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MACROECONOMICS:
EXPLORE & APPLY
by Ayers and Collinge
CHAPTER 5
“Measuring National Output”
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
1
Learning Objectives
1. Present three widely accepted goals for
the macro economy.
2. Delineate gross domestic product (GDP)
and its components.
3. Distinguish real GDP from nominal
GDP.
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Ayers/Collinge, 1/e
2
Learning Objectives
4. Track the stages of the business cycle.
5. (E&A) Identify the advantages and
disadvantages of static and dynamic
scoring.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
3
5.1
MACROECONOMIC GOALS
 Economic Growth occurs when the
economy’s total output of goods and services
increase.
 Full Employment occurs when jobs are
available for those who are willing and able
to work.
 Low Inflation when prices are relatively low
and stable.
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Effects of Growth: Selected Changes
in the U.S. Standard of Living
Indicator
Computer
Ownership
Internet Access
Consumer Credit
Infant Mortality
Rate
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Years Compared Indicator Values
1994: 24%
2001: 57%
1998: 26%
2001: 50%
1997: $1272 billion
2001: $1701 billion
1980: 12.6 per 1000
2001: 6.7 per 1000
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Effects of Growth: Selected Changes
in the U.S. Standard of Living
Indicator
Life expectancy at
Birth
Homeownership
Rates
Years Compared
1970: 70.8 years
2000: 76.9 years
1992: 6,217
2000: 5,915
1965: 62.9
2002: 67.8
College Graduate
or More
1970: 11%
2000: 26%
Work Fatalities
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Indicator Values
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5.2
MEASURING NATIONAL OUTPUT
Output is usually measured by tallying
the value of final goods and services those which are sold to their final
owners.
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Gross Domestic Product (GDP)
The most widely reported measure of
the economy’s output is gross
domestic product (GDP) which is the
market value of the final goods and
services produced in the economy
within some time period (usually
one year or one quarter).
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Gross Domestic Product (GDP)
Spending on final goods and services may be
attributed to four sources:
Consumption
Investment
Government
Foreign Commerce
Spending on intermediate goods is not
included in GDP so as to avoid double
counting.
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Consumption (C)
Purchasing by households
The majority of spending in the U.S.
economy - about 68%
Consumer durable goods,
Consumer nondurable goods
Services
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Investment (I)
Spending now in order to increase
output or productivity later:
Purchases by firms of capital
Consumers’ purchases of new
housing
Market value of changes in
inventories
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Gross Investment, Net Investment,
and Net Domestic Product
Gross
Investment
Net
Investment
NDP
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=
Total Amount of
Investment
=
Gross Investment
minus Depreciation
=
GDP minus
Depreciation
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Government (G)
At federal, state, and local levels account
for 18% of total purchasing in the U.S.
economy.
Approximately 1/10 of government
spending could be investment.
Government purchases of goods and
services must be distinguished from
transfer payments such as Social Security
and unemployment benefits.
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Foreign Commerce (NX)
Because a portion of spending by
consumers, businesses, and government is
on imports, it is useful to subtract imports
from exports.
Net
Exports
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=
Exports - Imports
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5.3
Gross Domestic Product (GDP)
GDP is the sum of purchases by the four sectors
of the economy.
GDP = C + I + G + NX
$10,208.1 = $7,064.5 +$1,633.9 +$1,839.5 + -$329.8
(69%)
(16%)
(18%)
(-3%)
2001 Data
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The Four Components of GDP
Dollars
Gross Domestic Product (2001)
$8,000.0
$7,000.0
$6,000.0
$5,000.0
$4,000.0
$3,000.0
$2,000.0
$1,000.0
$0.0
-$1,000.0
-$2,000.0
Consumption
Investment
Government
Net Exports
Exports
Imports
GDP
GDP Components
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Potential GDP
Potential GDP is the value of GDP that
would exist if all resources in the economy
were fully and efficiently employed.
Actual GDP equals potential GDP only if
there is no unemployment or
underemployment of resources.
