Download Problems with using GDP as a measure of our country`s Output

If the government levies a tax on
the producers of a certain product:
1.
Consumers will take on most of that burden (in the form of
higher prices) only if demand for that product is relatively
elastic.
2.
Producers will be unable to pass any of that tax on to the
consumer unless the consumer has a perfectly inelastic
demand for that product.
3.
Producers will have to increase supply to compensate for the
greater cost of production caused by the tax.
4.
Producers will be able to pass some of the tax on to the
consumers in the form or higher prices and how MUCH they
can pass on depends on the elasticity of demand.
The Laffer Curve shows:
1. A positive relationship between tax rates
and tax revenues
2. A negative relationship between tax
rates and tax revenues
3. That a decrease in tax rates always leads
to a decrease in tax revenues.
4. That a decrease in tax rates sometimes
leads to an increase in tax revenues.
Ch. 7 – Taking the Nation’s
Economic Pulse
• Major points of Ch. 7
– What is GDP?
– How do we calculate GDP?
– Real v. Nominal GDP
– Drawbacks of using GDP as a measure of our
country’s output
Why do we try to measure out
country’s output anyway?
• Because income growth comes directly out
of production or output growth. One
directional only…output causes income,
not vice versa.
So, what do we already know about GDP?
PRS
GDP measures the amount of
assets a country has during a
specific time period.
1. True
2. False
GDP measures the amount of
goods and services sold within a
specific time period.
1. True
2. False
GDP measures the amount of
goods and services produced by
the citizens of a specific country.
1. True
2. False
Chapter 7 – Taking the Nation’s
economic pulse – What is GDP?
• GDP –
– Market value of all final goods and
services produced in a country during a
specific time period.
Chapter 7 – Taking the Nation’s
economic pulse – What is GDP?
• GDP – where it’s produced
– Market value of all final goods and
services produced in a country during a
specific time period.
Chapter 7 – Taking the Nation’s
economic pulse – What is GDP?
• GDP – where it’s produced
– Market value of all final goods and
services produced in a country during a
specific time period.
• GNP –
• Market value of all final goods and services
produced by citizens of a country (either
produced domestically or in another
country.)
Chapter 7 – Taking the Nation’s
economic pulse – What is GDP?
• GDP – where it’s produced
– Market value of all final goods and
services produced in a country during a
specific time period.
• GNP – who produces it
• Market value of all final goods and services
produced by citizens of a country (either
produced domestically or in another
country.)
NOMINAL GDP,
in millions,
2005
www.nationmaster.com/encyclopedia/G
ross-Domestic-Product#_note-0
2005
How do we calculate GDP?
• Two ways:
– Expenditures Approach – market value of
all final goods and services produced in the
US in a given accounting period.
Y = C + I + G + (X-M)
Y = C + I + G + (X-M)
• C = consumption expenditures (what
people buy—except it does not count
new home sales—those are part of
Inv.)
Y = C + I + G + (X-M)
• C = consumption expenditures (what
people buy)
• I = business expenditures (what
businesses buy) ex. Oscar Mayer
buys Weiner-mobile (includes new
home sales)
Y = C + I + G + (X-M)
• C = consumption expenditures (what
people buy)
• I = business expenditures (what
businesses buy) ex. Oscar Mayer
buys Weiner-mobile
• G = Government Spending
Y = C + I + G + (X-M)
• C = consumption expenditures (what
people buy)
• I = business expenditures (what
businesses buy) ex. Oscar Mayer
buys Weiner-mobile
• G = Government Spending
• X - M = Net Exports (+ means we export
more, - means we import more)
Second way we calculate GDP
• Two ways:
– Expenditures Approach – market value of
all final goods and services produced in the
US in a given accounting period.
Y = C + I + G + (X-M)
– Income Approach – add up all the income
generated in the production of all goods and
services
Y = R + W + i + T + SA (stat. adj.)
PRS
Businesses produced $10 million in 2005 but
sold only $9 million. Is the $1 million
increase in inventory counted as part of
2005 GDP?
1. No because if these inventories were sold in
2006, they would be counted twice.
2. No, because inventories are intermediate
goods.
3. Yes, because these inventories are part of the
output of the economy in 2005.
4. Yes, but only if they are sold in 2006.
What does GDP include?
1. Market value ($$) of final goods & services
Not intermediate goods (to avoid double counting).
