Download Measurement of Economic Variables

Measurement of Economic
Variables
Gross domestic product (GDP)
• GDP is the dollar value of all final goods
and services produced by a domestic
economy in a years time.
Fair model
• FAIRMODEL site
Gross National Product (GNP)
• GNP=Income earned by U.S. residents
• GNP=GDP-payments to foreigners who
own assets located in the U.S. +
payments to U.S. residents who own
foreign assets
GDP=Household income in this
class
• NNP=GNP-IBT
– GNP=Gross National Product
– IBT = Indirect Business Taxes (sales tax)
– NNP=Net National product\
Assume IBT = 0, so
NNP=GDP
• NI=NNP-CCA = GDP - CCA
– NI = National Income
– CCA = Capital Consumption Allowence
(depreciation)
Assume CCA = 0
NI=NNP=GDP
Source of Household Income
• Assume no foreign sector, no retained
earnings, no corporate taxes
• GDP = NI = Household Income=Y
Uses of Household Income
• Y=C+S+T
– C=Consumption
– S=Household Saving
– T=Taxes
YD=Y-T
YD = Disposable Income
Spending
• AE=C +Ir + G
– AE = Aggregate Expenditures
– C = Household spending
– Ir = Realized Investment (Business spending)
– G = Government spending
AE = GDP = Y
Value Added
• VA = Value Added
•
= Revenue – Cost of Materials
Value Added.xls
• Sum of VA at each stage of production =
price of a good
• Sum of VA for all firms = final price of all
output.
• Sum of VA for all firms = GDP
• VA automatically eliminates double
counting of output.
• Profits = Revenue – Costs
• Profits = Revenue –
•
Wages – Rent – Interest –
•
Cost of Materials
• Profits + Wages + Rent + Interest =
•
Revenue – Cost of Materals
• Profits + Wages + Interest + Rent = VA
• Sum (Profits+Wages+Interest+Rent) =
•
Sum(VA)
• Sum (Profits+Wages+Interest+Rent)=GDP
• Sum(Household Income) = GDP
Planned Spending
• Firms may spend more than they plan to
(inventories build up)
• Actual Expenditures=C + Ir + G
• Planned Expenditures = C + I + G
Real vs Nominal GDP
Real Output = Q1  Q2  Q3 
Q1  bushels of wheat
Q2  new cars
Q3  gallons orange juice
Qn
Real vs Nominal GDP
•
Real output  Q1  Q2  Q3 
Q1  bushels of wheat
Q2  new cars
Q3  gallons of orange juice
 Qn
Nominal GDP
Nominal GDP  PQ
1 1  P2Q2  PQ
3 3 
Nominal GDP  P  Real GDP
• If Nominal GDP doubles is that due to P
increases or Q increases ?
Two ways to estimate prices
• Directly by constructing price indexes
• Indirectly by computing the implicit price
deflator
Price index for groceries
• Market basket (in base year of 1960)
– 1 dozen eggs
– 2 chickens
– 3 pounds hamburger
– Other things a typical family might buy
Price of basket =$100 in 1960
Price of basket = $200 in 1970
Price index
• The market basket does not change so
any difference must be due to prices.
• Price indexes however miss
– Substitution effect
– New goods
– Quality changes
– Discount stores
Computing real GDP using price
index
•
Nominal GDP
Real GDP 
P
Implicit price deflator
• Can get good estimate of Nominal GDP
– Nominal GDP = Sum of Value Added
• Estimate real GDP by determining what
people buy now using base year prices
– If year 2000 is the base year compute real
GDP by determining what year 2003 GDP
would have cost in 2000
Implicit price deflator
•
Nominal GDP
P
Real GDP
Unemployment
• Overview of BLS Statistics on Employment
and Unemployment