Download Measuring the macroeconomy - E-SGH

Lecture 2
Gross National Product
 The market value of the goods and services produced within a given period by
nationals (residents of a nation). It includes the income earned by nationals
abroad. It does not include income earned within the country by foreigners
 Income earned by Poles working in London a part of Polish GNP, profit
earned by a Japanese owner of Toyota in Wałbrzych part of Japanese GNP
 How to avoid double counting (cars + tiers = other parts, materials?)
 Counting of value added of each firm only
 Value added = firm’s sale minus the value of materials it buys to use in
producing its products
 Final goods and services = those purchased by their final users
 GNP = value of final goods and services
 Value of output not sold through market should be estimated (value of services
homeowners receive from living in their houses)
 But volunteer services, value of housework and do-it-yourself not included
 Illegal activities excluded as well (grey or underground economy)
 How big it is? Could be 25%?
Gross Domestic Product
 The total income earned domestically. It includes income
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earned domestically by foreigners. It does not include
income earned by domestic residents abroad.
Some examples: a Ukrainian worker income earned in
Poland part of Poland GDP (earned domestically) but not
the part of Polish GNP (worker not a Polish national).
The difference between GNP and GDP in most cases rather
small. GDP more frequently used as a measure
How to estimate the value of services produced by
government not sold through market (defense, police,
public education)?
Usually value of public goods = wages paid to public
employees
Other measures of income
 1) Net National Product (NNP) = GNP – depreciation
 Depreciation of capital=the amount of stock of plants, equipment and
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residential structures that wears out during a year, equals about 10% of
GNP
2) National Income (NI) = NNP – indirect taxes (such as sales tax)
NI a measure of how much everyone has earned
5 categories of National Income:
compensation of employees (wages+ benefits)
proprietors’ income (income of noncorporate businesses such as
small farms, mom-and-pop stores, law partnerships)
rental income ( income of landlords )
corporate profits (the income of corporations after payments to their
workers and creditors)
net interest (interest paid by domestic businesses minus the interest
they receive, plus interest earned from foreigners)
Personal Income
 An income that households and noncorporate businesses
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receive
Personal Income=National Income
- corporate profits (retaining earnings + dividends + taxes)
+ transfers (such as social security and welfare benefits)
+ social insurance contributions
+ dividends
+ personal interest income (the interest that households
earn)
Disposable Personal Income = Personal Income – Personal
Tax and nontax payments
Nominal and Real GNP
output
output
Price
$/unit
Price
$/unit
Value of
output,
current $
Value of
output
current $
Value of
output,
1982 ( $)
Value of
output
1982 ($)
1982
1989
1982
1989
1982
1989
1982
1989
Cars
100
150
2
4
200
600
200
300
meat
100
140
4
6
400
840
400
560
600
1440
600
860
Nominal
GNP
Nominal
GNP
Real
GNP
Real
GNP
The GNP deflator
 Distinction between real and nominal GNP = one of most
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widely used measure of inflation
GNP deflator = the ratio of nominal GNP to real GNP
expressed as an index
GNP deflator for 1989 = (1440/860) x 100 = 167,4
Prices increased 67.4% between 1982-89
Nominal GDP=real GDP x GDP deflator
Nominal GDP measures the dollar value of the output
Real GDP measures the amount of output, the output
valued at constant (base year) prices
The GDP deflator measures the price of the typical unit of
output relative to its price in the base year
The consumer price index
 The most popular measure of the level of prices
 CPI turns the prices of many goods and services into a
single index measuring the overall level of prices
 C PI the price of a basket of goods and services relative
to the price of this basket in a base year
 CPI tells us how much it costs now to buy the basket
relative to how much it cost to buy the same basket in
a base year
 The producer price index measures the price of typical
basket of goods bought by firms
C PI and GDP deflator
 GDP deflator measures the prices of all goods and
services produced, CPI prices of goods bought by
consumers
 GDP deflator includes goods produced domestically,
prices of imported goods do not show up
 C PI assigns fixed weights to the prices of different
goods, GDP deflator assigns changing weights (allows
the basket of goods to change over time)