VA
Bread (final good)
Farmer’s wheat
$.40
$ .40
Miller’s Flour
$.48
$ .88
Baker’s Bread
$.80
$1.68
Grocer’s Bread
$.32
$2.00 (market value)
$4.96 (dbl counting)
Chap. 7—Core Macroeconomics
2. Only goods & services produced during the
accounting period (not second hand sales)
ex. Not used cars and antiques (were
counted the year they were produced
ex. but DOES count salesman’s
commission (current production)
Chap. 7—Core Macroeconomics
2. Only goods & services produced during the
accounting period (not second hand sales)
ex. Not used cars and antiques (were
counted the year they were produced
ex. but DOES count salesman’s
commission (current production)
3. Does NOT count financial transactions and
transfer payments.
ex. Sale of stock does NOT count—nothing was
produced…only transfer of ownership
ex. Welfare payments do not count—Just transfer
of Y
Which of these goods DO
count in GDP?
a. Value of home production
househusband output)
(housewife or
Which of these goods DO
count in GDP?
a. Value of home production
househusband output)
b. Value of Maid Service
(housewife or
Which of these goods DO
count in GDP?
a. Value of home production
(housewife or
househusband output)
b. Value of Maid Service
c. Sale of Rembrandt Painting
Which of these goods DO
count in GDP?
a. Value of home production
(housewife or
househusband output)
b. Value of Maid Service
c. Sale of Rembrandt Painting
d. Do-it-yourself projects
Which of these goods DO
count in GDP?
a. Value of home production
(housewife or
househusband output)
b.
c.
d.
e.
Value of Maid Service
Sale of Rembrandt Painting
Do-it-yourself projects
Est. of farmer’s own use of goods
Which of these goods DO
count in GDP?
a. Value of home production
(housewife or
househusband output)
b.
c.
d.
e.
f.
Value of Maid Service
Sale of Rembrandt Painting
Do-it-yourself projects
Est. of farmer’s own use of goods
Unemployment compensation payments
Which of these goods DO
count in GDP?
a. Value of home production
(housewife or
househusband output)
b.
c.
d.
e.
f.
g.
Value of Maid Service
Sale of Rembrandt Painting
Do-it-yourself projects
Est. of farmer’s own use of goods
Unemployment compensation payments
Clean-up bill from an economic BAD (oil spill)
Problems with using GDP as a
measure of our country’s Output
1. Does not count non-market production (woman marries her
housekeeper, GDP decreases…you paint your house, no
increase to GDP…you hire someone to paint it, GDP
increases)
Problems with using GDP as a
measure of our country’s Output
1. Does not count non-market production (woman marries her
housekeeper, GDP decreases…you paint your house, no
increase to GDP…you hire someone to paint it, GDP
increases)
2. Does not count underground economy (illegal activities &
barter or cash payments)
Problems with using GDP as a
measure of our country’s Output
1. Does not count non-market production (woman marries her
housekeeper, GDP decreases…you paint your house, no
increase to GDP…you hire someone to paint it, GDP
increases)
2. Does not count underground economy (illegal activities &
barter or cash payments)
3. Does not reflect leisure time activities (human cost)
o/p of $100 B. w/ave. work wk of 50 hrs.
v. o/p of $100 B. w/ave. work wk of 35 hrs.
Human Cost? Jobs today may be less stressful but that’s not
accounted for in GDP.
Problems with using GDP as a
measure of our country’s Output
4. Does not account for product quality
Problems with using GDP as a
measure of our country’s Output
4. Does not account for product quality
5. Does not subtract out for Economic BADS
i.e. Pollution
Ex. o/p of $500 B. but generates $100 B. of pollution
v. o/p of $450 B. with no pollution
Problems with using GDP as a
measure of our country’s Output
4. Does not account for product quality
5. Does not subtract out for Economic BADS
i.e. Pollution
Ex. o/p of $500 B. but generates $100 B. of pollution
v. o/p of $450 B. with no pollution
6. Does not account for introduction of new goods. Therefore,
it’s hard to use GDP as a comparison with lots of years in
between.
Which of the following would
always be included in GDP?
1. Sale of a Picasso painting
2. Cash payments made to your child’s guitar
3.
4.
teacher
Estimate of a farmer’s own use of goods
produced (total bushels produced – total
bushels sold)
Social Security payments paid by government
as a part of C + I + G (gov’t spending)
In terms of causation, output
causes income, NOT vice versa.
1. True, we must have output before we have an
2.
3.
income to spend. Output creates income.
False, we must have income to spend before
producers will produce anything. This is not
Field of Dreams.
