1. MEASURING AGGREGATE ECONOMIC ACTIVITY

2. National Income Accounting
Why measure?
National income accounting
A way of measuring total, or aggregate production.
Gross Domestic Product (GDP)
The total value of all final goods and services produced in an economy in a one-year period.

3. Calculating GDP Adding together millions of goods and services.
Adding apples and oranges
All of the quantities of goods and services produced are multiplied (weighted) by their market price per unit to determine a value measure of that good or service.
The sum of all of these values is GDP.

4. The Expenditure Approach
GDP is the sum of four categories of expenditures.
GDP = C + I + G + (X – M)
Consumption
Investment
Includes inventories
Government Spending
Valued at cost
Excludes transfer payments
Net exports

5. CALCULATING GDP
Suppose that consumption is $1150, investment is $400, and government purchases are $500. Exports are $100 and imports are $150. How much is
Gross Domestic Product?
GDP = C + I + G + (X – M) by substitution,
GDP = ( )
GDP = $2000

6. GDP IN THE U.S. vs. BELGIUM GDP = C + I + G + Exports - Imports
U.S $14,000 B = 70% + 17% + 19% % %
Belgium $365 B = 53% + 21% + 23% % %

7. Flows vs. Stocks Flows Stocks Involves a time period
GDP is reported on an annualized basis
About $14 Trillion ($14,000,000,000,000)
Stocks
An amount at a point in time
Wealth accounts—assets minus liabilities
About $50 Trillion ($50,000,000,000,0000)

8. GDP Measures Final Output
Final vs. Intermediate goods and services
Final output – goods and services purchased for final use.
Intermediate products are used as an input in the production of some other product.
GDP counts only final goods and services
Counting both final and intermediate goods would result in double counting.

9. Two Ways of Eliminating Double Counting
Calculate only final output.
A firm would report how much it sold to consumers and how much it sold to producers (intermediate goods).
Follow the value added approach.
Value added is the increase in value that a firm contributes to a product or service.
It is calculated by subtracting intermediate goods (the cost of materials that a firm uses to produce a good or service) from the value of its sales.

10. Value Added Approach Participants Cost of Value of Value Added
Materials
Sales
Farmer
$ 0
$ 100
$ 100
Cone factory
150
100
250
and ice
Cream maker
Middleperson
250
400
150
Vendor
400
500
100
Totals
$ 750
$1,250
$500

11. What is Counted in GDP? Not counted Counted Value of resold goods
Government transfer payments
Sales of stocks or bonds
Non-market transactions---e.g., work of housespouses
Counted
Value added by a used car dealer
Commissions of stock brokers

12. GDP and NDP
Net domestic product is GDP adjusted for depreciation – the amount of capital used up in producing that year’s GDP.
NDP = C + (I – depreciation) + G + (X-M)
NDP measures output available for purchase.

13. GDP AND GNP When is the difference important?
Gross Domestic Product (GDP)
Total value of all final goods and services produced in country in a one-year period.
Gross National Product (GNP)
Total value of all final goods and services produce by the citizens and businesses of a country in a one- year.
When is the difference important?

14. The Income Approach
Aggregate income is the total income earned by citizens and businesses in a country in a year.
Aggregate income consists of:
employee compensation
rent paid to households (But not to businesses)
interest paid to households (But not to businesses)
profits

15. The Income Approach United States Aggregate Income $14 Trillion
Employee compensation 70%
Rents %
Interest %
Profits %

16. Income = Expenditures
Whenever a good or service is produced (output), somebody receives income for producing it.
Aggregate Income = Aggregate Production
Profit is a residual that makes income and expenditures equal.

17. Comparing GDP Among Countries
Per capita GDP
Used to compare relative standards of living among various countries.
Because of differences in nonmarket activities and difference in product prices, per capita GDP may be a misleading measure of living standards.
Purchasing power parity
Adjusts for relative price differences before making comparisons.

18. Economic Welfare Over Time
If increases in GDP are due to increases in prices, then welfare does not increase.
Changes in welfare over time are best indicated by changes in real GDP, nominal GDP adjusted for inflation.
And
% ∆ in Nominal GDP = % ∆ in Real GDP + inflation

19. CALCULATING REAL GDP
Suppose that in year 1 nominal GDP is $1200; in year 2, $ The GDP deflator is 110 and 115, respectively. Find the change in nominal GDP. How much of the change is due to a real increase in output and how much is due to price changes?

20. Limitations of National Income Accounting
GDP measures economic activity, not welfare.
GDP does not measure happiness, nor does it measure economic welfare.
Non-market activities are not included
Subcategories are often interdependent.
For example, the line between consumption and investment may be unclear.
Measurement problems exist.

21. Genuine Progress Indicator
The genuine progress indicator (GPI) makes a variety of adjustments to GDP to better measure the progress of society rather than just economic activity.
The GPI includes social goals such as pollution reduction, education, and health.