Download GDP - OBS

III
THE DATA OF MACROECONOMICS
CHAPTER 5 MEASURING A NATION’S INCOME
Measuring a Nation’s
Income
5
Microeconomics and Macroeconomics
• Microeconomics is the study of how
individual households and firms make
decisions and how they interact with one
another in markets
• Macroeconomics is the study of the
economy as a whole
• Its goal is to explain the economic changes
that affect many households, firms, and
markets at once
CHAPTER 5 MEASURING A NATION’S INCOME
Macroeconomics
• Macroeconomics answers questions like
the following:
• Why is average income high in some countries
and low in others?
• Why do prices rise rapidly in some time
periods while they are more stable in others?
• Why do production and employment expand in
some years and contract in others?
CHAPTER 5 MEASURING A NATION’S INCOME
Total Income
• When judging whether the economy is
doing well or poorly, it is natural to look at
the total income that everyone in the
economy is earning
• We can temporarily boost our standard of
living by borrowing from others.
• But in the long run we can’t depend on
others; our standard of living depends
heavily on our own total income
CHAPTER 5 MEASURING A NATION’S INCOME
Income = Expenditure
• We could measure either total income or
total expenditure
• the result would be the same either way
• For an economy as a whole, income must
equal expenditure because:
• Every transaction has a buyer and a seller.
• Every dollar of spending by some buyer is a
dollar of income for some seller.
CHAPTER 5 MEASURING A NATION’S INCOME
But what about saving?
• Q: People typically save part of what they
earn. How then is income equal to
expenditure for the economy as a whole?
• A: What people save tends to be loaned to
businesses who then spend what they
borrowed.
CHAPTER 5 MEASURING A NATION’S INCOME
International Trade
• We buy foreign-made goods and foreigners
buy goods made by us
• Q: In that case, how can our total income
be equal to our total expenditure?
• A: Very good point! It is better to say that
total income equals the total expenditure on
domestically produced goods (GDP)
CHAPTER 5 MEASURING A NATION’S INCOME
Gross Domestic Product
• Gross Domestic Product (GDP) is one
measure of a country’s total income
• There are other measures
• GDP is the total market value of all final
goods and services produced within a
country in a given period of time.
• For example, the GDP of the United States
was more than fourteen trillion dollars in 2008
• $ 14,264.60 billion, according to the U.S.
Department of Commerce
CHAPTER 5 MEASURING A NATION’S INCOME
GDP is the Market Value …
• In GDP, all output is valued at market
prices.
• The market value of all sandwiches
produced is both the total expenditure of
the buyers of those sandwiches and the
total income of the makers of those
sandwiches
• As our goal is to measure total income, it
therefore makes sense to measure the
market values of the various produced
goods and add them up
CHAPTER 5 MEASURING A NATION’S INCOME
… Of All Final Goods …
• GDP records only the value of final goods,
not intermediate goods
• Intermediate goods are those goods that
disappear inside other goods that are
produced for sale
• Final goods are goods that are not intermed
iate goods
• This way, the value of intermediate goods
is counted only once, not twice or thrice.
CHAPTER 5 MEASURING A NATION’S INCOME
… Of All Final Goods …
• Intermediate goods are sold by their producers to
producers of other goods
• Examples: milk sold by a dairy to an ice-cream
company, grapes sold by a vineyard to a winemaker,
printer paper sold to Kinko’s
• Final goods are goods that are sold to the final
users of those goods
• Examples: milk you buy at the supermarket, table
grapes you buy at the farmer’s market, printer paper
you buy for your computer printer
• All goods made this year but not sold by year’s end are
regarded as final goods (inventories)
CHAPTER 5 MEASURING A NATION’S INCOME
… Of All Final Goods …
• Suppose a dairy farmer sells milk worth $50,000 to an icecream company.
• The farmer does not buy anything from any other firm.
• The total income of the dairy farmer and her employees
is, therefore, $50,000
• The ice-cream company uses the milk to produce icecream which it sells for $75,000.
• The ice-cream company does not buy anything from any firm
other than the dairy.
• Therefore, the total income of the owners and employees
of the ice-cream firm is $25,000.
• Therefore, the total income of this country is $75,000
• This is accurately measured by the value of the ice-cream
(the final good) alone
• Had we also counted milk, the intermediate good, we
would have calculated total income to be $125,000, which
would have been an exaggeration.
CHAPTER 5 MEASURING A NATION’S INCOME
… and Services …
• GDP includes both
• tangible goods (food, clothing, cars) and
• intangible services (haircuts, housecleaning,
doctor visits, legal consultations).
• Trade in assets does not affect GDP.