Sometimes, true, sometimes false, depending
on where we are in the production process.
(PMA) American owned Burger King, opens a
new store in China. How will net revenue
earned by this restaurant affect GDP and
GNP of the US?
1.
2.
3.
4.
5.
6.
GDP will not change
GDP will decrease
GDP will increase
GNP will not change
GNP will decrease
GNP will increase
Which of the following would
increase GDP of the US?
1. A Californian buys a case of wine from a
2.
3.
4.
winery in France.
A Frenchman buys a case of wine from a
winery in California.
A Californian spends $3,000 on a vacation in
the French Alps.
A French investor purchases 100 share of a
computer company located in Silicon Valley,
CA.
(PMA) Which of the following
DO count in GDP?
1.
2.
3.
4.
Work done at home by residents
Do – it – yourself projects
Welfare payments
Sales from a German car manufacturing
plant located in Tennessee.
5. None of the above count in GDP.
An automobile manufacturing plant opens in
Indiana and it’s owner, all of the workers
and all raw materials are from Japan. How
would your purchase of an automobile from
this plant change domestic GDP and GNP (in
the US)?
1. It would increase GNP and GDP
2. I would increase GNP and leave GDP
unchanged
3. It would increase GDP and leavea GNP
unchanged
4. It would leave both GDP and GNP unchanged.
The difference between real and
nominal GDP is:
1. Real GDP has the inflation taken out (has
been corrected for inflation)
2. Nominal GDP indicates the value of the
item in the year it is produced and thus
has some inflation in it.
3. Both of the above statements are correct.
4. None of the above are correct.
Problems with using GDP as a
measure of our country’s Output
4. Does not account for product quality
5. Does not subtract out for Economic BADS
i.e. Pollution
Ex. o/p of $500 B. but generates $100 B. of pollution
v. o/p of $450 B. with no pollution
6. Does not account for introduction of new goods. Therefore,
it’s hard to use GDP as a comparison with lots of years in
between.
7. And the NO. 7 problem with using GDP as a measure of our
nation’s output is…….
Problems with using GDP as a
measure of our country’s Output
4. Does not account for product quality
5. Does not subtract out for Economic BADS
i.e. Pollution
Ex. o/p of $500 B. but generates $100 B. of pollution
v. o/p of $450 B. with no pollution
6. Does not account for introduction of new goods. Therefore,
it’s hard to use GDP as a comparison with lots of years in
between.
7. And the NO. 7 problem with using GDP as a measure of our
nation’s output is…….
INFLATION
Index card:
• Rank these products purchased from your
local convenience store from least
expensive to most expensive:
– Gallon of ice cream
– Gallon of bottled water
– Gallon of gasoline
Video – biggest drawback to
using GDP as a measure of our
nation’s output is inflation. Why
do we need to study this?
Stossel Video—nominal vs. real
Problems with using GDP as a
measure of our country’s output
• 7. INFLATION—
 Nominal output—value the year it’s produced
 Real output—value when measured by other
year’s standard (other year’s dollars)
 CPI—market basket of goods
 GDP Deflator – C + I + G things
Year
1990
2000
Nom GDP
$ 800 B.
$1,000 B.
GDPD
100
138
REAL GDP
$800 B.
Problems with using GDP as a
measure of our country’s output
• 7. INFLATION—
 Nominal output—value the year it’s produced
 Real output—value when measured by other
year’s standard (other year’s dollars)
 CPI—market basket of goods
 GDP Deflator – C + I + G things
Year
1990
2000
Nom GDP
$ 800 B.
$1,000 B.
GDPD
100
138
REAL GDP
$800 B.
1000 X 100 = $724.64 B.
138
If the price index for 1978 is 207
(based on 1950 prices)
1. There has been 7 % inflation over those 28
2.
3.
4.
years.
There has been 107 % inflation over those 28
years.
There has been 20.7 % inflation over those 28
years.
We don’t have enough information to tell
anything about inflation.
An increase in the CPI indicates
that:
1. Real net worth of consumers is
increasing
2. Cost of buying a typical bundle of
goods is increasing
3. Purchasing Power of money is
increasing
4. Real Y of households is increasing
You go to work in 2000 at a salary of
$10,000 per year. In 2003, you get a $5000
raise. By 2006, you are earning $20,000.
How much is real income in 2003 and 2006
in terms of the year you started work?
Year
2000
Nom Y
$10,000
GDPD
100
2003
$15,000
135
2006
$20,000
150
REAL Y
$10,000
You go to work in 2000 at a salary of
$10,000 per year. In 2003, you get a $5000
raise. By 2006, you are earning $20,000.
