Download Macroeconomic Aggregates

Macroeconomic Aggregates
The Importance of Economic Data
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For the practicing economists and those who
must make economic decisions, measuring the
economy accurately is essential.
Faulty economic statistics can lead to bad
decisions by government decision-makers and
by those running private business firms.
Economic statistics are also important for
economists who are developing theories to
explain economic growth and fluctuations.
Gross Domestic Product

GDP is the total final output produced
within the country over a given period (12month).

Production of domestic firms in abroad is
not calculated in GDP.

It is an alternative measure of national
output.
Real and Nominal GDP
Real GDP is calculated in constant or
invariant prices.
 Nominal GDP is measured at current
market prices.

GDP deflator= Nominal GDP /Real GDP
IPDGDP = ∑Q1 P1 / ∑Q1 P0
Implicit price deflator
Total GDP and GDP per-capita
Total GDP is a measure of a country's
overall economic output (economic power).
 GDP per head equals to the country's GDP
divided by the total number of people in the
country. In order to compare living
standards of different countries GDP has to
be expressed per capita (per head).

The Three Ways of Measuring GDP
The Expenditure Method: this measures the
total amount that people spend on the final
goods and services. (aggregate spending)
 The Income Method: this measures the
total income that is earned by all the
workers and businesses that produced
goods and services. (aggregate income)
 The Product Method: this measures the
total of all the goods and services as they
are produced. (aggregate production)
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The Circular-Flow Diagram
Goods &
Services sold
Market for
Goods
and Services
Goods &
Services
bought
Households
Firms
Inputs for
production
Wages, rent,
and interest
Market for
Factors
of Production
Labour, land,
and capital
Income
The Expenditure Method
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
Total spending in the economy is divided
into four categories.
GDP = C + I + G + X
GDP = C + I + G + X
C = Personal consumption expenditure
Purchases of final goods and services by
households and by non-profit institutions serving
households.
The market prices are used as weights in valuing
different commodities, because in a wellfunctioning market economy prices reflect the
relative satisfactions that consumers receive from
each good.
GDP = C + I + G + X

Investment includes:
◦ Investment in capital (new machines, factories
and other tools that businesses use to
produce goods and services).
◦ Inventory investment is defined as the change
in inventories (+ increase, - decrease in
inventories).
GDP = C + I + G + X
Gross investment represents additions to the
stock of durable capital goods (buildings,
equipment, inventories) during a year that
increase production possibilities in the future.
 Gross investment is not adjusted for
depreciation.
 Depreciation measures the amount of capital
that has been used up in a year.
 Net investment = gross investment depreciation

GDP = C + I + G + X
Government expenditures include
purchases of good and services and all the
government payroll expenditures on its
employees.
 GDP excludes spending on transfer
payments.
 Transfer payments are government
payments to individuals that are not made in
exchange for goods or services supplied.

GDP = C + I + G + X
Net exports is the difference between
exports and imports of goods and services.
(trade deficit/trade surplus)
 Exports: the total value of the goods and
services that people in one country sell to
people in other countries.
 Imports: the total value of the goods and
services that people in one country buy
from people in other countries.
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Income Method
Income method includes the incomes
earned by those involved in the production
process (wages, interest, rents and profits)
that are the costs of producing society's
final products.
 GDP =
W (wages)
+ R (rents)
+ i (interest)
+ P (profit)
+ Indirect business taxes
+ Depreciation

GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation

Wages, salaries and other employee
supplements include all take-home pay,
fringe benefits.

Economists classify wages, salaries, and
fringe benefits paid to workers as labour
income.
GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation
Rental payments are income to persons
who own buildings and rent them out. The
rents they receive from their tenants are
rental payments.
 Land rent is paid to landlords by tenants.

GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation
Interest payments are incomes received
from lending.
 Because many economic agents pay interest
as well as they receive interest, interest
payments are defined as the difference
between receipts and payments (net
interest).

GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation

Gross profits include the profits of large
corporations and also of small businesses and
farms.

There are two kinds of profits:
Profit of corporations
Profit of unincorporated enterprises
GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation

Economists classify rental payments, interest
payments, and gross profits as capital
income
GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation
Indirect business taxes must be included as a
separate item in the income method (value added
tax levied on goods and services, consumer taxes).
Capital and labour income do not include
indirect business taxes paid by the businesses to
government. But those taxes are part of the
income generated in producing GDP.
Therefore we have to add those taxes to capital
and labour income.
GDP = W
+ R+i+P
+ Indirect business taxes
+ Depreciation
Depreciation on capital goods that were
used up must appear as an expense in GDP,
like other costs.
 The difference between investment, the
purchases of final goods by firms, and
depreciation is called net investment.
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The Product Method
The third measure of GDP adds up the
production of each firm or industry in the
economy.
 Using this method we must to avoid “double
counting”.Thus when we measure GDP by
production, it is necessary to count only
value added by each manufacturer.
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Intermediate goods
Intermediate goods are part of final goods.
 Final goods are goods that undergo no
farther processing.
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Intermediate goods are not included in the
GDP in order to avoid distortions resulting
from double counting.
Gross National Product
The gross national product (GNP) is the
most comprehensive measure of a
nation's total output of goods and
services.
GNP is a measure of the value of all the
final goods and services newly produced
by the nation during some period of
time.
NNP and NDP

Net national product = GNP – depreciation

Net domestic product = GDP – depreciation
National Income

NI represents the total factor income
received by labour, capital and land.

NI equals total wages, profits, rents
and interest.

NI = GNP – depreciation – indirect
taxes
Disposable Income

Personal income = NI - corporate
undistributed profits
- taxes paid by firms
- social insurance
payments
+ benefits (transfer
payments)

Disposable income represents incomes received
by households. It measures the income that
people have available for spending or saving.
DI = PI – personal taxes
Net Economic Welfare
GNP is an imperfect measure of genuine
economic welfare. An alternative measure is
net economic welfare.
 NEW is an adjusted measure of total
national output . It is calculated as additions
to gross national product (GNP), including
the value of leisure and the underground
economy, and deductions such as
environmental damage.
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Human Development Index
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HDI was found in the United Nations
Development Programme’s (UNDP) and
launched by Pakistani Economist Mahbub ul
Haq in 1990 with the explicit purpose: ‘‘to
shift the focus of development economics
from national income accounting to people
centred policies’’.
HDI is a composite statistic used to rank
countries by level of "human development"
and separate developed (high development),
developing (middle development), and
underdeveloped (low development) countries.
Human Development Index
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HDI combines three dimensions:
◦ A long and healthy life: Life expectancy at birth
◦ Access to knowledge: Mean years of schooling and
Expected years of schooling
◦ A decent standard of living: GNI per capita (PPP
US$)