Understanding Macroeconomic Measurements for Economic Analysis

1. ECONOMICS, 5e Roger Arnold CHAPTER 6 Macroeconomic Measurements, Part II: GDP and Real GDP

2. MACROECONOMIC QUESTIONS • A Nation's Income • The most central issue of macroeconomics is an economy's total production of goods and services • A nation's income is the total of all the incomes of the people that live there

3. MACROECONOMIC QUESTIONS • Gross Domestic Product (GDP) • The dollar value of total output of goods and services is called nominal GDP • Part of the increases in GDP reflect inflation • Adjusting GDP for inflation gives real GDP

4. MACROECONOMIC VARIABLES • Definitions • Real gross domestic product is a measure of a country's total output of final markets goods and services during some year • Nominal gross domestic product is the dollar value of a country's output of final market goods and services during some year

5. SOURCE: Bureau of Economic Analysis.

6. Exhibit 4 The Circular Flow: Total Purchases (Expenditures) Equal Total Income in a Simple Economy

7. CIRCULAR FLOW AND AGGREGATE DEMAND • Types of Spending • Consumption, or consumer spending, is spending by people on the final goods and services for current use

8. CIRCULAR FLOW AND AGGREGATE DEMAND • Types of Spending • Investment refers to spending to create new capital goods, such as machines, equipment, inventories, human skills, and knowledge

9. CIRCULAR FLOW AND AGGREGATE DEMAND • Types of Spending • Government purchases refers to all spending by the government except transfer payment (direct payments of money to people)

10. CIRCULAR FLOW AND AGGREGATE DEMAND • Types of Spending • Exports are sales of goods and services to people and firms in other countries

11. CIRCULAR FLOW AND AGGREGATE DEMAND • Types of Spending • Exports are sales of goods and services to people and firms in other countries • Imports are purchases of goods and services from people and firms in other countries

12. CIRCULAR FLOW AND AGGREGATE DEMAND • Types of Spending • Net exports, or the balance of international trade, equals exports minus imports

13. Exhibit 1 The Components of GDP

14. What is the difference between GDP and GNP? • GNP is the value of all final goods and services produced by citizens of a nation regardless of their location. • GDP is the value of all final goods and services produced within the border of a nation regardless of citizenship. • GNP = GDP + net foreign factor income

15. Why do we make the distinction about FINAL goods? • Final goods are in the hands of the ultimate user. • Intermediate goods are inputs into the production of final goods. • We only use final goods to avoid the problem of “DOUBLE COUNTING” • Alternatively, we can use the value added at each stage of production

16. What GDP Omits • Certain Nonmarket Goods and Services • Underground Activities • Sales of Used Goods • Financial Transactions • Government Transfer Payments • Leisure

17. GDP and Well Being • GDP is useful in measuring the productive capacity of an economy. • GDP is not necessarily a good measure of happiness or well being. • Measurements of well being often include measures of education, access to health care, infant mortality, and life expectancy.

18. Two Ways of Measuring GDP • Expenditure approach • Income approach • See pages 79-80 in your workbook.

19. The Expenditure Approach • Household sector: Consumption • Business sector: Gross private domestic investment • Government sector: Government purchases • Foreign sector: Net exports

20. The Income Approach gives us NATIONAL INCOME • Compensation of employees • Proprietor's Income • Corporate profits • Rental income • Interest

21. From National Income to GDP: Making Some Adjustments • - Income earned from the rest of the world • + Income earned by the rest of the world • + Indirect business taxes • + Capital consumption allowance (depreciation) • + Statistical discrepancy

22. From National Income to GDP: Making Some Adjustments • GDP = NI + indirect business taxes + depreciation – net foreign factor income • NI = GDP - indirect business taxes - depreciation + net foreign factor income

23. Other National IncomeAccounting Measurements • Net Domestic Product = GDP - Depreciation • Personal Income = National Income - undist. corp. profits - Social Security taxes - corp. profits taxes + transfer pmts. + net interest • Disposable Income = Personal Income - Personal taxes • Disposable Income = Personal Cons. + Personal Saving

24. Desirable Economic States or Goals • Price stability • Low unemployment • High and sustained economic growth

25. MACROECONOMIC MODELS • Business Cycles • Business cycles are 2-year to 5-year fluctuations around trends in real GDP and other related variables

26. MACROECONOMIC MODELS • Business Cycles • A recession is a large fall in the growth of real GDP and related variables • A depression is an especially large recession

27. What Is a Business Cycle? • Peak • Contraction (Recession) • Trough • Recovery • Expansion

28. Exhibit 7 The Phases of the Business Cycle