Measurement of Economic Variables

1. Measurement of Economic Variables

2. Gross domestic product (GDP) • GDP is the dollar value of all final goods and services produced by a domestic economy in a years time.

3. Fair model • FAIRMODEL site

4. Gross National Product (GNP) • GNP=Income earned by U.S. residents • GNP=GDP-payments to foreigners who own assets located in the U.S. + payments to U.S. residents who own foreign assets

5. GDP=Household income in this class • NNP=GNP-IBT • GNP=Gross National Product • IBT = Indirect Business Taxes (sales tax) • NNP=Net National product\ Assume IBT = 0, so NNP=GDP

6. NI=NNP-CCA = GDP - CCA • NI = National Income • CCA = Capital Consumption Allowence (depreciation) Assume CCA = 0 NI=NNP=GDP

7. Source of Household Income • Assume no foreign sector, no retained earnings, no corporate taxes • GDP = NI = Household Income=Y

8. Uses of Household Income • Y=C+S+T • C=Consumption • S=Household Saving • T=Taxes YD=Y-T YD = Disposable Income

9. Spending • AE=C +Ir + G • AE = Aggregate Expenditures • C = Household spending • Ir = Realized Investment (Business spending) • G = Government spending AE = GDP = Y

10. Value Added • VA = Value Added • = Revenue – Cost of Materials Value Added.xls

11. Sum of VA at each stage of production = price of a good • Sum of VA for all firms = final price of all output. • Sum of VA for all firms = GDP

12. VA automatically eliminates double counting of output.

13. Profits = Revenue – Costs • Profits = Revenue – • Wages – Rent – Interest – • Cost of Materials • Profits + Wages + Rent + Interest = • Revenue – Cost of Materals

14. Profits + Wages + Interest + Rent = VA • Sum (Profits+Wages+Interest+Rent) = • Sum(VA) • Sum (Profits+Wages+Interest+Rent)=GDP • Sum(Household Income) = GDP

15. Planned Spending • Firms may spend more than they plan to (inventories build up) • Actual Expenditures=C + Ir + G • Planned Expenditures = C + I + G

16. Real vs Nominal GDP

17. Real vs Nominal GDP

18. Nominal GDP • If Nominal GDP doubles is that due to P increases or Q increases ?

19. Two ways to estimate prices • Directly by constructing price indexes • Indirectly by computing the implicit price deflator

20. Price index for groceries • Market basket (in base year of 1960) • 1 dozen eggs • 2 chickens • 3 pounds hamburger • Other things a typical family might buy Price of basket =$100 in 1960 Price of basket = $200 in 1970

21. Price index • The market basket does not change so any difference must be due to prices. • Price indexes however miss • Substitution effect • New goods • Quality changes • Discount stores

22. Computing real GDP using price index

23. Implicit price deflator • Can get good estimate of Nominal GDP • Nominal GDP = Sum of Value Added • Estimate real GDP by determining what people buy now using base year prices • If year 2000 is the base year compute real GDP by determining what year 2003 GDP would have cost in 2000

24. Implicit price deflator

25. Unemployment • Overview of BLS Statistics on Employment and Unemployment