Download The Language of Macroeconomics

MACROECONOMICS
AND THE GLOBAL BUSINESS ENVIRONMENT
The Language of Macroeconomics:
The National Income Accounts
PowerPoint by Beth Ingram
University of Iowa
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.
2-2
Key Concepts
 Gross Domestic Product (GDP)
 Gross National Income
 Real and Nominal Measures
 National Income Accounts
 GDP and Human Welfare
2-3
Gross Domestic Product
 Total market value of final goods and services
produced in a country during a given period
 Need to know


How much was produced (quantity)
What the production was worth (price)

Why do we need to know the price?
 Price provides a common unit in which to
value quantities

Important when you have more than one type
of good
2-4
Example -- Company X
 Production in 2002


Production in 2004
200 washers at $500
100 dryers at $400


200 washers at $600
100 dryers at $450
Nominal Production = 200 x $500 + 100 x $400
= $140,000
Nominal Production = 200 x $600 + 100 x $450
= $165,000
Problem: dollar value of output higher, but real output the same
2-5
Nominal GDP vs. Real GDP
Important Distinction
 Nominal GDP: measure output in current prices
= py
 Real GDP (y): accounts for price change
---measure output in constant prices
---use prices from a base year
---is an index
 Difference between Nominal GDP and Real GDP is
the change in prices


Nominal GDP/Real GDP = GDP Deflator => tells
change in prices => price index
(py)/p = y
2-6
By how much has production increased between
2002 and 2005? (using 2002 as base year for prices)
 Production in 2002


200 washers at $500
100 dryers at $400
Production in 2005


300 washers at $600
100 dryers at $450
Real Production (2005) = 300 x $500 + 100 x $400 = $190,000
Real Production (2002) = 200 x $500 + 100 x $400 = $140,000
Growth Rate = ($190,000-$140,000)/$140,000 = 35.71%
2-7
By how much has production increased between
2002 and 2005? (using 2005 as base year for prices)
 Production in 2002


200 washers at $500
100 dryers at $400
Production in 2005


300 washers at $600
100 dryers at $450
Real Production (2005) = 300 x $600 + 100 x $450 = $225,000
Real Production (2002) = 200 x $600 + 100 x $450 = $165,000
Growth Rate = ($225,000-$165,000)/$165,000 = 36.36%
2-8
Chain Weighted Prices
 Problems with fixed prices


Different growth rates dependent on which
base year for price is used
Fixed price assumes fixed fundamental value
society places on good
 Chain weighting as “averaging” of prices

Chain-weighted growth of 36.03%
2-9
GDP Annual Percent Growth
Indonesia, Real and Nominal GDP growth
60
50
40
30
Percent
20
10
0
-10
-20
90
91
92
Nominal GDP growth
93
94
95
96
97
98
99
00
01
02
Real GDP Growth
Source: EcoWin
2-10
A Closer Look at GDP
 GDP = (1) total market value of (2) final goods and
services produced in a (3) country during a (4) given
period

(1) Total market value
 Prices reflect value placed on good/service by
society
Ignores non-market economic activity
(2) Final goods & services
 No intermediate goods…avoid double counting
(3) In a country/region…domestically produced
(4) Given period
 No used sales counted
 Services rendered on used sales is counted




2-11
GDP as Value-Added Measure
(Bread Example)
Revenues – Cost of purchased inputs = Value added
Company
ABC Grain
$0.50
$0.00
$0.50
General Flour
$1.20
$0.50
$0.70
Hot’n’Fresh
$2.00
$1.20
$0.80
Total
$2.00
GDP equals final goods sold = $2.00
Or
GDP equals valued added
= $0.50 + $0.70 + $0.80 = $2.00
2-12
Measures of Output
 product (output) approach: The
market value of the final goods and services
produced in a country during a given period
 expenditure approach: how much
households, firms, government, and
foreigners spend on GDP
 Income approach: the income generated
from making GDP

