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Measuring the Economy’s Output

Measuring the Economy’s Output. SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE. In this chapter you will learn. 5.1 What gross domestic product (GDP) is and how to measure it 5.2 Other measures of a nation’s production of goods and services

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Measuring the Economy’s Output

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  1. Measuring the Economy’s Output SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE Macroeconomics, Chapter 5

  2. In this chapter you will learn 5.1 What gross domestic product (GDP) is and how to measure it 5.2 Other measures of a nation’s production of goods and services 5.3 The distinction between nominal GDP and real GDP 5.4 The shortcomings of GDP as a measure of domestic output and well-being Macroeconomics, Chapter 5

  3. Chapter 5 Topics 5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP Macroeconomics, Chapter 5

  4. Measuring the Economy’s Performance National income accounting is useful • to assess the health of the economy Macroeconomics, Chapter 5

  5. Measuring the Economy’s Performance National income accounting is useful • to assess the health of the economy • to track the long-run course over time Macroeconomics, Chapter 5

  6. Measuring the Economy’s Performance National income accounting is useful • to assess the health of the economy • to track the long-run course over time • as a basis for policy formation Macroeconomics, Chapter 5

  7. Gross Domestic Product • the total market value of all final goods and services produced in a given year in a country • A Monetary Measure Macroeconomics, Chapter 5

  8. Gross Domestic Product • the total market value of all final goods and services produced in a given year in a country • A Monetary Measure • Avoiding Multiple Counting illustrated… Macroeconomics, Chapter 5

  9. Value Added in a Five-Stage Production Process Table 5-2 Production StageSales Value Sheep Ranch $120 Wool Processor $180 Suit Manufacturer $220 Wholesaler $270 Retailer$350 Total $1140 Value Added $120 $ 60 $ 40 $ 50 $ 80 $350 Macroeconomics, Chapter 5

  10. Value Added in a Five-Stage Production Process Table 5-2 Production StageSales Value Sheep Ranch $120 Wool Processor $180 Suit Manufacturer $220 Wholesaler $270 Retailer$350 Total $1140 Value Added $120 $ 60 intermediate good $ 40 $ 50 $ 80 $350 Macroeconomics, Chapter 5

  11. Value Added in a Five-Stage Production Process Table 5-2 Production StageSales Value Sheep Ranch $120 Wool Processor $180 Suit Manufacturer $220 Wholesaler $270 Retailer$350 Total $1140 Value Added $120 $ 60 $ 40 final good $ 50 $ 80 $350 Macroeconomics, Chapter 5

  12. Gross Domestic Product • the total market value of all final goods and services produced in a given year in a country • A Monetary Measure • Avoiding Multiple Counting • GDP Excludes Non-Production Transactions • Financial Transactions • public & private transfer payments • stock market transactions • Second-Hand Sales Macroeconomics, Chapter 5

  13. Two Ways of Calculating GDP: Spending & Income • The Expenditures Approach • the sum of all the money spent in buying final goods & services • The Income Approach • the income derived or created from producing final goods & services • Buying (spending money) & selling (receiving income) are two aspects of the same transaction Macroeconomics, Chapter 5

  14. The Expenditures Approach • includes several types of spending: • Personal Consumption Expenditures (C) • durables • non-durables • services Macroeconomics, Chapter 5

  15. The Expenditures Approach • includes several types of spending: • Gross Investment (Ig) • machinery, equipment, tools • construction • changes in inventories • must include increases in inventories with this year’s production • must subtract decreases in inventories (production from previous years) Macroeconomics, Chapter 5

  16. Gross Investment, Depreciation, Net Investment & the Stock of Capital Figure 5-1 gross investment depreciation stock of capital January 1 Macroeconomics, Chapter 5

  17. Gross Investment, Depreciation, Net Investment & the Stock of Capital Figure 5-1 net investment depreciation depreciation stock of capital January 1 Macroeconomics, Chapter 5

  18. Gross Investment, Depreciation, Net Investment & the Stock of Capital Figure 5-1 net investment stock of depreciation depreciation stock of capital capital January 1 December 31 Macroeconomics, Chapter 5

