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Intermediate Macro: Measuring GDP Jeffrey H. Nilsen Inflation and Unemployment Ch. 12 Monetary Policy Fiscal Policy Ch. 14 Ch. 15 Business Cycles IS-LM, AD-AS Classics (RBC) Keynesians Open Economy Asset Market Ch. 7 Ch. 8 Ch. Ch. Ch. Ch. 9 10 11 13 Labor Market Ch. 3 Measurement Ch. 2 Growth Ch. 6 Goods Market Ch. 4, Open 5 Macro: study of structure and performance of national economies and the policies gov’t tries to use to affect economic performance. http://video.ft.com/3705256588001/Big-daybig-week-for-US-indicators/Markets GDP defined within the 3 approaches Expenditure App: GDP: total spending on final goods & svcs by domestic households (C), domestic firms (I), gov’t (G) and foreigners (NX) Product App GDP: mkt value of final goods & svcs newly produced within nation’s borders Income App GDP: total incomes of workers (wages), firms (profits) & gov’t (taxes) Expenditure App Apple Co Total Rev. 35 Sales to Public 10 Sales to JC 25 Juice Co 40 25 (paid to AC) Net Exports: Add EX since foreigners’ purchases of BG goods adds to output Subtract IM: spending C, I, G includes imports Omit transfers (e.g. U benefits) since they’re not exchanged for services Spent by purchasers of final goods (example only consumers: GDP = 50) Product App Mkt value of final goods & svcs newly produced within nation’s borders Mkt value (weigh goods by their price so e.g. 5 cars count more than 5 shoes) Ignore non-market goods, e.g. housekeeping Underground economy: try to adjust for unreported transactions Gov’t services (not sold at market price): value at cost of provision Newly produced: not e.g. resale of old house (although include value of real estate agent’s services) Final goods & services: Ignore intermediate goods (inputs used up producing goods in same period as produced). Examples of “surprising” final goods: Car sold as taxi not used up in period produced: a capital good (creates other goods) Inventory investment: (change in inventory over period) e.g. baker’s 1000 flour rises to 1100 (unused output [of mill] that will add to future output) Product App (Add up Value Added) Value Added = sales revenues – cost of intermediate goods AC: 35 – 0 JC: 40 – 25 GDP = 50, again Apple Co Total Rev. 35 Sales to Public 10 Sales to JC 25 Juice Co 40 25 (paid to AC) GNP = GDP + NFP GNPBG BG workers fgn pay “-“ Fgn workers BG pay GNP: output produced by a nation’s factors, wherever located GDPBG BG Factors in BG GDP: output produced within nation’s borders, whoever produces it NFP NFP = pay to BGers abroad less pay to foreigners in BG GDP = NFP = GDP + NFP = bg-citizens’-pay + my-bg-pay your-us-pay – my-bg-pay GNP Income App GDP again 50 Apple Co Total Rev. 35 Sales to JC 25 Wages Paid 15 Taxes Paid 5 Profit 35 – 15 – 5 = 15 Juice Co 40 25 (paid to AC) 10 2 40 – 25 – 10 – 2 = 3 Building Disposable Income from National Income Note: text ignores VAT (USA has no VAT) Saving: current income less spending on current needs S PRIV GNP T TR INTGov C DI PRIV SGOV T TR INTGov G S NAT = Y S PRIV SGOV = (C + I + G + NX) S PRIV I NX NFP S GOV CA + + NFP – C – G NFP – C – G Uses of Private Savings Identity S PRIV I NX NFP S GOV CA What can be done with $1 of private savings ? I: lend to domestic firms wanting to buy new capital goods (- SGOV): lend to government wanting to spend more than it receives in tax revenues CA surplus: lend to foreigners who want to purchase your goods (more than you want to buy their’s) Savings is a “flow” augmenting wealth (a “stock”) National Wealth: BG’s stock of physical assets + NFA (net foreign assets): BG-owned assets abroad less Foreign-owned assets in BG NB: Domestic financial assets NOT wealth (since offsetting liabilities) Wealth rises with positive savings or if value of existing assets rises Nominal & Real GDP Nominal is measured at current market P (adds up values of many different goods) Real is measured in base-year prices (to neutralize effect of price changes in comparison over time) Nominal GDP: Y P value (PY) total value (GDP) Y1 computers bikes computers bikes computers bikes 5 10 200 250 $1,200 $600 $200 $240 _______ _______ _______ _______ _______ Y2 _______ Nominal GDP: Y P value (PY) Y1 computers bikes computers bikes computers bikes total value (GDP) 5 200 $1,200 $200 $6,000 $40,000 $46,000 $66,000 Y2 10 250 $600 $240 $6,000 $60,000 Real GDP (Y 1 prices) units P value Y1 computers 5 bikes 200 computers $1,200 bikes $200 computers ______ bikes ______ real GDP ______ ______ Y2 10 250 ------______ ______ Real GDP (Y 1 prices) units P value Y1 computers 5 bikes 200 computers $1,200 bikes $200 computers $6,000 bikes $40,000 real GDP $46,000 $62,000 Y2 10 250 ------- $50,000 $12,000 Price Index measures average price level: GDP deflator GDP deflator: amount to divide nominal Y to get real Y nominal GDP real GDP P Y GDP defl. Y GDP defl. “Variable weight index” nominal Y uses each good’s current P (if PORANGE rises, nominal Y reflects the actual quantity sold) Price Index measures average price level: CPI value basket at current prices CPI value basket at base year prices “Fixed weight price index”: uses P of same basket (until it’s revised) Base period: year when CPI = 100 (currently 1982) Expenditure base period: year when basket components chosen (currently 2005) Calculating Growth Rates (always in percentages) Y growth: (Yt+1 - Yt)/Yt Price level growth: (Pt+1 - Pt)/Pt Interest rates or returns: (end price – start price)/start price Practice Multiple Choice 1 1. The primary factor that caused most economists to lose their faith in the classical approach to macroeconomic policy was (a) the high levels of unemployment that occurred during the Great Depression. (b) the presence of both high unemployment and high inflation during the 1970s. (c) the theoretical proof that classical ideas were invalid. (d) the evidence that classical ideas were useful during economic booms, but not during economic recessions. These questions are taken from 2012 exam 1 Practice Question 2 2. Bigdrill inc. drills for oil, which it sells for $200 million to Bigoil inc. to be made into gas. Bigoil inc’s gas is sold for a total of $600 million. What is the total contribution to the country’s GDP from Bigdrill and Bigoil? (a) $200 million (b) $400 million (c) $600 million (d) $800 million 3. In 2002, private saving was $1590 billion, investment was $1945 billion, and the current account balance was – $489 billion. From the uses-of-saving identity, how much was government saving? (a) –$134 billion (b) –$844 billion (c) $844 billion (d) $134 billion 4. Intermediate goods are (a) capital goods, which are used up in the production of other goods but were produced in earlier periods. (b) final goods that remain in inventories. (c) goods that are used up in the production of other goods in the same period that they were produced. (d) either capital goods or inventories. Example short answer 1. The country of Old Jersey produces milk and butter. It’s published this data, where quantities are in gallons and prices are $ per gallon. 2003 2004 Good Qty Price Qty Price Milk 500 $2 900 $3 Butter 2000 $1 3000 $2 (a) From 2003 to 2004, nominal GDP grew (b) From 2003 to 2004, use 2003 as base year to find real GDP growth