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# Introduction to Macroeconomics - PowerPoint PPT Presentation

Introduction to Macroeconomics. Chapter 4 Measuring Output of the Macroeconomy. Chapter 4. Measuring the Macroeconomy. 1. Measuring Total Output 2. How to Measure GDP 3. GDP Accounting Complications Nominal and Real GDP Measuring Price Changes 6. Empirical Applications.

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### Introduction to Macroeconomics

Chapter 4

Measuring Output of the Macroeconomy

1. Measuring Total Output

2. How to Measure GDP

3. GDP Accounting Complications

• Nominal and Real GDP

• Measuring Price Changes

6. Empirical Applications

Introduction to Macroeconomics

• Monetary Measure of Value

• GDP versus GNP

• Omissions from GDP - does not measure social welfare

Introduction to Macroeconomics

1. Measuring Total Output Monetary Measure of Value

QuantitytimesPriceequalsMarket Value

Cars 1,000 x \$20,000 = \$20,000,000

Dolls 10,000 x \$ 10 = \$ 100,000

Total Value of Output = \$20,100,000

Introduction to Macroeconomics

1. Measuring Total Output GDP versus GNP

• Nominal Gross Domestic Product (GDP)- the market value of final goods and services (i.e., sold to final consumers) produced by a nation during a specific period, usually 1 year.

• Nominal Gross National Product (GNP)- the market value of final goods and services produced by labor and property supplied by the residents of a nation during a specific period, usually 1 year.

Introduction to Macroeconomics

1. Measuring Total Output Omissions from GDP

GDP is a poor measure of social welfare:

• Leisure

• Home and volunteer labor

(non market production)

• Depletion of nonrenewable resources

• Unregulated pollution

• Distribution of income

• Differences in preferences

Introduction to Macroeconomics

• Circular Flow

• Expenditure Approach

• Income Approach

Introduction to Macroeconomics

2. How to Measure GDP Circular Flow of Income and Expenditures

Income

Resources

Firms

Households

Goods and Services

Expenditures

Solid Lines - Flow of Money

Dashed lines - Flow of Goods and Services

Introduction to Macroeconomics

2. How to Measure GDP Expenditure Approach

• GDP = Consumption Spending (C)

+ Private Domestic Investment (I)

+ Government Spending (G)

+ Exports - Imports (net exports, NX)

• GDP = C + I + G + NX

Introduction to Macroeconomics

2. How to Measure GDP Expenditure Approach: Expenditure Shares

2002 U.S. Nominal Gross Domestic Product

Government Spending

18.8 %

Consumption

69.9 %

Investment

15.2 %

Net Exports = - 4.1 % (not shown in slide)

Introduction to Macroeconomics

2. How to Measure GDP Expenditure Approach: Consumption

U.S.

Japan

1999

U.S. 68.2 %

Japan 60.1 %

Introduction to Macroeconomics

2. How to Measure GDP Expenditure Approach: Government

U.S.

Japan

1999

U.S. 17.6 %

Japan 18.4 %

Introduction to Macroeconomics

2. How to Measure GDP Expenditure Approach: Investment

Japan

U.S.

1999

U.S. 17.9 %

Japan 20.0 %

Introduction to Macroeconomics

2. How to Measure GDP Expenditure Approach: Net Exports

Japan

U.S.

1999

U.S. - 3.7 %

Japan 1.5 %

Introduction to Macroeconomics

2. How to Measure GDP Income Approach

• National Income = GDP (with corrections)

• Personal Income = National Income

(with corrections)

• Personal Income - Personal income taxes - Social Security withholding = Disposable Personal Income

Introduction to Macroeconomics

• Double Counting

• Depreciation

Introduction to Macroeconomics

3. GDP Accounting Complications Double Counting

• Intended for “final” use

• excludes intermediate products

• excludes used goods

Introduction to Macroeconomics

3. GDP Accounting Complications Depreciation

Gross Investment

- Depreciation

= Net Investment

Gross Domestic Product (GDP)

