chapter 2 -- measuring output and the price level
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Chapter 2 -- Measuring Output and The Price Level. Data complied at the National Income and Product Accounts (NIPA). Measuring Output -- Gross Domestic Product (GDP). Gross Domestic Product -- The total market value of all currently produced final goods and services over a period of time. - PowerPoint PPT PresentationTRANSCRIPT
Chapter 2 -- Measuring Output and The Price Level
Data complied at the National Income and Product Accounts (NIPA)
Measuring Output -- Gross Domestic Product (GDP)
Gross Domestic Product -- The total market value of all currently produced final goods and services over a period of time.
Nominal GDP -- GDP in current dollars
Real GDP -- GDP in constant dollars.
Aspects of GDP Definition
“Over a Period of Time” GDP is a flow measure.
“Currently Produced” GDP excludes the following
-- sales of used items -- transfer payments -- purchases of stocks, bonds, or land
“Market Value” -- the transaction must be recorded and have a specific dollar figure attached GDP excludes
-- illegal purchases -- household production
Final Goods and Services and Measuring GDP
Example -- Production of a pair of shoes.
GDP and Making ShoesStep Value Value AddedFarmer 3 3Packing Plant 7 4Tannery 13 6Shoe Manufacturer 25 12Wholesaler 40 15Retailer 75 35Total 163 75
What Real GDP (Y) Signifies
Total Production or Output of final goods and services
Total Sales on Final Goods and Services (Approximately)
Total IncomeCorrelated With Total Employment
Computing GDP -- The Expenditure Approach
Operative Equation:
Y = C + I + G + NX
Consumption (C)
Defined as consumer purchases of final goods and services
components of consumption -- nondurable goods -- durable goods -- serviceslargest component of GDP
Investment (I)
Business Purchases of New Plant and Equipment
New Residential HousingChanges In Inventories
Output Versus Sales -- The Approximation
Example -- $18,000 car, produced in 2000, sold in 2001
Year C I G NX Y2000 $0 $18 $0 $0 $182001 $18 -$18 $0 $0 $0
Investment Goods Versus Intermediate Goods
The Similarity -- Transactions between businesses.
The Conceptual Difference -- Producing Final Goods Versus Being Part of a Final Good
The Operational Difference -- Is it used repeated times?
Government Purchases of Goods and Services (G)
Not the same as government expenditure (does not include transfer payments)
In the US, the government is a purchaser, not a producer.
Net Exports (NX)
NX = Exports - Importsexports are all final goods and
servicesGNP versus GDP -- the accounting
of multinational firms
Real GDP and Quality of Life
Real GDP does not account for the following changes:
-- leisure time -- quality differences -- crime -- environmental impacts
More Quality of Life Variables Not in Real GDP
-- non-market production activities (I) household production (II) underground economy -- income distribution
Other Measures of Output or Income
Gross Domestic Product (GDP) – DepreciationNet Domestic Product (NDP) – Indirect Business TaxesNational Income (NI)
National Income – Undistributed Corporate Profits (Business Saving) – Social Security and Corporate Taxes + Transfer Payments and Interest Personal Income (PI) – Personal Income TaxesDisposable Income (YD)
Disposable Income and Personal Saving
Define -- Personal Saving (SP) SP = YD - C
Define -- Total Private Saving (S), S = Personal Saving
+ Business Saving
The “Magic Equation”
Let T = Net Taxes Net Taxes = Tax Revenues - (Transfer
Payments + Interest on the Government Debt)
Then the identity is:
S = I + (G - T) + NX.
Interpreting the Identity: Saving = Investment
Identity: S = I + (G-T) + NXRearrange Identity Into: S + (T - G) + -NX = I
Special Case: (T - G) = 0, NX = 0 S = I
Measuring The Price Level
Measures of the Price Level (P) -- GDP Deflator -- Personal Consumption Expenditure (PCE) Deflator
Measure #1 -- The GDP Deflator
Market Basket -- set of final goods and services that are used to compute GDP.
Chain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).
Measure #2 – The PCE Deflator
Market Basket -- set of final goods and services that are used to compute Consumption within GDP.
Chain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).
Computing the Inflation Rate
Inflation Rate = Percentage Change or growth in the Price Index (P), such as the GDP Deflator.
Example: Inflation Rate for 2011 Inflation Rate2011 = P2011 – P2010
P2010
Converting Nominal GDP to Real GDP Example -- find Real GDP 2011
Real GDP2011 = Nominal GDP2011
GDP Deflator2011
Real GDP for other years is computed the same way.
Real GDP Growth = Percentage Change (or growth) in Real GDP.
Sources to Obtain Macroeconomic DataThe Economic Report of the President (Historical Data) www.gpoaccess.gov/eop/
Economic Indicators (Recent) www.gpoaccess.gov/indicators/
index.html
More Websites for Macro Data and Informationwww.federalreserve.gov (Federal
Reserve) research.stlouisfed.org/fred2/ (Federal
Reserve Economic Data)bea.gov (Bureau
of Economic Analysis)www.bls.gov (Consumer
Price Index inflation, unemployment rate, labor productivity growth)