• Such trade does not require new productive
activity, it is merely the transfer of ownership of
an asset from one person to another
CHAPTER 5 MEASURING A NATION’S INCOME
… Produced Within a Country …
• GDP measures the value of all production
within the geographic boundaries of a
country.
• The citizenship of the owners of the
resources used in production is not the key
issue
• Production by foreigners living in a country
is counted in the country’s GDP
• Production by a country’s citizens working
in other countries is not counted
CHAPTER 5 MEASURING A NATION’S INCOME
… In a given period of time
• GDP measures the value of production that
takes place within a specific interval of
time, usually a year or a quarter (three
months).
• GDP includes goods and services currently
produced, not transactions involving goods
produced in the past.
• Transactions involving used cars or buildings
that were constructed in the past are not
counted
CHAPTER 5 MEASURING A NATION’S INCOME
What’s not counted in GDP?
• GDP includes all items produced in the
economy and sold legally in markets.
• It excludes items produced and sold illicitly,
such as illegal drugs.
• GDP excludes most items that are
produced and consumed at home and that
never enter the marketplace.
CHAPTER 5 MEASURING A NATION’S INCOME
Real Versus Nominal GDP
• Nominal GDP values the production of
goods and services at current prices.
• Real GDP values the production of goods
and services at constant prices.
CHAPTER 5 MEASURING A NATION’S INCOME
CHAPTER 5 MEASURING A NATION’S INCOME
Real and Nominal GDP of USA
CHAPTER 5 MEASURING A NATION’S INCOME
The GDP Deflator
• The GDP deflator is a measure of the price
level calculated as the ratio of nominal
GDP to real GDP times 100.
• It tells us what part of the rise in nominal
GDP is attributable to a rise in prices rather
than a rise in the quantities produced.
CHAPTER 5 MEASURING A NATION’S INCOME
The GDP Deflator
• The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
CHAPTER 5 MEASURING A NATION’S INCOME
Example: 2009
• US Nominal GDP was $14,119.0 billion
• US Real GDP was $12,880.6 billion
(chained 2005 dollars)
• US GDP Deflator = (14,119.0/12,880.6) ×
100 = 109.6
• This means that, roughly, final goods and
services were on average 9.6% pricier in 2009
compared with 2005
CHAPTER 5 MEASURING A NATION’S INCOME
Converting Nominal GDP to Real GDP
• Nominal GDP is converted to real GDP as
follows:
Real GDP20XX
Nominal GDP20XX

 100
GDP deflator20XX
CHAPTER 5 MEASURING A NATION’S INCOME
Table 2 GDP Deflator
CHAPTER 5 MEASURING A NATION’S INCOME
Components of GDP
• We need to pay attention not only to the value
of all final goods and services made in a
country (GDP), we also need to watch where
the demand is coming from
• That way, when there’s a recession, we’ll
know which sector needs the most attention
• GDP = Consumption Spending +
Investment Spending +
Government Spending +
Exports – Imports
CHAPTER 5 MEASURING A NATION’S INCOME
Components of GDP
• GDP = Consumption Spending +
Investment Spending +
Government Spending +
Exports – Imports
• Q: Why do we subtract imports?
• A: GDP is the market value of all final “Made
in USA” goods. But consumption, investment,
and government spending all include foreign
goods. Therefore, to make the two sides of
the equation the same, we must take out all
imported goods
CHAPTER 5 MEASURING A NATION’S INCOME
The Components Of GDP
• Consumption (C):
• The spending by households on goods and
services, with the exception of purchases of
new housing.
• Investment (I):
• The spending on capital equipment,
inventories, and structures, including new
housing.
CHAPTER 5 MEASURING A NATION’S INCOME
The Components Of GDP
• Government Purchases (G):
• The spending on goods and services by local,
state, and federal governments.
• Does not include transfer payments because
they are not made in exchange for currently
produced goods or services.
• Net Exports (NX):
• Exports minus imports.