- Depreciation

= Net Domestic Product (NDP)

Introduction to Macroeconomics

• Definitions

• Sample Problem

• GDP Growth

Introduction to Macroeconomics

4. Nominal and Real GDP Definitions

• Nominal GDP

• Value of output measured at actual prices (current dollar output)

• Does not correct for inflation

• Real GDP

• Value of output based on prices of some base period (“constant” dollar output)

• eliminates effect of inflation

Introduction to Macroeconomics

4. Real GDP Sample Problem

Introduction to Macroeconomics

4. Real GDP Definition of Nominal GDP

Nominal GDP

= Current year Quantities

x Current year Prices

Introduction to Macroeconomics

4. Real GDP Sample Problem: 1992 Nominal GDP

= 1992 Quantities x 1992 Prices

= 1992 Spending on

Food Housing Fun Machines

= 4 • \$12 + 3 • \$9 + 3 • \$4 + 2 • \$20

= \$48 + \$27 + \$12 + \$40

= \$127

Introduction to Macroeconomics

4. Real GDP Sample Problem: 1994 Nominal GDP

= 1994 Quantities x 1994 Prices

= 1994 Spending on

Food Housing Fun Machines

= 5 • \$14 + 3 • \$10 + 4 • \$5 + 2 • \$20

= \$70 + \$30 + \$20 + \$40

= \$160

Introduction to Macroeconomics

4. Real GDP Definition of Real GDP

Real GDP

= Current year Quantities

x Base year Prices

Introduction to Macroeconomics

4. Real GDP Sample Problem: 1992 Real GDP

= 1992 Quantities x 1992 Prices

Food Housing Fun Machines

= 4 • \$12 + 3 • \$9 + 3 • \$4 + 2 • \$20

= \$48 + \$27 + \$12 + \$40

= \$127

Introduction to Macroeconomics

4. Real GDP Sample Problem: 1994 Real GDP

= 1994 Quantities x 1992 Prices

Food Housing Fun Machines

= 5 • \$12 + 3 • \$9 + 4 • \$4 + 2 • \$20

= \$60 + \$27 + \$16 + \$40

= \$143

Introduction to Macroeconomics

4. Real GDP Sample Problem: GDP Growth

• Growth in Nominal GDP

= (160 - 127) • 100 = 26%

127

• Growth in Real GDP

= (143 - 127) • 100 = 13%

127

Introduction to Macroeconomics

• Price index

• GDP deflator

• Consumer price index

• Problems with price indexes

Introduction to Macroeconomics

Measuring Price ChangesPrice indexes

• Price Index: a measure of the change in the average level of prices

• GDP Deflator

• Base-year prices

• Quantities variable

• Imports excluded

• Consumer Price Index

• Base year quantities

• Prices variable

• Imports included

Introduction to Macroeconomics

Measuring Price ChangesGDP deflator

GDP Deflator = Nominal GDP • 100

Real GDP

1992 GDP Deflator = 127• 100 = 100.0

127

1994 GDP Deflator = 160 • 100 = 111.9

143

Introduction to Macroeconomics

Measuring Price ChangesInflation

Change in Average Level of Prices

= Percent Change in GDP Deflator

Inflation from 1992 to 1994

= (1994 Deflator - 1992 Deflator) • 100

1992 Deflator

= (111.9 - 100.0) • 100 = 11.9%

100.0

Introduction to Macroeconomics

Measuring Price ChangesProblems with price indexes

• Substitution bias - changes in relative prices

• between goods (butter vs margarine)

• between stores (small vs large discounters)

• Quality changes and new products

• Chain-weighted indexes

Introduction to Macroeconomics

• Use Real rather than Nominal values

• Compare Per Capita rather than Aggregates

• Compare Growth Rates rather than Levels

Introduction to Macroeconomics

6. Empirical Applications Compare Per Capita rather than Aggregates

Introduction to Macroeconomics

6. Empirical Applications Compare growth rates rather than levels

Introduction to Macroeconomics