chapter 8 measuring the economy’s performance. slide 8-2 introduction gross domestic product is...
TRANSCRIPT
Chapter 8
Measuring the Economy’s Performance
Slide 8-2
Introduction
Gross domestic product is the statistic most often used to indicate the
economy’s overall performance. What is included and what is omitted from GDP?
Slide 8-3
Learning Objectives
Describe the circular flow of income and output
Define gross domestic product (GDP)
Understand the limitations of using GDP as a measure of national welfare
Slide 8-4
Learning Objectives
Explain the expenditure approach to tabulating GDP
Explain the income approach to computing GDP
Distinguish between nominal GDP and real GDP
Slide 8-5
The Simple Circular Flow
National Income Accounting
Two Main Methods of Measuring GDP
Other Components of National Income Accounting
Chapter Outline
Slide 8-6
Chapter Outline
Distinguishing Between Nominal and Real Values
Comparing GDP Throughout the World
Slide 8-7
Did You Know That...
Decisions on how to categorize business expenses will affect the relative size of an increase or a decrease in economic activity?
Statisticians measuring our national economic performance strive for consistency in constructing their measures across time?
Slide 8-8
National Income Accounting
National Income Accounting
– A measurement system used to estimate national income and its components
Slide 8-9
The Simple Circular Flow
Figure 8-1
Slide 8-10
The Simple Circular Flow
Figure 8-1
Slide 8-11
The Simple Circular Flow
Figure 8-1
Slide 8-12
The Simple Circular Flow
Figure 8-1
Slide 8-13
The Simple Circular Flow
Two observations
– In every economic exchange, the seller receives exactly the same amount that the buyer spends.
– Goods and services flow in one direction and money payments flow in the other.
Slide 8-14
The Simple Circular Flow
Profits explained
– Question• Why is profit a cost of production?
– Answer• Profits are the return entrepreneurs receive
for the risk they incur when organizing productive activities
Slide 8-15
The Simple Circular Flow
Product Markets
– Transactions in which households buy goods
Slide 8-16
The Simple Circular Flow
Final Goods and Services
– Goods and services that are at their final stage of production and will not be transformed into yet other goods or services
Slide 8-17
The Simple Circular Flow
Factor Markets
– Transactions in which businesses buy resources
Slide 8-18
The Simple Circular Flow
Total Income
– The yearly amount earned by the nation’s factors of production
Slide 8-19
The Simple Circular Flow
Question– Why must total income
be identical to the dollar value of total output?
Answer– Every transaction
simultaneously involves an expenditure and a receipt
Slide 8-20
National Income Accounting
Gross Domestic Product (GDP)
– The total market value of all final goods and services produced by factors of production located within a nation’s borders
Slide 8-21
National Income Accounting
Observations
– GDP measures the dollar value of final output
– GDP measures the dollar value of final goods and services produced per year by factors of production located within a nation’s borders
Slide 8-22
National Income Accounting
Stress of final output
– What is a final good?• Wheat?• Steel?• Oil?• Bread?• Automobile?• Gasoline?
Slide 8-23
National Income Accounting
Intermediate Goods
– Goods used up entirely in the production of final goods
Slide 8-24
Stage 1: Fertilizer and Seed $.03
Stage 2: Growing .06
Stage 3: Milling .12
Stage 4: Baking .30
Stage 5: Retailing .45
Total value added $.45
Stage of Production Dollar Value of Sales Value Added
$.03
$.03
$.06
$.18
$.15
Sales Value and Value Added at Each Stage of Donut Production
Total dollar value of all sales $.96
Slide 8-25
National Income Accounting
Exclusion of financial transactions, transfer payments, and secondhand goods
– Numerous transactions occur that have nothing to do with final goods and services being produced.
Slide 8-26
National Income Accounting
Financial transactions
– Securities• Stocks and bonds
– Government transfer payments• Social Security• Unemployment compensation
– Private transfer payments• Individual gifts• Corporate gifts
Slide 8-27
National Income Accounting
Transfer of secondhand goods– Why not count the sale of a used car,
stereo, or snowboard as part of GDP?
