Download Chapter 5

Chapter 5. Measuring a Nation’s Production and Income
I.
General introduction (pp. 100 – 101)
A.
Macroeconomics--Definitions
1.
Macroeconomics—focuses on economy-wide phenomena, e.g., income, unemployment, inflation, growth
2.
Income—flow of payments over time in exchange for resources
3.
Unemployment—i.e., joblessness. Used as a labor market indicator as well as a proxy for overall capacity
utilization
4.
Inflation—a sustained increase in the general price level
a.
Goods price inflation
b.
Asset price inflation
c.
Cause of inflation—increase in money supply faster than increase in supply goods (more later)
2.
Circular flow model
a.
Origins—Tableau Economique, (Economic Table), François Quesnay, 1755
b.
Idea: Flow of resources, goods and services (real flow), reverse flow of money payments (nominal flow)
c.
See diagram, p. 101 & below
Simple Circular Flow Model
nue
e
v
Re
Firms
(businesses)
Fa
cto
r
Pa
d
he
s
i
Fin ods
go
Inp
uts
ym
en
ts
i.
ii.
iii.
iv.
II.
Product (goods)
Market
Pur
Con
sum
rs
to
c
Fa
(LL
KE
)
Factor (resource)
Market
cha
ses
ptio
n
KE
L
(L
a
on
i
t
Na
)
Households
m
co
n
lI
e
Households own factors but want goods
Firms purchase factors, produce goods
Outer loop is the money (nominal) loop
Inner loop is the resource/goods (real) loop
This leads us to the National Income Identity:
Total Spending
=
=
Total Income
=
GDP
III.
Gross Domestic Product, or GDP (pp. 102-107, 111-113, Notes 19, 19’)
A.
Definition—total market value of all final goods and services produced within an economy in a given year
1.
Goods are valued at market, i.e., actual sale price
2.
Final goods; no primary or intermediate goods (double counting otherwise)
◊
Wool sweater—count the final retail price, not wholesale, not the price of the wool, nor of the labor
3.
Within the geographic boundaries of a country/economic unit (contrast with GNP, p.108)
4.
Computed on an annual basis; in the US and most developed countries, updated each quarter
B.
Nominal vs. Real GDP (includes topics from section 5.4)
1.
Nominal GDP—measures production in current dollars
2.
a.
“Money GDP”
b.
Problem—value of the dollar changes over time (inflation/deflation)
Real GDP—measures production in constant dollars (dollar value of a particular year, extended over time)
a.
“Goods GDP”
b.
Calculated as
Real GDPt = Nominal GDPt
x
100 GDP Deflatort
where t stands for the time period, i.e., the year
C.
D.
IV.
c.
GDP Deflator (actually, Chain-type Index)—a price index
d.
Calculate an example using FRED data
e.
Why we use real GDP—see Notes 19
Components of GDP—Expenditure approach:
1.
GDP = C + I + G + (X – M)
a.
A better equation for our purposes would be:
GDP = CP + IP + CG + IG + (X – M)
--private (P) and government (G) consumption (C) and investment (I)
2.
See Notes 19’
3.
C = Consumption Expenditures
4.
I = Gross Domestic Private Investment
5.
G = Government Purchases
◊
Does not include transfer payments!
6.
(X – M) = Net Exports
a.
Also equals trade balance
b.
Differs from current account balance, which includes trade in services as well
Cross-Country comparisons
1.
Real GDP, Purchasing Power Parity (PPP)
2.
Per Capita Real GDP (PPP)
National Income (pp. 107 – 110)
1.
Concepts & Definitions
National Income Accounts
GDP
Gross Domestic Product
+ profits by US firms on foreign operations
+ US workers' remittances ‐ profits by foreign firms on US operations
‐ foreign workers' remittances
GNP
Gross National Product
‐ depreciation
NNP
Net National Product
‐ indirect taxes
NNI
Net National Income
‐ retained corporate profits
‐ taxes on production
‐ payroll taxes
‐ import tariffs
+ personal interest income
+ transfer payments
PI
Personal Income
‐ income taxes
PDI
2.
Personal Disposable Income
Value added
a.
Difference between cost of inputs and revenue earned by selling outputs
b.
c.
•
Can be negative (value subtracted) if outputs are less valuable than inputs.
Note: Market economies reward and encourage value adders with profits, and punish and discourage
value subtractors with losses. Socialist (redistributive) economies punish and discourage value adders
with taxes, and reward and encourage value subtractors with subsidies.
Note on Value Added Tax (VAT)
V.
The Circular Flow, mark 2
VI.
Real and Nominal GDP (pp. 111-113; see section III.B. above)
VII.
The Business Cycle (pp. 113 – 114; Notes 12)
• Refer to Notes 12 for a complete discussion of this topic
VIII.
Strengths and shortcomings of GDP as a measure of social welfare (pp. 114 – 117)
STUDY QUESTIONS FOR CHAPTER 5
1. Which of the four major components of GDP--C, I, G, or (X - M)--is most volatile? Briefly explain.
2. What is a value-adding firm? Value-subtracting firm? Which type is rewarded and which type is punished by a market economy?
In a socialist economy, how does this change? What are the consequences of this difference?
3. Which of the three components of consumer expenditures--durables, nondurables, and services--is most volatile? Briefly explain.
4. Briefly explain the method by which GDP is calculated.
5. How does real GDP differ from nominal GDP? Which measure is generally more useful? Explain. Be able to calculate real GDP,
given nominal GDP and the GDP deflator.
6. Briefly describe and contrast the GDP deflator (actually, the chain-type index) and the CPI.
7. How does GDP differ from GNP?