. (GNP, not GDP) –American plants in China (not GNP, GDP)

20. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-20 Nominal and Real GDP and Price Indices Price index: price of a set of goods and service produced in an economy over a period of time. A general measure of price level. Inflation rate: the rate of change in the price level. Growth in nominal GDP = Growth in real GDP + Inflation

21. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-21 Table 2.10 Data for Real GDP Example

22. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-22 Chain-Weighting Approach Use rolling base year. g 3 = sqrt ( (1+g 1 )(1+g 2 ) ) - 1 –A geometric average of the growth rates calculated by using year 1 and year 2 as base year.

23. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-23 Figure 2.1 Nominal GDP (black line) and Chain-Weighted Real GDP (colored line) for the Period 1947–2006

24. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-24 Table 2.11 Implicit GDP Price Deflators, Example

25. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-25 Figure 2.2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line)

26. Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-26 Figure 2.3 The Price Level as Measured by the CPI and Implicit GDP Price Deflator, 1947–2006