Other excluded transactions– Household production
– Legal underground transactions
– Illegal underground transactions
Slide 8-28
Recognizing GDP Limitations
GDP’s limitations
– Excludes non-market production
– Different countries have different legal versus illegal activities
– Quality of life is not measured
– GDP poorly measures a nation’s well-being
Slide 8-29
Two Main Methodsof Measuring GDP
Expenditure Approach
– A way of computing national income by adding up the dollar value at current market prices of all final goods and services
Slide 8-30
Two Main Methodsof Measuring GDP
Expenditure Approach
Slide 8-31
E-Commerce Example:Using the Internet to Reduce Business
Inventory Levels
With access to internet auctions, firms find it easier to follow a just-in-time inventory practice.
The ratio of inventories to sales in manufacturing has dropped since 1990.
How does this change affect the investment component of GDP?
Slide 8-32
Two Main Methods of Measuring GDP
Income Approach
– A way of measuring national income by adding up income received by all factors of production
Slide 8-33
Two Main Methodsof Measuring GDP
Income Approach
Slide 8-34
Two Main Methodsof Measuring GDP
Deriving GDP by the expenditure approach– Consumption Expenditure (C)
• Durables– Life span of more than three years
• Nondurables– Life span of less than three years
• Services– Intangible commodities
Slide 8-35
Two Main Methodsof Measuring GDP
Deriving GDP by the expenditure approach– Gross Private Domestic Investment (I)
• The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future
Slide 8-36
Two Main Methodsof Measuring GDP
Deriving GDP by the expenditure approach– Government Expenditures (G)
• State, local, and federal• Valued at cost
Slide 8-37
Two Main Methodsof Measuring GDP
Deriving GDP by the expenditure approach– Net Exports (Foreign Expenditures)
Net exports (X) = total exports - total imports
Slide 8-38
Two Main Methodsof Measuring GDP
Mathematical representation using the expenditure approach
GDP = C + I + G + X
Slide 8-39
GDP and Its Components
Figure 8-4
Slide 8-40
Two Main Methodsof Measuring GDP
Depreciation and net domestic product– Deducting for depreciation (capital
consumption allowance)• Reduction in the value of capital goods over a
one-year period due to physical wear and tear, and also to obsolescence
NDP = GDP - depreciation
Slide 8-41
Two Main Methodsof Measuring GDP
GDP = C + I + G + X
NDP = C + I + G + X - depreciation
Net Investment = I - depreciation
– Domestic investment minus an estimate of the wear and tear on the existing capital stock
NDP = C + net I + G + X
Slide 8-42
Two Main Methodsof Measuring GDP
Deriving GDP by the income approach
Slide 8-43
Deriving GDP by the Income Approach
Gross Domestic Income (GDI)– The sum of all income—wages, interest,
rent, and profits—paid to the four factors of production
Slide 8-44
Two Main Methodsof Measuring GDP
Gross Domestic Income (GDI)– Wages
– Interest
– Rent
– Profits
Slide 8-45
Two Main Methodsof Measuring GDP
Gross domestic product equals gross domestic income plus indirect business taxes and depreciation.
These last items are called nonincome expense items.
Slide 8-46
Gross Domestic Product and Gross Domestic Income, 2005(in billions of 2005 dollars per year)
Figure 8-5 Source: U.S. Department of Commerce. First quarter preliminary data annualized.
Slide 8-47
Other Components of National Income Accounting
National Income (NI)
– The total of all factor payments to resource owners
Personal Income (PI)
– The amount of income that households actually receive before they pay personal income taxes
Slide 8-48
Other Components of National Income Accounting
Disposable Personal Income (DPI)
– Personal income after personal income taxes have been paid
Slide 8-49
Source: U.S. Department of Commerce, and author’s estimates
Going from GDP to Disposable Income, 2005
Table 8-2
Slide 8-50
Distinguishing Between Nominal and Real Values
Nominal Values
– Measurements in terms of the actual market prices at which goods are sold; expressed in current dollars
Slide 8-51
Distinguishing Between Nominal and Real Values
Real Values
– Measurements after adjustments have been made for changes in the average of prices between years; expressed in constant dollars
Slide 8-52
Example: Correcting GDP for Price Index Changes
Correcting GDP for price index changes
– Nominal (current) dollars GDP
– Real (constant) dollars GDP
*Price level: measured by the GDP deflator
Real GDP = x 100nominal GDP
price level*
Slide 8-53
Example: Correcting GDP for Price Index Changes
Source: U.S. Department of Commerce, Bureau of Economic Analysis, and author’s estimatesTable 8-3
Slide 8-54
Distinguishing Between Nominal and Real Values
Questions
– Why is the price index greater than 100 for 2002?
