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Intermediate Macro: Measuring GDP

Intermediate Macro: Measuring GDP. Jeffrey H. Nilsen. Macro : study of structure and performance of national economies and the policies gov’t tries to use to affect economic performance. Approaches to Count up GDP.

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Intermediate Macro: Measuring GDP

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  1. Intermediate Macro:Measuring GDP Jeffrey H. Nilsen

  2. Macro: study of structure and performance of national economies and the policies gov’t tries to use to affect economic performance.

  3. Approaches to Count up GDP • Expenditure App: GDP: total spending on final goods & svcs by domestic households (C), domestic firms (I), gov’t (G) and foreigners (NX) • Product App GDP: mkt value of final goods& svcsnewly produced within nation’s borders • Income AppGDP: total of incomes of workers (wages), firms (profits) & gov’t (taxes)

  4. Apple Co Juice Co Total Rev.3540 Sales to Public 10 Sales to JC 25 25 (paid to AC) ExpenditureApp • Net Exports: Add EX since foreigners’ purchases of BG goods adds to output • Subtract IM since C, I, G count spending on imports • Omit transfers (e.g. U benefits) since they’re not exchanged for services • Spent by purchasers of final goods: consumers: GDP = 50

  5. Product App • Mktvalue of final goods& svcsnewly produced within nation’s borders • Mktvalue (weigh goods by their prices, e.g. car counts more than same # of shoes) • Ignore non-market goods, e.g. child-rearing • For underground economy, try to adjust for unreported transactions • For gov’t services (not sold at market price), value at cost of providing • Newly produced: eg. not resold house (but include value of real estate agent’s services) • Final goods & services: Ignore intermediate goods (inputs used up producing goods in same period as produced). Examples of “strange” final goods: • Car sold as taxi not used up in period produced: a capital good (creates other goods) • Inventory investment: rise in inventory in period, e.g. baker’s 1000 flour rises to 1100 (unused output that augments future output)

  6. Product App (Add up Value Added) • Value Added = sales revenues – cost of intermediate goods • GDP = 50, again Apple Co Juice Co Total Rev.3540 Sales to Public 10 Sales to JC 25 25 (paid to AC)

  7. GNPBG GDPBG BG workers fgn pay BG Factors in BG Fgn workers BG pay “-“ NFP GNP = GDP + NFP NFP = pay to BGers abroad less pay to foreigners in BG GDP = bg-citizens’-pay + my-bg-pay NFP = your-us-pay – my-bg-pay GNP = GDP + NFP

  8. Income App • GDP again 50 Apple Co Juice Co Total Rev.3540 Sales to JC 25 25 (paid to AC) Wages Paid 15 10 Taxes Paid 5 2 Profit 35 – 15 – 5 = 15 40 – 25 – 10 – 2 = 3

  9. National Incometo Disposable Income Note: text ignores VAT (USA has no VAT) (represents spending power)

  10. Saving iscurrent incomeless spending on current needs = Y + NFP – C – G = (C + I + G + NX) + NFP – C – G

  11. Uses of Savings Identity What can be done with private savings ? I: lend to domestic firms wanting to buy new capital goods (- SGOV): lend to government wanting to spend more than it receives in tax revenues CA surplus: lend to foreigners who want to purchase your goods (more than you want to buy their’s)

  12. Savings is “flow” that augments the “stock” that is wealth • National Wealth: • BG’s stock of physical assets + • NFA (net foreign assets): BG-owned assets abroad less foreign-owned assets in BG • NB: Domestic financial assets NOT wealth (since offsetting liabilities) • Wealth rises with positive savings or if value of existing assets rises

  13. Nominal & Real GDP • Nominal is measured at current market P (adds up values of many different goods) • Real is measured in base-year prices (to neutralize effect of price changes for comparison over time)

  14. Nominal GDP: Y 1 Y 2 Y computers 5 10 bikes 200 250 Pcomputers $1,200 $600 bikes $200 $240 value (PY)computers _______ _______ bikes _______ _______total value (GDP) _______ _______

  15. Nominal GDP: Y 1 Y 2 Y computers 5 10 bikes 200 250 Pcomputers $1,200 $600 bikes $200 $240 value (PY)computers $6,000 $6,000 bikes $40,000 $60,000 total value (GDP) $46,000 $66,000

  16. Real GDP (Y 1 prices) Y 1 Y 2 units computers 5 10 bikes 200 250 Pcomputers $1,200 ---- bikes $200 ---- value computers ______ ______ bikes ______ ______ real GDP ______ ______

  17. Real GDP (Y 1 prices) Y 1 Y 2 units computers 5 10 bikes 200 250 Pcomputers $1,200 ---- bikes $200 ---- value computers $6,000 $12,000 bikes $40,000 $50,000 real GDP$46,000 $62,000

  18. Price Index measures average price level: GDP deflator • GDP deflator: amount to divide nominal Y to get real Y • “Variable weight index” nominal Y uses each good’s current P (if PORANGE rises, nominal Y reflects the actual quantity sold)

  19. Price Index measures average price level: CPI • “Fixed weight price index”: uses P of same basket (until it’s revised) • Base period: year when CPI = 100 (currently 1982) • Expenditure base period: year when basket components chosen (currently 2005)

  20. Calculating Growth Rates • Y growth: (Yt+1 - Yt)/Yt • Price level growth: (Pt+1 - Pt)/Pt

  21. Practice Question 1 • 1. The primary factor that caused most economists to lose their faith in the classical approach to macroeconomic policy was • (a) the high levels of unemployment that occurred during the Great Depression. • (b) the presence of both high unemployment and high inflation during the 1970s. • (c) the theoretical proof that classical ideas were invalid. • (d) the evidence that classical ideas were useful during economic booms, but not during economic recessions. These questions are taken from 2012 exam 1

  22. Practice Question 2 • 2. The Bigdrillinc. drills for oil, which it sells for $200 million to Bigoilinc. to be made into gas. Bigoilinc’s gas is sold for a total of $600 million. What is the total contribution to the country’s GDP from Bigdrilland Bigoil? • (a) $200 million • (b) $400 million • (c) $600 million • (d) $800 million

  23. 3. In 2002, private saving was $1590 billion, investment was $1945 billion, and the current account balance was –$489 billion. From the uses-of-saving identity, how much was government saving? • (a) –$134 billion • (b) –$844 billion • (c) $844 billion • (d) $134 billion

  24. 4. Intermediate goods are • (a) capital goods, which are used up in the production of other goods but were produced in earlier periods. • (b) final goods that remain in inventories. • (c) goods that are used up in the production of other goods in the same period that they were produced. • (d) either capital goods or inventories.

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