Download Gordon - Westminster College

CHAPTER 2
The Measurement of Income,
Prices, and Unemployment
It has been said that figures rule the world; maybe.
I am quite sure that it is figures which show us
whether it is being ruled well of badly
-Johann Wolfgang Goethe, 1830
Copyright 2000 Addison-Wesley Longman
Flows and Stocks
• Investment and the Capital Stock:
K = K-1 + I
– Capital stock = capital stock last year +
investment
• Saving and Wealth
W = W-1 + S
• Current Account and net International
Investment Position
– net international investment position (NIIP)
measures the net stock of outstanding loans
between a country and the rest of the world
NIIP = NIIP-1 + CA
• Public Debt and the Deficit
Dg = Dg-1 + DEF
Copyright 2000 Addison-Wesley Longman
National Income Accounting
• Purpose: measure the flow of output; it
measures the performance of the economy
for purposes of public policy
• Created in the aftermath of the Great
Depression, during WWII to determine the
capacity of US industry to help fight the war
Gross Domestic Product
• GDP is the most important measure of economic
output
• GDP is defined as the total value of all final goods
and services produced by the domestic economy
in one year
• Includes:
– Currently produced goods and services
– Goods sold on the market
– Excludes goods that are resold in the current period
• Genuine Progress Indicator
Copyright 2000 Addison-Wesley Longman
GDP and GNP
• GNP=total value of all goods and services
produced by the nation’s citizens
• GNP = GDP + NFP
• NFP (Net Foreign Product) = factor
payments to domestic residents abroad
minus factor payments to foreigners earned
domestically
Measuring GDP
Output Approach:
GDP = C + I + G + NX
Value-added Approach:
GDP = Wages + Profits +
Rents + Interest +
Indirect Business
Taxes
Figure 2-2 The Contribution of One Loaf of Bread to Consumption Expenditures and Income Created
Copyright 2000 Addison-Wesley Longman
Types of Expenditures
• Consumption ( C )
– durable goods
– nondurable goods
– services
• Investment (I)
– Inventory investment
– Fixed investment
• producer goods
• new construction
• Government (G)
– R = tax revenue
– F = transfer payments
– T = net taxes = R - F
• Net Exports (NX)
– exports
– Imports
Flow in equations
•
•
•
•
Y = C+S+T
E= C+I+G+(NX)
Y=E
C+S+T=
C+I+G+(NX)
• S+T= I+G+(NX)
Copyright 2000 Addison-Wesley Longman
• Saving and taxes
(income not consumed
equals that part of
expenditures that is
not consumed
• Leakages=withdrawals
from expenditures
(income not
consumed) S,T, IM
• Injections=expenditure
s not consumed) I,G,
EX
Figure 2-3 Introduction of Saving and Investment to the Circular Flow Diagram
Copyright 2000 Addison-Wesley Longman
Figure 2-4 Introduction of Taxation, Government Spending, and the Foreign Sector to the Circular Flow Diagram
Copyright 2000 Addison-Wesley Longman
Consumption as a Percentage of GDP
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1930
35
40
45
50
55
60
65
70
75
80
85
90
95
Investment as a Percentage of GDP
20%
15%
10%
5%
0%
1930
35
40
45
50
55
60
65
70
75
80
85
90
95
Government Spending as a Percentage of GDP
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1930 35
40
45
50
55
60
65
70
75
80
85
90
95
Exports and Imports
as a Percentage of GDP
14%
12%
10%
8%
6%
4%
2%
0%
1930
35
40
45
50
55
60
65
70
Years
Imports
Exports
75
80
85
90
95
Types of Income
•
•
•
•
•
Compensation
Corporate Profits
Proprietor Profits
Interest
Rents
Employee Compensation as a Percentage of National Income
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
30
35
40
45
50
55
60
65
Years
70
75
80
85
90
95
Corporate Profits, Proprietorships, and Interest as a Percentage of National Income
25%
20%
Pr opr i et or shi ps
15%
10%
Copor at e Pr of i t s
5%
I nt er est
0%
30
-5%
35
40
45
50
55
60
65
70
75
80
85
90
95
Other Measures of Economic Output
• Net national product (NNP) = GNP depreciation
• National Income (NI) = NNP - indirect
taxes + business transfer payments (gifts,
etc)
• Personal Income (PI) = NI
– - contributions to social insurance (FICA)
– - corporate profits minus dividends
– + personal interest income from the
government and consumers
– + government transfer payments (e.g.,
unemployment insurance, relief, benefits to
veterans)
• Disposable Income (Yd) = NI - personal
taxes
GDP over time
Figure 2-5 Nominal GDP, Real GDP, and the Implicit GDP Deflactor, 1900-98
Copyright 2000 Addison-Wesley Longman
1987
1999
0.10 $
0.20 $
0.20
0.25
Prices
Apples
Bananas
Physical outputs
Apples
Bananas
Nominal Expenditures
Apples
Bananas
Total: Nominal GDP
Constant Dollar Expenditures
at 87 prices
at 99 prices
Expenditures each Year
At fixed 87 quantitites
At fixed 99 quantitites
$
$
30
10
20
20
$
$
$
3.00 $
2.00 $
5.00 $
4.00
5.00
9.00
$
$
5.00 $
8.50 $
6.00
9.00
P87*Q87 P87*Q99
P99*Q87 P99*Q99
$
$
5.00 $
6.00 $
8.50
9.00
P87*Q87 P99*Q87
P87*Q99 P99*Q99
Real GDP
At 87 prices
At 99 prices
Chain-weighted
GDP Deflator
at 87 quantities
at 99 quantities
Chain-weighted
Copyright 2000 Addison-Wesley Longman
1
1.2
1 1.058824
1
1.13
1
1
1
1.7
1.5
1.59
Figure 2-6 The U.S. Ratio of Actual to Natural Real GDP (Y/YN) and the Unemployment Rate, 1956-98
Copyright 2000 Addison-Wesley Longman
Relation Between Unemployment and the Business Cycle
• Okun’s law: for every 2 percent increase in
GDP, unemployment falls by 1 percent
Copyright 2000 Addison-Wesley Longman
Unemployment Rate
Unemployment Rate
30%
20%
10%
0%
1930 35 40 45 50 55 60 65 70 75 80 85 90 95
Vi et namOi l Fed
Gr eat WWI I Kor ean
Embar goI nduced
Depr essi on War
Recessi on
Copyright 2000 Addison-Wesley Longman
Selected Unemployment Rates
14.0
12.0
10.0
8.0
Japan
Germany
6.0
UK
4.0
2.0
Copyright 2000 Addison-Wesley Longman
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
19
70
0.0