Payments to labor and capital
2-13
Three Measures GDP are Equal
Production
Product
Market
value of
final
goods
and
services
Expenditure
Expenditure
Income
Income
Consumption
Labor Income
=
=
=
=
Investment
Government
purchases
Net exports
Capital
Income
2-14
Product Approach: Sectors as a % of
GDP (2001)
U.S.
80
70
60
50
40
30
20
10
0
Low Income
Middle Income
Agriculture
Industry
High Income
Service
2-15
Income Approach
 Global Rule of Thumb: 70% of income goes to labor,
30% of income goes to capital
 U.S. example
1993-2003: Functional Distribution of Income
Other, 8.8%
Interest, 6.0%
Corporate Profits,
10.2%
Rental Income,
1.8%
Proprietors
Income, 8.1%
wages, salaries,
benefits, 65.2%
2-16
Expenditure (Demand) Approach
Y = C + G + I + NX


Consumption by individuals (C)
Consumption and investment by government (G)


Investment by the private sector (I)


Does not include transfer payments
Generally presented in two subcategories
(1)
Gross Capital Formation
(2)
Change in Inventories
Net Exports (NX)…exports-imports
2-17
Expenditure (Demand) Approach
 Expenditure approach often used to see what
forms of spending are driving economic
growth
 Calculate contributions to growth
Expenditure Componentt 1
 Growth Rate of Expenditure Componentt
GDPt 1
2-18
Expenditure (Demand) Approach
Contribution to Growth
8%
6%
4%
2%
0%
-2%
Source: BEA
04
20
02
20
00
20
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
82
19
80
-4%
19
84
U.S. GDP Growth Rate
Contribution from Private & Public Consumption, Housing Investment
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
2-19
Expenditure (Demand) Approach
U.S. Consumption as a % of GDP
90%
85%
80%
75%
70%
65%
2-20
World GDP
2004 Dollar Size of the World GDP
$45,000.00
$40,000.00
$35,000.00
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
th
er
O
a
in
ric
a
Af
is
em
W
.H
Ch
ph
er
e
pa
n
Ja
o
Eu
r
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.
U
W
or
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$0.00
2-21
World GDP
Value of Economy ($ Billions)
$14,000.00
$12,000.00
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$0.00
Dollar Value
PPP Dollar Value
China
U.S.
2-22
GDP Per Capita
GDP Per Capita (Thousands PPP $)
$45,000.00
$40,000.00
$35,000.00
$30,000.00
$25,000.00
$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
China
U.S.
2-23
GDP and GNI
 GDP
 Output produced within a geographic location (US,
Italy, etc.)
 GNI (Gross National Income)
 Also called GNP (Gross National Product)
 Output produced by citizens of a geographic region
 Value must be remitted back to country
 GNI = GDP + NFP (Net Factor Payments)
 NFP = payments to domestically owned factors (labor
and capital) located abroad minus payments to foreign
factors located domestically
 Payments: (1) net dividends, interest, rent flows
abroad (2) net wage flows abroad
2-24
Example
 Joe Canadien, citizen of Canada, works in US
and sends wages back to Canada
US GDP includes Joe’s wages
Canadian GNI includes Joe’s wages
2-25
GDP: Two Questions
 Does GDP correctly measure
production?
 Is GDP a good proxy for welfare?
2-26
GDP Measurement Problems
 Underground economic activity


Illegal activities
Tax avoidance
 Non-market transactions


Homemaking
Leisure
 Negative consequences of production

pollution
2-27
Does Increased GDP = Improved Human
Welfare?
Indicator
All developing
countries
Least developed
countries
Industrialized
countries
GDP per person
(U.S. dollars)
3,530
1,170
25,860
Life expectancy at
birth (years)
64.5
51.7
78.0
Infant mortality rate
(per 1,000 live births)
61
100
6
Under-5 mortality rate
(per 1,000 live births)
89
159
6
Doctors
(per 100,000 people)
78
30
252
Incidence of HIV/Aids
(% in 15-49 age group)
1.3
4.3
0.3
Undernourished
people (%)
18
38
Negligible
Primary enrollment
rate (as % of age group)
85.7
60.4
99.9
Secondary enrollment
rate (as % of age group)
60.4
31.2
96.2
Adult literacy rate (%)
72.9
51.7
98.6
2-28
Does Increased GDP = Improved
Human Welfare?
 Is more output better?
 Human Development Index




Table from UNDP website
Animated comparisons
HDI calculator
Note that as countries get richer, income per
capita plays smaller role
2-29
Summary
 Need for consistent set of data
 Real and Nominal Variables
 GDP and GNI
 Value added = Income = Total Expenditure
 GDP a rough proxy for human welfare
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