Download Chapter_07_Macro_13e_class_slides

Macro Chapter 7
Taking the Nation’s
Economic Pulse
4 Learning Goals
1) Define gross domestic product and
describe the key phrases of the definition
2) List the ways to measure gross domestic
product and identify the source of higher
income levels
3) Differentiate between real and nominal
GDP
4) Examine the limitations of using GDP as
a measure of output and income(on your
own)
GDP – A Measure of Output
Definition of Gross Domestic
Product (GDP):
The market value of final goods and
services produced within a country during
a specific time period.
GDP as a Measure of Both
Output and Income
First way to measure GDP:
expenditure approach
GDP = sum of purchases
GDP = Y = C + I + G + X
C = consumption; purchases for goods and
services by consumers
I = investment
G = government purchases
X = net exports (exports – imports)
Investment ≠ buying stocks and
bonds
Investment = businesses buying final
goods and services to use in their
production of another good
AND
consumers buying houses
Second way to measure GDP:
income approach
Add up income generated in the
production of goods and services
The two methods of calculating GDP are
summarized below:
Expenditure Approach
Resource Cost-Income Approach
Personal consumption expenditures
Aggregate income:
Employee Compensation
Income of self-employed
Rents
Profits
Interest
+
Gross private domestic investment
+
Government consumption
and gross investment
+
Net exports of goods and services
= GDP
+
Non-income cost items:
Indirect business taxes
and depreciation
+
Net income of foreigners
= GDP
Key Point:
Higher income levels come from (are caused by)
more output
That is, more output comes first, then higher
income comes second
Adjusting for Price Changes
and Deriving Real GDP
Nominal (money) _________ = current
year data only
Real __________ = adjusted for inflation
Use a price index to adjust nominal data
into real data
These two indexes are used to
adjust nominal data to real data.
CPI: representative sample of goods
bought by households, “market basket”
GDP deflator: accounts for almost all
goods bought (broader measure than CPI)
Inflation = the percentage change in an
index
The simplest example
Suppose all prices doubled between 1950
and 2000. Then $1 in 1950 would be
equal to $2 in 2000. Or, $1 in 2000 would
be equal to $0.50 in 1950.
Problems with GDP as a
Measuring Rod
4) Examine the limitations of using GDP as
a measure of output and income(on your
own)