  19. The Expenditures Approach • includes several types of spending: • Personal Consumption Expenditures (C) • Gross Investment (Ig) • Government Purchases (G) • not transfer payments Macroeconomics, Chapter 5

  20. The Expenditures Approach • includes several types of spending: • Personal Consumption Expenditures (C) • Gross Investment (Ig) • Government Purchases (G) • Net Exports (Xn) • must subtract spending on imports • must add sales abroad Macroeconomics, Chapter 5

  21. Putting It All Together GDP=C+Ig+G+Xn Macroeconomics, Chapter 5

  22. The Income Approach • Wages, Salaries & Supplementary Labour Income • Profits of Corporations & Government Enterprises before Taxes • profits can be divided into three categories: • corporate income taxes • dividends • undistributed corporate profits • Interest & Investment Income • Net Income from Farms & Unincorporated Businesses Macroeconomics, Chapter 5

  23. Adding Up Domestic Income but GDP was $1,154.9 billion!! Macroeconomics, Chapter 5

  24. Adding Up Domestic Income • Adjustments: • Indirect Taxes • Depreciation: Capital Consumption Allowance Macroeconomics, Chapter 5

  25. Adding Up Domestic Income Macroeconomics, Chapter 5

  26. GLOBAL PERSPECTIVE 5.1 Macroeconomics, Chapter 5

  27. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP Macroeconomics, Chapter 5

  28. Other National Accounts • Gross National Product (GNP) • Net Domestic Product (NDP) • Net National Income at Basic Prices (NNI) • Personal Income (PI) • Disposable Income (DI) Macroeconomics, Chapter 5

  29. Macroeconomics, Chapter 5

  30. The Circular Flow Revisited Macroeconomics, Chapter 5

  31. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP  Macroeconomics, Chapter 5

  32. Nominal GDP Versus Real GDP • GDP = real quantities X prices • what is really changing? • price? • quantity? • both? • get around this by: • deflating GDP when prices rise • inflating GDP when prices fall Macroeconomics, Chapter 5

  33. Nominal GDP Versus Real GDP • nominal GDP is based on prices when output was produced • real GDP is based on prices in some reference (base) year Macroeconomics, Chapter 5

  34. Adjustment Process in a One-Product Economy Method 1 • find nominal GDP for each year • index numbers tell us whether prices are rising or falling Macroeconomics, Chapter 5

  35. Adjustment Process in a One-Product Economy Method 2 • gather separate data on physical outputs • determine market value with base year prices • leads to the implicit price index, as follows: Macroeconomics, Chapter 5

  36. Calculating Real GDPTable 5-6  X 300 300 100 X X  280 308 110 Macroeconomics, Chapter 5

  37. Table 5-8 2000 1970 1,075.6 90.4 1,020.8 378.6 1995 1980 810.5 315.2 54.7 97.4 Year NominalGDP Real GDP GDP Price Index 23.9 576.2 832.1 105.4 Macroeconomics, Chapter 5

  38. Chain Weighted Index • up to 2001, Stats Canada established weights, based on price, for a base year for 380 categories of goods & services • fixed based price index method • as of May 2001, Stats Canada has used a chain weighted index (Fisher index), adjusted annually to better reflect weights of each category • alleviates underweighting of categories where prices have fallen rapidly (e.g., computers) Macroeconomics, Chapter 5

  39. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP   Macroeconomics, Chapter 5

  40. Shortcomings of GDP • GDP has several shortcomings, both • as a measure of total output • as a measure of well-being Macroeconomics, Chapter 5

  41. Shortcomings of GDP • Measurement Shortcomings • Non-Market Transactions • The Underground Economy • Leisure • Improved Product Quality • Well-Being Measure Shortcomings • GDP & the Environment • Composition & Distribution of Output • Non-Material Sources of Well-Being Macroeconomics, Chapter 5

  42. GLOBAL PERSPECTIVE 5.2 Macroeconomics, Chapter 5

  43. Chapter 5 Topics  5.1 Assessing the Economy’s Performance: GDP 5.2 Other National Accounts 5.3 Nominal GDP Versus Real GDP 5.4 Shortcomings of GDP    Macroeconomics, Chapter 5

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