GDP

Measuring the Macroeconomy

• Early economists believed it would regulate itself– “Hands off”

• Great Depression convinced them to monitor and try to prevent

National Income and Product Accounts

• National Income Accounting – system that collects stats on production, income, investment and savings.

• NIPA– Compiles data– U.S. Department of Commerce– GDP

Gross Domestic Product

• The dollar value of all final goods and services produced within a country’s borders in a given year.

– Dollar Value – selling prices of all goods and services– Final Goods and Services – Finished product the consumer

receives• Intermediate Goods – used to produce final

– Country’s borders – Includes car made in Ohio by Japanese company, but not made in Brazil by an American company.

– Given Year – House built in 1982 counted in that year’s GDP

GDP

• Gross = entire; whole• Domestic = within a country’s borders• Product = good or service

• 1982 House: real estate agent’s fee for reselling would be included in GDP

• Lumber, Nails, Shingles, Windows counted?– No, they are intermediate goods

Expenditure Approach

• Calculate GDP by 4 categories:1. Private Consumption2. Business investments3. Government spending4. Net exports minus imports

• GDP = C + I + G + (X – M)

Consumer Goods

• Durable Goods – refrigerators, cars, and DVD players

• Nondurable Goods – food, light bulbs, sneakers

Income Approach

• Better accuracy• Add up all income earned in the economy• A house may generate $150,000 in a sale– This # is the combined incomes of the people who

provided goods and services to build the house

Nominal vs. Real

• Nominal GDP – Measured in current prices• Real GDP – Expressed in constant, or

unchanging, prices– Increase in prices appears to make GDP rise, but

output has not

Nominal vs. Real GDPYear 1 Nominal GDP Year 2 Nominal GDP Year 2 Real GDP

1. Suppose an economy’s entire output is cars and trucks

1. In the second year, the economy’s output does not increase, but the prices of the cars and trucks do:

1. To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices from the base year. So we calculate the real GDP for year 2 using the prices from Year 1

2. This year the economy produces:10 cars at $15,000 each = $150,000+10 trucks at $20,000 each = $200,000

Total = $350,000

10 cars at $16,000 each = $160,000+10 trucks at $21,000 each = $210,000

Total = $370,000

10 cars at $15,000 each = $150,000+10 trucks at $20,000 each = $200,000

Total = $350,000

3. Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350,000

2. This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP

2. Real GDP for Year 2, therefore, is $350,000

Limitations of GDP

• Not a perfect “yardstick”– Doesn’t measure quality of life like leisure and safety

• Nonmarket Activities – goods and services people do for themselves– Caring for children, mowing the lawn, cooking dinner,

washing the car• Underground Economy – not reported to the gov’t and

not counted in GDP– Black Market: drugs, weapons, stolen cars, exotic animals,

illegal gambling– “Under the Table”

Other Income and Output Measures

• Gross National Product (GNP)– Annual income earned by U.S. owned firms and

residents– Does not account for depreciation, the loss of

value of capital equipment that results from normal wear and tear

Measurements

• Net National Product – measure of output after adjustment for depreciation

• National Income – subtract sales and excise taxes from NNP

• Personal Income – how much pretax income businesses pay to households after reinvesting

• Disposable Personal Income - $ people can spend after taxes

Measurements

GDP+ income earned outside

U.S. by U.S. firms and citizens

-- income earned by foreign firms and foreign

citizens in the U.S.= GNP

GNP -- depreciation of capital equipment = NNP

NNP -- sales and excise taxes = NI

NI--• firms’ reinvested profits• Firms’ income taxes• Social Security taxes

+ other household income PI

PI -- individual income taxes = DPI

Influences on GDP• Price Level – Average of all prices in the

economy• Aggregate Supply – total amount of goods and

services in the economy available at all possible price levels Aggregate

SupplyPr

ice

Leve

l

Real GDP

Aggregate Demand

Aggregate Demand

Real GDP

Pric

e Le

vel

Wealth Effect – falling prices increase wealth and demand

• Aggregate Demand – amount of goods and services in the economy that will be purchased at all possible price levels

Equilibrium

Aggregate Supply

Pric

e Le

vel

Real GDP

Aggregate Demand

• AS and AD work the same way as Supply and Demando Aggregate means “total amount”