Download Chapter 2 -- Measuring Output and The Price Level

Measuring Output and
The Price Level
Close look at the measures of the
“big two” goal variables -- real
GDP and the price level (to
compute the inflation rate).
Data complied at the National
Income and Product Accounts
(NIPA)
Measuring Output -- Gross
Domestic Product (GDP)
Gross Domestic Product -- The
total market value of all currently
produced final goods and services
over a period of time.
Nominal GDP -- GDP in current
dollars
Real GDP -- GDP in constant
dollars (of a base year).
Aspects of GDP Definition
“Over a Period of Time” 
GDP is a flow measure.
“Currently Produced” 
GDP excludes the following
-- sales of used items
-- transfer payments
-- purchases of stocks, bonds,
or land
“Market Value” -- the transaction
must be recorded and have a
specific dollar figure attached 
GDP excludes
-- illegal purchases
-- household production
(example – fixing your own car)
Final Goods and Services
and Measuring GDP
Example -- Production of a pair of
shoes.
GDP and Making Shoes
Step
Value
Farmer
3
Packing Plant
7
Tannery
13
Shoe
Manufacturer 25
Wholesaler
40
Retailer
75
Total
163
Value Added
3
4
6
12
15
35
75
What Real GDP (Y) Signifies
Total Production or Output of final
goods and services
Total Sales on Final Goods and
Services (Approximately)
Total Income (Approximately)
Correlated With Total Employment
Computing GDP (Y) -The Expenditure Approach
Operative Equation:
Y=C+I+G+X-M
Consumption (C)
Defined as consumer purchases
of final goods and services
components of consumption
-- nondurable goods
-- durable goods
-- services
largest component of GDP
Investment (I)
Business Purchases of New Plant
and Equipment
New Residential Housing
Changes In Inventories
Output Versus Sales -Approximation
The
 Example -- $18,000 car, produced in
2000, sold in 2001
Year
2000
2001
C
$0
$18
I G (X-M) Y
$18 $0
$0
$18
-$18 $0
$0
$0
 Bottom Line – The car is counted in the
year it was produced (as a change in
inventory), not the year it was sold.
Investment Goods Versus
Intermediate Goods
The Similarity -- Transactions between
businesses.
The Conceptual Difference -Producing Final Goods (Investment)
Versus Being Part of a Final Good
(Intermediate Good).
The Operational Difference –
Investment goods (e.g. shoe machines)
are used repeated times; intermediate
goods (e.g. leather) are used just once.
Government Purchases of
Goods and Services (G)
Not the same as government
expenditure (does not include
transfer payments)
In the US, the government is a
purchaser, not a producer.
Net Exports (X-M)
Net Exports
= Exports (X) - Imports (M)
Exports are, by definition, all final
goods and services (last sale in US).
Gross National Product (GNP) versus
Gross Domestic Product (GDP) –
different accounting of multinational
firms (firms operating in a country
other than their origin – e.g. a Honda
plant in Ohio).
Real GDP and the
Quality of Life
Real GDP does not account for the
following changes:
-- leisure time
-- quality differences
-- crime
-- environmental impacts
More Quality of Life
Variables Not in Real GDP
-- nonmarket production activities
(I) household production
(II) underground economy
-- income distribution
Disposable Income and
(Personal) Saving
Disposable Income (YD) -- total
consumer income after taxes.
(Personal) Saving (S)
S = YD - C
The Saving Rate -- (S)/(YD)
Measuring The Price Level
Measures of the Price Level (P)
-- Consumer Price Index (CPI)
-- GDP Deflator
Common Features:
Price Level Measures
They are indexes -- compare
current prices with those of a
given base year.
They consist of a ratio of weighted
expenditure of prices of selected
goods and services (market
basket) in current year to a
weighted average of prices in the
base year.
Weights are based upon quantities
of goods and services in the
market basket.
Inflation Rate = Percentage
Change in the Index.
Example: Inflation Rate for 2000
Inflation Rate2000 = P2000 - P1999
P1999
Distinctions in
Price Level Measures
What’s in the market basket?
Method of computation -- fixed
weight index versus chain weight
index.
Measure #1 -- The
Consumer Price Index (CPI)
Market Basket: Set of goods and
services purchases by consumers.
Fixed Weight Index
Computing a CPI
Example -- Compute the CPI for
2000 with 1992 as the base year.
CPI2000 =
(Cost of 1992 Market Basket
Purchased in 2000)
(Cost of Actual Consumer
Purchases in 1992)
Biases in CPI
(as a Fixed Weight Index)
Entry Bias -- goods leaving and
entering the market basket.
Quality Bias -- different quality of
the same goods.
Outlet Bias -- retail vs outlet
prices?
Substitution Bias -- changing
quantities over time due to
demand response to goods that
have become relatively expensive.
Implications -- CPI Bias
CPI inflation overstates the true
inflation rate.
Implication -- reforming Social
Security.
Measure #2 -The GDP Deflator
Market Basket -- set of final goods
and services that are used to
compute GDP (macro measure of
price level).
Chain Weight Index -- reduces
biases associated with fixed
weight index.
Converting
Nominal GDP to Real GDP
Example -- find Real GDP 2000
Real GDP2000 = Nominal GDP2000
GDP Deflator2000
Real GDP for other years is
computed the same way.
Real GDP Growth = Percentage
Change in Real GDP.
Sources to Obtain
Macroeconomic Data
The Economic Report of the
President (Historical Data)
Economic Indicators (Recent)
Some Websites for
Macro Data and Information
www.federalreserve.gov
(Federal Reserve)
www.stls.frb.org/fred
(Federal Reserve Economic Data)
www.bea.doc.gov
(Bureau of Economic Analysis)
www.dismal.com
(neat macro stuff)