Download MECON Macroeconomic Analysis

MECON Macroeconomic Analysis
Lecture 1
Readings: Blanchard Chapters 1 and 2
Measurements of GDP
GDP is the market value of all the new, final goods and services produced within
an economy during a given period
--new, not used; selling used cars does not count (but the “profit” earned
by the dealer counts)
--final, not intermediate goods/inputs; or else leads to double counting
--include services; medical service consumption is larger than
consumption of food in the U.S.
--produced and transacted in the market; staying home to take care of
kids does not count
--during a period, a quarter of a year
--within an economy; normally within a country; but there is also state
and provincial GDP
Three Basic Approaches for Measurement:
1. Production Approach
-- 1a. Value added Approach: Sum of all value added in the economy
Policy question: Should the government target “high value-added sectors,
given that GDP is the sum of all value added in the economy?
2. Expenditure/Purchases Approach
Consumption: durables, nondurables (about 70% in the US is consumption,
rising since 1980; in 1970, it was under 63%)
Question: is the U.S. consuming too much? Is Asia consuming too little
(or is Asia saving too much)?
Investment: nonresidential structures, equipment and software; residential
(construction of new homes)
Government purchases (excluding transfers)
Net Exports: exports – imports
Should we worry about the U.S. trade deficits?
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Trade deficits mean the U.S. promises to repay the “loan” in the future;
borrowing more means having to repay more and having less to spend in
the future
Policy Question: Should we worry about bilateral trade balance? Not
particularly related to whether a trading partner is protectionist or not
3. Income Approach
Compensation to Employees: Wages and salaries as well as benefits (health and
retirement)
Profits (net operating surplus) of businesses
Depreciation of capital (supposedly part of the incomes needed to compensate
owners of capital; if we subtract depreciation from GDP, we get net domestic
product)
If we assign all incomes to either labor or capital (one problem here is profits to
owners of capital may include labor income—work done by the owners as well as
capital income), then the shares in the US are stable—2/3 to labor; 1/3 to capital
What does GDP measure?
1. It does not include non-market activities; work by stay-at-home spouses
(exception: if you own your home in the US, there is no rent, but the national
accountants estimate a rental equivalent and include it in the GDP)
2. It ignores the health of a nation’s people
One study argues that the rise in life expectancy in the U.S. in the twentieth
century had roughly the same impact on the country’s economic welfare as the
entire gain in per capita consumption over that century
Question: would you like to have the medical technology of 2000 and the per
capita income of 1900? Or per capita income of 1900 but the medical technology
of 2000?
Millions of Africans may die from AIDS and have lower life expectancy but the
impact on GDP may not fully reflect this
3. GDP also ignores environmental degradation (Green GDP?)
depletion of nonrenewable resources; pollution; clean water safety, etc.
GNP is GDP plus net income receipts from the rest of the world; important for
economies that derive substantial incomes from abroad
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Nominal and Real GDP
Nominal GDP is the sum of the quantities of final goods produced multiplied by
their current prices
Nominal GDP can rise because of increases in production of goods over time as
well as increases in prices
Real GDP is the sum of the quantities of final goods multiplied by constant (not
current) prices; say by 2000 prices
Problem: the real GDP will be different if we use the prices in 2001 rather than
2000
Comparing GDP across countries
Using the market exchange rates may not yield the appropriate answer
If prices in Japan are 40% higher than in the U.S., adjust the nominal dollar
GDP of Japan by (1/1.4) to show the purchasing power of Japanese GDP
This is a better measure of “standard of living”
But this is true even for provinces and states
There are significant controversies about whether the law of one price holds
empirically
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