2. GDP – A Measure of Output The Macroeconomic Perspective Chapter 5

3. Measuring the Size of the Economy: Gross Domestic Product Adjusting Nominal Values to Real Values Tracking Real GDP over Time Comparing GDP among Countries How Well GDP Measures the Well-Being of Society

4. Basic Macroeconomics

7. Gross Domestic Product (GDP): The market value of final goods and services produced within a country during a specific time period, usually a year. GDP vs GNP?? GDP: production within a country’s borders (domestic) GNP: production by people of a country (national)

8. Two Ways of Measuring GDP What is Produced Expenditures

9. 1. Expenditure Approach: GDP is the sum of expenditures on final user goods and services purchased by households, investors, governments, and foreigners. There are four components of GDP: personal consumption purchases C gross private investment I g (including inventories) government purchases G (consumption and investment) net exports ( exports minus imports ) X n GDP Dollar flow of expenditures on final goods = Dollar flow of income (and indirect cost) of final goods = Measuring GDP

10. GDP = C + Ig + G + Xn (Consumer) Consumption is over half of the GDP. (Source: http://bea.gov/iTable/index_nipa.cfm)

11. (a) Not much change in the C, I or G percents over time. (b) Exports are added to total demand (c) Imports are subtracted from total demand. (d) Exports exceed imports, in the 1960s and 1970s (Source: http://bea.gov/iTable/index_nipa.cfm) GDP = C + Ig + G + Xn

12. 2.What is Produced: Goods and Services (and Structures) Services 62.1% Nondurable goods 16.7% Durable goods 13.2% Structures 7.4% n Inventory Changes 0.6% Measuring GDP

13. Goods, Services and the other stuff

14. GDP is measured in dollars Each good produced increases output by the amount the purchaser pays for the good. GDP is the sum of total spending on all goods and services produced during the year.

15. Stage of production Value added to the product (equals income created) Sales Receipts (at each stage of production) Stage 1: farmer’s wheat Stage 2: miller’s flour Stage 3: baker’s bread (wholesale) Stage 4: grocer’s bread (retail) $.30 $.65$.90 $1 by farmer $.30 by grocer $.10 by miller $.35 by baker $.25 What Does Not Count Toward GDP? Sales at intermediate stages of production. Their value is already counted in the final-user good. Including them would result in double counting. Total consumer expenditure = $1 Total value added = $1 Only final goods and services count

16. What Else? Financial transactions and income transfers. They do not reflect production. Production outside the geographic borders of the country is not counted. Goods not produced during the current period are not counted. Stocks 1955 Chevy

17. Which are included in this year's GDP ? : 1. Interest on an AT&T bond - 2. Social Security payments to retirees - 3. Services of a painter in painting a house - 4. Income of a dentist - 5. Money received from the sale of a 1990 model car- 6. Monthly allowance of a college student - 7. Rent for a 2 bedroom apartment - 8. Money received for selling this year's model car - 9. Interest on a government bond - YES NO YES NO

18. Which? 10. A two hour decline in the work week - 11. Purchase of the AT&T bond - 12. A $ 2 billion increase in business investments - 13. Purchasing 100 shares of GM common stock - 14. Purchase of an insurance policy - 15. Wages paid to your butler - 16. Market value of a homemaker's services - 17. Purchase of the Mona Lisa - NO YES NO

19. 2. Resource Cost - Income Approach GDP is the sum of costs incurred and income (including profits) generated by production of goods and services during the period. Not covered Other Measures of GDP

20. 4. Output – by Industry Add up output by each industrial sector Chemicals + Agriculture + … Not covered

21. Gross National Product (GNP): Output by the “nationals” – citizens of the country, regardless of whether that output is produced domestically or abroad. National income: Income earned by the nationals (citizens) during a period. It is the sum of employee compensation, self-employment income, rents, interest, and corporate profits. Minus depreciation and taxes Personal income: Income received by domestic households and non- corporate businesses. It is available for consumption, saving, and personal taxes. Includes transfers. Disposable income: Income available to individuals after personal taxes. Can be spent on consumption or saved.