CHAPTER 5 MEASURING A NATION’S INCOME
Table 1 GDP and Its Components (2004)
CHAPTER 5 MEASURING A NATION’S INCOME
GDP and Its Components (2004)
Government Purchases
15%
Net Exports
Investment
-5 %
16%
Consumption
70%
CHAPTER 5 MEASURING A NATION’S INCOME
Consumption, percent of real GDP
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1920
1930
1940
1950
1960
CHAPTER 5 MEASURING A NATION’S INCOME
1970
1980
1990
2000
2010
2020
Investment, percent of real GDP
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
1920
1930
1940
1950
1960
CHAPTER 5 MEASURING A NATION’S INCOME
1970
1980
1990
2000
2010
2020
Government Spending, percent of real GDP
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1920
1930
1940
1950
1960
CHAPTER 5 MEASURING A NATION’S INCOME
1970
1980
1990
2000
2010
2020
18.00
16.00
U.S. Exports and Imports, as a
percentage of real GDP
14.00
12.00
10.00
EX
IM
8.00
6.00
4.00
2.00
0.00
1920
1930
1940
1950
1960
1970
CHAPTER 5 MEASURING A NATION’S INCOME
1980
1990
2000
2010
2020
Net Exports, percent of real GDP
3.00
2.00
1.00
0.00
1920
1930
1940
1950
1960
-1.00
-2.00
-3.00
-4.00
-5.00
-6.00
-7.00
CHAPTER 5 MEASURING A NATION’S INCOME
1970
1980
1990
2000
2010
2020
Growth rates
new value -old value
percent change 
100
old value
CHAPTER 5 MEASURING A NATION’S INCOME
• http://research.stlouisfed.org/fred2/series/GDPCA
CHAPTER 5 MEASURING A NATION’S INCOME
Where to find US data
• Bureau of Economic Analysis, U.S.
Department of Commerce: http://bea.gov
• Federal Reserve Bank of St. Louis:
http://research.stlouisfed.org/fred2/categori
es/18
CHAPTER 5 MEASURING A NATION’S INCOME
International Comparisons
• When the GDP numbers for various
countries’ are being compared, the same
currency units must be used
• There are two ways of converting from
national countries to a common currency,
such as the US dollar
• Use market exchange rates
• Use a common set of prices (PPP)
CHAPTER 5 MEASURING A NATION’S INCOME
GDP per capita, in US dollars
PPP
Market Exchange Rates
44063.34
44063.34
United Kingdom 33849.18
40237.54
Japan
32051.81
34263.64
Uruguay
10584.77
6036.12
Ukraine
6269.05
2324.32
China
5815.12
4657.28
2891.94
2021.97
India
2317.19
762.14
Bangladesh
1223.01
417.66
724.61
202.05
333.45
170.88
United States
Albania
Ethiopia
Liberia
Source:
Economic
Outlook
2008 database, IMF
CHAPTER World
5 MEASURING
A NATION’S
INCOME
GDP And Economic Well-being
• GDP is the best single measure of the
economic well-being of a society.
• GDP per person tells us the income and
expenditure of the average person in the
economy.
CHAPTER 5 MEASURING A NATION’S INCOME
Table 3 GDP, Life Expectancy, and Literacy
CHAPTER 5 MEASURING A NATION’S INCOME
GDP And Economic
Well-being
• Some things that contribute to well-being
are not included in GDP.
• The value of leisure.
• The value of a clean environment.
• The value of almost all activity that takes place
outside of markets, such as the value of the
time parents spend with their children and the
value of volunteer work.
CHAPTER 5 MEASURING A NATION’S INCOME
Robert Kennedy on GDP
• [Gross Domestic Product] does not allow for the
health of our children, the quality of their
education, or the joy of their play. It does not
include the beauty of our poetry or the strength of
our marriages, the intelligence of our public
debate or the integrity of our public officials. It
measures neither our courage, nor our wisdom,
nor our devotion to our country. It measures
everything, in short, except that which makes life
worthwhile, and it can tell us everything about
America except why we are proud that we are
Americans.
CHAPTER 5 MEASURING A NATION’S INCOME
Any questions?
CHAPTER 5 MEASURING A NATION’S INCOME
Summary
• Because every transaction has a buyer and
a seller, the total expenditure in the
economy must equal the total income in the
economy.
• Gross Domestic Product (GDP) measures
an economy’s total expenditure on newly
produced goods and services and the total
income earned from the production of these
goods and services.
CHAPTER 5 MEASURING A NATION’S INCOME
Summary
• GDP is the market value of all final goods
and services produced within a country in a
given period of time.
• GDP is divided among four components of
expenditure: consumption, investment,
government purchases, and net exports.
CHAPTER 5 MEASURING A NATION’S INCOME
Summary
• Nominal GDP uses current prices to value
the economy’s production. Real GDP uses
constant base-year prices to value the
economy’s production of goods and
services.
• The GDP deflator—calculated from the
ratio of nominal to real GDP—measures
the level of prices in the economy.
CHAPTER 5 MEASURING A NATION’S INCOME
Summary
• GDP is a good measure of economic wellbeing because people prefer higher to
lower incomes.
• It is not a perfect measure of well-being
because some things, such as leisure time
and a clean environment, aren’t measured
by GDP.
CHAPTER 5 MEASURING A NATION’S INCOME