1. Macroeconomics: Measuring Total Production and Income
Chapter 8

2. Important issues in macroeconomics
Why does the cost of living keep rising?
Why are millions of people unemployed, even when the economy is booming?
Why are there recessions? Can the government do anything to combat recessions? Should it??

4. GDP – A Measure of Output
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 is the most widely used indicator of economic performance.

5. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.
GDP is measured in dollars.
Each good produced increases output by the amount the purchaser pays for the good.
The total spending on all final-user goods and services produced during the year is summed, in dollar terms, to obtain the annual GDP.

6. U.S. Gross Domestic Product in billions of chained 2000 dollars
long-run upward trend… 6

7. U.S. Gross Domestic Product in billions of chained 2005 dollars
longest economic expansion on record
Recessions

8. There are three methods for calculating GDP:
Market Value
Adding up total value of all final goods and services produced in an economy during a given time period
Expenditure approach
Total spending on US production
Adds up the aggregate expenditure on all final goods and services produced during that year
Income approach
Total income received from that production
Adds up the aggregate income earned during the year by those who produce that output

9. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.
Calculating Market Value:
Year Price of Cars Quantity of Cars Price of CDs Q of CDs
$10, $20 4
Market Value = (value of Cars) + (value of CDs)
($10,000 x 5) + ($20 x 4)
($50,000) + ($80)
Market Value = $50,080

10. Value added
definition:

11. Aggregate
Spending
$9,000
(steel)
$21,500
(car)
4,200
(ore)
9,000
(steel)
3,700
600
300
10,000
1,000
500
$15,700
2,600
1,000
2,200
Total Payments to Factors = $21,500
200
1,000
9,000
21,500
4,800
12,500
Sum of Value Added = $21,500
4,800
12,500

12. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.
GDP = Sum of value added at all stages of production
The value of the final goods already includes the value of the intermediate goods, so including intermediate goods in GDP would be double-counting.

13. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.
No Financial transactions
No Income Transfers

14. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.

15. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.

16. The Expenditure Method of Measuring GDP
Expenditure Approach:
GDP is the sum of expenditures on final-user goods and services purchased by households, investors, governments, & foreigners.
When calculated by this method, there are 4 components of GDP:
personal CONSUMPTION purchases
gross private INVESTMENT
GOVERNMENT purchases
NET EXPORTS
GDP in 2013: $ trillion dollars 16

17. Consumption (C)
def: the value of all goods and services bought by households. Includes:
durable goods last a long time ex: cars, home appliances
non-durable goods last a short time ex: food, clothing
services work done for consumers ex: dry cleaning, air travel. 17

18. U.S. Consumption, 2013 GDP in 2013: $15.94 trillion dollars
source: Bureau of Economic Analysis, U.S. Department of Commerce 18

19. Investment (I) Def. 1: spending on [the factor of production] capital.
Def. 2: spending on goods bought for future use.
Includes:
business fixed investment spending on plant and equipment that firms will use to produce other goods & services
residential fixed investment spending on housing units by consumers and landlords
inventory investment the change in the value of all firms’ inventories 19

20. Note on Inventory Investment:
American Motors Inc. produces 5,000 cars in 2011 and sells 4,500 cars in The average price per car is $10,000.
In 2012 AMI produces 5,000 cars and sells 5,100 cars in The average price per car is $12,000.

21. Inventories Net changes in inventories
Net increase in inventories counts as investment because it represents current production not used for current consumption
Net decrease in inventories counts as negative investment, or disinvestment, because it represents the sale of output already credited to a prior year’s GDP 21

22. U.S. Gross Private Domestic Investment, 2013
GDP in 2013: $ trillion dollars
U.S. Gross Private Domestic Investment, 2013
source: Bureau of Economic Analysis, U.S. Department of Commerce 22

23. Government spending (G)
G includes all government spending on goods and services by local, state, and federal governments.
Includes the salaries of government workers and spending on public works.
Government spending excludes transfer
payments. 23

24. Government spending, 2013 GDP in 2013: $15.94 trillion dollars
source: Bureau of Economic Analysis, U.S. Department of Commerce 24

25. Net exports
Def.: the value of total exports (X) minus the value of total imports (M)
(NX = X - M)
GDP is the value of spending on our country’s output of goods & services.
Exports represent foreign spending on our country’s output, so we include exports.
Imports represent the portion of domestic spending (C, I, and G) that goes to foreign goods and services, so we subtract off imports.
NX, therefore, equals net spending by the foreign sector on domestically produced goods & services. 25

27. 2013 Net exports = –$424 billion

28. GDP: The Expenditure Approach
Item
Symbol
Personal CONSUMPTION Expenditures C
Gross Private Domestic INVESTMENT I
GOVERNMENT Purchases G
NET EXPORTS NX
Gross Domestic Product Y
Amount in 2013
Percentage of GDP
$10,832
68.0%
$2,643
16.6%
$2,939
18.4%
-$424
-2.7%
$15,942
100%
Aggregate Expenditures = Total Output = Real GDP =
Y = C + I + G + (X – M)