22. The term "real" means adjusted for inflation. Price indexes are use to adjust data for inflation. A price index measures the cost of purchasing a good (or goods) at a point in time relative to the cost of purchasing the identical good during an earlier (or base) period.

23. Year$ SpendingIndex 1170_____ 2180_____ 3 Base year 200_____ 4200_____ 5224_____ 6250_____ 7280_____ Year$ SpendingIndex 1170_____ 2180_____ 3 Base year 200_____ 4200_____ 5224_____ 6250_____ 7280_____ Current year spending Base year spending x 100 Creating a price index

24. Gross Domestic Product Complete the following table assuming that Year 1 is the base year. YearOutputPriceMoney GDP GDP Index Real GDP 1100$4.00 21204.40 31105.00 41105.20 51355.20 61405.60

25. Gross Domestic Product Complete the following table assuming that Year 1 is the base year. YearOutputPriceMoney GDP GDP Index Real GDP 1100$4.00 $400100$400 21204.40 528110480 31105.00 550125440 41105.20 572130440 51355.20 702130540 61405.60 784140560

26. measures the impact of price changes on the cost of a typical bundle of goods and services purchased by households. designed to measure the change in the average price of the market basket of goods included in GDP (a broader price index than the CPI).

27. 2. WPI 2. WPI 1. PPI 1. PPI 3. MPI 3. MPI

28. CPI and GDP Deflator: 1991-2001 Even though the CPI and the GDP deflator are based on different market baskets and procedures, they yield similar estimates of the rate of inflation. Year CPI (1982-84 = 100) 1996 1997 1998 1999 2000 156.9 160.5 163.0 166.6 172.2 3.0 2.3 1.5 2.2 3.4 1.9 1.7 1.1 1.4 2.2 GDP deflator (2000 = 100) 2002 2003 179.9 184.0 1.6 2.3 1.7 1.8 104.1 106.0 93.9 95.4 96.5 97.9 100.0 Inflation rate (percent) Inflation rate (percent) Source: http://www.economagic.com. 2001177.12.82.4102.4 2005 2006 195.3 201.6 3.4 3.2 3.0 2.9 112.7 116.0 2004188.92.72.8109.4

29. Real GDP 2 = Nominal GDP 2 * GDP Deflator 1 GDP Deflator 2 Data on both money GDP and price changes are essential for meaningful comparisons of output between two time periods. The formula for converting the nominal GDP into real GDP is:

31. Converting Earlier Figures to Current Dollars For comparisons across time periods, we must use current dollars. Done by “inflating” the earlier data for the increase in the price level. The formula: Figure current $ = Figure earlier $ * price index current year price index earlier year This will “inflate” the data for earlier years into line with the current purchasing power of the $.

32. Source: U.S. Department of Commerce. 1996 2001 % increase Nominal GDP (billions of U.S. $) Real GDP (billions of 1996 $) $7,813 $10,208 30.7% Price index (GDP deflator, 1996 = 100) 100.0 109.4 9.4% $7,813 $9,331 19.4% Deriving Real GDP Like “Deflating” the $ Source: http://www.economagic.com. 1998 2003 % increase Nominal GDP (billions of U.S. $) Real GDP (billions of 1998 $) $8,747 $11,004 25.8% Price index (GDP deflator, 2000 = 100) 96.5 106.0 9.8% $8,747 $10,018 14.5% Source: http://www.economagic.com. 2000 2006 % increase Nominal GDP (billions of U.S. $) Real GDP (billions of 2000 $) $9,817 $13,247 34.9% Price index (GDP deflator, 2000 = 100) 100.0 116.0 16.0% $9,817 $11,420 16.3%

33. Interesting Questions 1. The CPI was 177 in 2001 compared to 100 in 1983. Suppose that the price of a ticket at a local movie theater rose from $4 to $8 between 1983 and 2001. Did the real ticket price increase or decrease? Calculate the 1983 ticket price measured in 2001 dollars. 2. The CPI was 210 in 2007 compared to 100 in 1983. Suppose that the price of a ticket at a local movie theater rose from $4 to $8 between 1983 and 2007. Did the real ticket price increase or decrease? Calculate the 1983 ticket price measured in 2007 dollars.