– Why is the price index less than 100 for 1996?
– Why is real GDP greater than nominal GDP for 1996 and less than nominal GDP for 2002?
Slide 8-55
Nominal and Real GDP
Figure 8-6 Source: U.S. Department of Commerce
Slide 8-56
Distinguishing Between Nominal and Real Values
Per capita GDP
– Adjusting for population growth
Per capita real GDP =real GDP
population
Slide 8-57
Nominal and Real GDP
The Bureau of Economic Analysis now uses a chain-weighted measure of real GDP.
This means that changes in the prices and output levels of a certain good will contribute to overall changes in GDP to the extent that the good accounts for a significant share of overall economic activity.
Slide 8-58
Distinguishing Between Nominal and Real Values
A new chain-weighted measure of the growth in real GDP
– Prior to 1996 • U.S. Department of Commerce Bureau of
Economic Analysis (BEA) used a fixed weight measure for real GDP
Slide 8-59
Distinguishing Between Nominal and Real Values
A new chain-weighted measure of the growth in real GDP
– 1996• BEA converted to a chain-weighted real GDP
that measures GDP by considering relative price and share changes
Slide 8-60
Example: Real GDP Really Lightens Up
The value of real GDP has increased dramatically over the past century.
The physical weight of GDP has increased only slightly over this time frame.
Think about the contributions of pharmaceuticals, software, and other information goods.
Slide 8-61
Distinguishing Between Nominal and Real Values
Question
– Is real per capita GDP a good indicator of social well-being?
Slide 8-62
Distinguishing Between Nominal and Real Values
Some issues– The distribution of output
– Changes in leisure time
– Increased traffic congestion
– Air pollution
– Crime
– Housework
Slide 8-63
Comparing GDPThroughout the World
Example
– France• $1.25 = 1 euro• Per capita income = 23,168.80 euros
– France per capita income in terms of dollars equals23,168.80 x 1.25 = $28,961.
Slide 8-64
Comparing GDPThroughout the World
True purchasing power
– Accounting for goods and services that are not traded in the world market
– Purchasing Power Parity• Adjustments in exchange rate conversions that
takes into account differences in the true cost of living across countries
Slide 8-65Source: World Bank
International Example:Purchasing Power Parity Comparisons of Incomes
Table 8-4
Slide 8-66
Social scientists attempt to measure general levels of personal satisfaction, and to compare them on an international basis.
There is a positive correlation between self-reported measures of life satisfaction and per capita real GDP.
Some economists point to this as evidence that GDP is a good proxy measure for overall well-being.
Issues and Applications:Does More GDP Make People Happier?
Slide 8-67
Summary Discussion of Learning Objectives
The circular flow of income and output– In every economic transaction, receipts exactly
equal expenditures
– Goods and services flow in one direction and money payments flow in the other
Gross Domestic Product (GDP)– The total market value of a nation’s final output of
goods and services produced in a year using factors of production located within its borders
Slide 8-68
Summary Discussion of Learning Objectives
The limitations of using GDP as a measure of national welfare– Excludes non-market transactions
– Does not measure national well-being
The expenditure approach to tabulating GDP– GDP = C + I + G + X
Slide 8-69
Summary Discussion of Learning Objectives
The income approach to computing GDP – The sum of wages, rent, interest, profit,
depreciation, and indirect business taxes
Distinguishing between nominal GDP and real GDP– Nominal GDP is the value of newly produced final
output in the current year measured in current market prices.
– Real GDP adjusts nominal GDP into constant dollars by correcting for price level changes.
End of Chapter 8Measuring the Economy’s Performance