How much is real income in 2003 and 2006
in terms of the year you started work?
Year
2000
Nom Y
$10,000
GDPD
100
2003
$15,000
135
2006
$20,000
150
REAL Y
$10,000
$15,000 X 100 = $11,111
135
$20,000 X 100 = $13,333
150
You go to work in 2000 at a salary of
$10,000 per year. In 2003, you get a $5000
raise. By 2006, you are earning $20,000.
How much is real income in 2003 and 2006
in terms of the year you started work?
Year
2000
Nom Y
$10,000
GDPD
100
2003
$15,000
135
2006
$20,000
150
REAL Y
$10,000
$15,000 X 100 = $11,111
135
$20,000 X 100 = $13,333
150
What does the CPI tell us?
Real income comparisons:
Year
1990
1995
Nom Y
$10,000
$15,000
GDPD
100
135
2000
$20,000
150
REAL Y
$10,000
$15,000 * 100 = $11,111
135
$20,000 *100 = $13,333
150
What does the CPI tell us?
• In this example, how much inflation
•
has there been from 1990 to 1995?
From 1995 to 2000?
To find the inflation rate from one year
to another:
– Set new base year PI to 100
– Find new PI for year desired:
Old Price index for year desired
X 100 = NEW PI
Old Price Index for new base yr.
Year
1990
1995
2000
GDPD
100
135
150
New GDPD
100
________
To find the inflation rate from one year
to another:
– Set new base year PI to 100
– Find new PI for year desired:
Old Price index for year desired
Old Price Index for new base yr.X 100 = NEW PI
Year
1990
1995
2000
GDPD
100
135
150
New GDPD
100
150
X 100 = 111
135
Class Work 7.2
• In the following example, please tell me
how much inflation there has been from
2000 to 2006.
Year
CPI
New CPI
1990
100
2000
107
______
2006
111
______
NA
Another way to look at inflation:
• Compare how long it took to earn
something (in hours, minutes, days—work
length required) in one year compared to
another year.
The left price column shows the price in
1897. The right price column shows how
much money we would earn if we worked
the same number of hours as we did in 1897
to buy that good.
For example, if we worked the
same amount of time in 1997 to buy
a dozen pencils as we had to to buy
them in 1897, we would’ve earned
$12.47. The true cost of a dozen
pencils today are $.89 and a box of
baking soda is $2. You can get a
nice upright piano today for $1,900
or a 1 carat diamond ring for
$2,500.
1908
$850
4,696 hr.
1955
$3,030
1,638 hr.
1997
$17,995
1,365 hr.
1908
$850
4,696 hr.
1955
$3,030
1,638 hr.
1997
$17,995
1,365 hr.
1908
$850
4,696 hr.
1955
$3,030
1,638 hr.
1997
$17,995
1,365 hr.
1908
$850
4,696 hr.
1955
$3,030
1,638 hr.
1997
$17,995
1,365 hr.
1908
$850
4,696 hr.
1955
$3,030
1,638 hr.
1997
$17,995
1,365 hr.
Drawbacks to using GDP as a
measure of our country’s output:
• Sen. Robert Kennedy voiced this criticism:
• The gross national product includes air pollution and
advertising for cigarettes and ambulances to clear our
highways of carnage. It counts special locks for our
doors and jails for the people who break them. GNP
includes the destruction of the redwoods and the death
of Lake Superior. It grows with the production of
napalm, and missiles and nuclear warheads... it does not
allow for the health of our families, the quality of their
education, or the joy of their play. It is indifferent to the
decency of our factories and the safety of our streets
alike. It does not include the beauty of our poetry or the
strength of our marriages, or the intelligence of our
public debate or the integrity of our public officials. It
measures everything, in short, except that which makes
life worthwhile.
Chap. 7 – National Y
Accounting
• With all the problems, why do we use GDP to
measure our country’s output?
– Best Measure we have
– Is good at measuring CHANGES (when not many
years in between)
– Even Simon Kuznets (inventor of GDP accounting)
recognized the problems:
Simon Kuznets:
(inventor of GDP accounting method, c. 1930s)
• ...the welfare of a nation can scarcely be
inferred from a measure of national
income. If the GDP is up, why is America
down? Distinctions must be kept in mind
between quantity and quality of growth,
between costs and returns, and between
the short and long run. Goals for more
growth should specify more growth of
what and for what.
End of Chapter 7