34. Questions for Thought: 3. Use the following data to answer this question. a. Calculate the real GDP in 1999, 2000, and 2001 measured in 1996 dollars. b. What was the percent change in real GDP between 1999 and 2000? What was the percent change between 2000 and 2001? c. What was the inflation rate as measured by the GDP deflator in 2000 and 2001? Nominal GDP (trillions of $) GDP deflator (1996=100) 1999 2000 2001 9.27 9.87 10.21 104.7 107.0 109.4

35. Questions for Thought: 1.The CPI was 177 in 2001 compared to 100 in 1983. Suppose that the price of a ticket at a local movie theater rose from $4 to $8 between 1983 and 2001. Did the real ticket price increase or decrease? Calculate the 1983 ticket price measured in 2001 dollars. Year CPI Nominal Ticket Real Ticket 1983 Real Ticket 2001 1983100 $4 2001 177 $8 2007 210 $8 2. Use the following data to answer this question. a. Calculate the real GDP in 1999, 2000, and 2001 measured in 1996 dollars. b. What was the percent change in real GDP between 1999 and 2000? What was the percent change between 2000 and 2001? c. What was the inflation rate as measured by the GDP deflator in 2000 and 2001? Nominal GDP (trillions of $) GDP deflator (1996=100) 1999 2000 2001 9.27 9.87 10.21 104.7 107.0 109.4 Real GDP (trillions of $) % changeInflation rate _______

36. GDP Deflator

37. Real and Nominal GDP

38. GDP Comparisons Across Time Periods and Across Countries

39. GDP Across Countries

40. GDP per Capita

41. CountryReal GDPGDP per Capita Brazil2,35611,875 Canada1,48842,734 China12,4069,162 Egypt5406,545 Germany3,19739,028 India4,6843,830 Japan4,62836,266 Mexico1,75932,272 South Korea1,61415,312 United Kingdom2,33636,941 United States16,24551,706

42. Per capita GDP Across Time Periods Per capita GDP has steadily risen. In 2000, per capita GDP was 4.6 times the 1940 figure. What does this mean? $7,827 $13,840 $22,666 $6,418 $11,717 $18,391 $35,769 $28,429 1930 1950 19701990 2000 U.S. Per Capita GDP (in 2000 U.S. dollars) 194019601980 Source: derived from U.S. Department of Commerce data. $38,687 2006

43. Per Capita GDP Comparisons Across Countries GDP comparisons across countries may be biased (or vary) because of differences in leisure versus time worked, size of the underground economy, the share of output in the household rather than the business sector.. POPULATION There is a strong relationship between per capita GDP across countries and indicators of living standards such as life expectancy, infant mortality, and literacy.

44. Shortcomings of GDP: It does not count non-market production. It does not count the underground economy. It makes no adjustment for leisure. It probably understates output increases because of the problem of estimating improvements in the quality of products. It does not adjust for harmful side effects. It does not consider standard of living – GDP per person Great contribution of GDP: In spite of its shortcomings, real GDP is a reasonably accurate measure of short-term fluctuations in output.

45. 1.Which of the following activities will affect GDP: a. You pay $600 per month to lease an apartment. b. You pay $8,000 to purchase a four-year-old car. c. You have car trouble and have to pay a repair shop $1,500 to fix the transmission of your car. d. You pay $5,100 to purchase 100 shares of Microsoft stock ($50 per share for the stock plus a $100 fee). e. You sell your 100 shares of Microsoft stock (purchased for $5,000) for $6,000 minus a $100 brokerage fee. f. Your aunt sends you $500 to help with your expenses. g. You earn $500 providing computer services for a faculty member. h. You win $500 playing cards with classmates.