1. Taking the Nation’s Economic Pulse
Macro Chapter 7
Taking the Nation’s
Economic Pulse

2. 4 Learning Goals
Define gross domestic product and describe the key phrases of the definition
List the ways to measure gross domestic product and identify the source of higher income levels
Differentiate between real and nominal GDP
Examine the limitations of using GDP as a measure of output and income(on your own)

3. GDP – A Measure of Output

4. Definition of Gross Domestic Product (GDP):
The market value of final goods and services produced within a country during a specific time period.

5. GDP as a Measure of Both Output and Income

6. First way to measure GDP: expenditure approach
GDP = sum of purchases
GDP = Y = C + I + G + X
C = consumption; purchases for goods and services by consumers
I = investment
G = government purchases
X = net exports (exports – imports)

7. Investment ≠ buying stocks and bonds
Investment = businesses buying final goods and services to use in their production of another good
AND
consumers buying houses

8. Second way to measure GDP: income approach
Add up income generated in the production of goods and services

9. The two methods of calculating GDP are summarized below:
Expenditure Approach
Resource Cost-Income Approach
Personal consumption expenditures
Aggregate income:
Employee Compensation
Income of self-employed
Rents
Profits
Interest +
Gross private domestic investment +
Government consumption
and gross investment +
Non-income cost items:
Indirect business taxes and depreciation +
Net exports of goods and services
= GDP
Net income of foreigners +
= GDP

10. Key Point: Higher income levels come from (are caused by) more output
That is, more output comes first, then higher income comes second

11. Adjusting for Price Changes and Deriving Real GDP

12. Nominal (money) _________ = current year data only
Real __________ = adjusted for inflation
Use a price index to adjust nominal data into real data

13. These two indexes are used to adjust nominal data to real data.
CPI: representative sample of goods bought by households, “market basket”
GDP deflator: accounts for almost all goods bought (broader measure than CPI)
Inflation = the percentage change in an index

14. The simplest example
Suppose all prices doubled between 1950 and Then $1 in 1950 would be equal to $2 in Or, $1 in 2000 would be equal to $0.50 in 1950.

15. Problems with GDP as a Measuring Rod

16. Examine the limitations of using GDP as a measure of output and income(on your own)