29. GDP: The Expenditure Approach
Symbol
Percentage of GDP in 2011 C
71.1% I
12.7% G
20.1% NX
-3.8% Y
100%
Percentage of GDP in 2007
Percentage of GDP in 2000
69.7%
68.6%
16.4%
17.8%
19.1%
17.4%
-5.1%
-3.8%
100%

30. GDP: Income Approach
Income approach sums, or aggregates, income arising from that production
Recall that double-entry bookkeeping ensures that the value of aggregate output equals the aggregate income paid for resources used to produce that output
Wages
Interest
Rent
Profit arising from production

31. Employee compensation
Relative Size of
U.S. GDP Components:
(a) Expenditure approach
(b) Resource cost-income approach a
Private
investment
Net exports
Rental income
Indirect
Net
- 3%
< 1%
taxes
interest 6%
17%
Depreciation 7%
Gov’t
13%
18%
58%
Corporate
profits 9%
68% 7%
Employee compensation
Self-employed
Personal
proprietor income
consumption
Source: Economic Report of the President, 2002.
a The net income of foreigners was negligible.

32. Market value of final goods and services
The Three Faces of GDP =
Market value of final goods and services
Production
Expenditure
Income
Investment
Consumption
Government
purchases
Net exports
Capital Income
Labor Income
Chapter 5: Measuring Economic Activity: GDP and Unemployment
Slide 32

33. GNP vs. GDP
Gross National Product (GNP): total income earned by the nation’s factors of production, regardless of where located
Gross Domestic Product (GDP): total income earned by domestically-located factors of production, regardless of nationality.
(GNP – GDP) = (factor payments from abroad) – (factor payments to abroad)
From the perspective of the U.S., factor payments from abroad includes things like
wages earned by U.S. citizens working abroad
profits earned by U.S.-owned businesses located abroad
income (interest, dividends, rent, etc) generated from the foreign assets owned by U.S. citizens
Factor payments to abroad includes things like
wages earned by foreign workers in the U.S.
profits earned by foreign-owned businesses located in the U.S.
income (interest, dividends, rent, etc) that foreigners earn on U.S. assets 33

34. In your country, which would you want to be bigger, GDP or GNP?
Discussion Question:
In your country, which would you want to be bigger, GDP or GNP?
Why? 34

35. (GNP – GDP) as a percentage of GDP selected countries, 2002
For the U.S., GDP and GNP are very close. Thus, students may not realize why we bother teaching them the difference.
The data on this slide makes clear that the difference is very important for many countries.
Source: World Bank. 35

36. Real GDP Per Person: 1900 – 2000

37. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.
Calculating Market Value:
Year Price of Cars Quantity of Cars Price of CDs Q of CDs
$10, $20 4
Market Value = (value of Cars) + (value of CDs)
($10,000 x 5) + ($20 x 4)
($50,000) + ($80)
Market Value = $50,080

38. Gross Domestic Product (GDP) is …
…the market value of all final goods and services produced within a country in a given period of time.
Calculating Market Value:
Year Price of Cars Quantity of Cars Price of CDs Q of CDs
$10, $20 4
Year Price of Cars Quantity of Cars Price of CDs Q of CDs
$15, $22 4
Market Value = (value of Cars) + (value of CDs)
($15,000 x 5) + ($22 x 4)
($75,000) + ($88)
Market Value = $75,088
Market Value = $50,080

39. A Measure of the Economy’s Price Level – Consumer Price Index
Source: The CPI Home page of the U.S. Bureau of Labor Statistics at
requests.cpi\cpia.html 39

40. Real GDP controls for inflation
Changes in Nominal GDP can be due to:
Changes in Real GDP can only be due to: 40

41. Practice problem, part 1 Compute nominal GDP in each year
2002
2003
2004 P Q
Toy cars
$30
900
$31
1,000
$36
1,050
Toy dolls
$10
850
$12
925
Plastic
$100
192
$102
200
205
Compute nominal GDP in each year
Compute real GDP in each year using 2002 as the base year. 41

42. Real GDP multiply each year’s Qs by 2002 Ps 2002: $ 2003: $ 2004: $
Toy cars
$30
900
$31
1,000
$36
1,050
Toy dolls
$10
850
$12
925
Plastic
$100
192
$102
200
205
Nominal GDP multiply Ps & Qs from same year 2002: $ 2003: $ 2004: $
Real GDP multiply each year’s Qs by 2002 Ps : $ : $ : $ 42

43. U.S. Real & Nominal GDP, 1970-2004 (base year = 2000)43

44. GDP Deflator

45. GDP Deflator Example
Using the values in the table below, we can compute GDP deflator for 2007 and 2008.
What is the percentage increase in the price level from 2007 to 2008?