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Per Capita GDP
 Per capita GDP is GDP per person
 In 2001, total GDP was $10.2 trillion
 In 2001, the U.S. population was over
284 million people
 Per capita GDP for 2001 was $35,843 the amount of output produced and
equally divided among every man,
woman, and child in the U.S.
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GDP and Value Added
GDP may also be viewed as the sum of value
added in the economy.
Each firm takes inputs of materials and
intermediate goods and increases their value
through the firm’s production process.
Value added equals the revenue from the
sale of output minus the cost of purchased
inputs.
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Underground Economy
 The underground economy refers to the
market transactions which go unreported.
 Some of these goods and services are illegal
and thus not recorded in GDP.
 Others are legal, but not reported so that
their producers may avoid paying taxes on the
output.
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Nominal versus Real GDP
Nominal GDP is the value of GDP
expressed in current dollars terms.
Real GDP adjust for inflation the nominal
value of GDP.
The chain-type price index is an index of
prices that measure price changes over
time.
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Nominal versus Real GDP
Real GDP
=
Nominal GDP divided by
GDP chain price index x 100
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Nominal and Real GDP
Slected Years
1961
1971
1981
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
©2004 Prentice Hall Publishing
Nominal GDP
(in trillions)
GDP
Chain Type
price index
(1996 $)
Real GDP
in trillions of 1996 $'s
0.546
1.129
3.131
5.986
6.319
6.642
7.054
7.400
7.813
8.318
8.782
9.269
9.873
10.208
22.43
30.52
62.37
89.66
91.85
94.05
96.01
98.10
100.00
101.95
103.20
104.66
107.04
109.37
2.434
3.699
5.020
6.676
6.880
7.062
7.347
7.543
7.813
8.163
8.510
8.856
9.224
9.333
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5.4
THE BUSINESS CYCLE
The business cycle refers to the
expansions and contractions in
economic activity that take place
over time.
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Stages of the Business Cycle
Peak
Recession
Expansion
Trend Line
Trough
Trough
Time
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Rising Trend of GDP
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
58
60
62
64
66
68
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70
72
74
76
78
80
82
84
86
88
90
92
94
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The Upward Trend of Real GDP
10000
9000
8000
Dollars
7000
6000
5000
4000
3000
2000
1000
0
01
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
19
68
19
64
19
62
19
60
19
Real GDP
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Economic Indicators
Leading Indicators: index of building
permits, housing starts, and manufacturers’
new orders for durable goods.
Lagging indicators: unemployment rate and
expenditures on new plant and equipment.
Coincident indicators: index of industrial
production and the prime interest rate.
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5.5 EXPLORE & APPLY
Static vs. Dynamic Scoring
Static scoring: the traditional method of
computing the effects of federal actions.
Static scoring assumes no general change
in behavior as a result of government
policy changes.
Dynamic scoring: allows for the
consideration of all behavioral changes
caused by changes in government policy.
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Terms along the Way
gross domestic product
(GDP)
consumption spending
investment
gross investment
net investment
net domestic product
(NDP)
value added
potential GDP
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underground economy
GDP chain price index
nominal GDP
real GDP
potential GDP
business cycle
leading indicators
static scoring
dynamic scoring
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Test Yourself
1. The consumption spending portion of
GDP includes
a. durables, nondurables, and services
b. goods, services, and new houses.
c. intermediate foods, but not final goods.
d. about 90% of all production that occurs
in the economy.
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Test Yourself
2. Gross Investment equals
a. net investment plus depreciation.
b. investment adjusted for the effects of
inflation.
c. a negative component of GDP.
d. the change in business inventories.
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Test Yourself
3.
a.
b.
c.
d.
The value of a new house is included in
consumption.
investment.
government purchases.
net exports.
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Test Yourself
4. Which of the following is an example of a
transfer payment?
a. A school district pays the salary of a school
teacher.
b. A senior citizen is issued a Social Security
check by the government.
c. A farmer raises a field of corn from seed..
d. A little boy and girl spend their allowances at
Chuck E. Cheese’s pizza restaurant.
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Test Yourself
5.
a.
b.
c.
d.
Net exports are computed as
exports minus depreciation.
export minus imports.
export minus GDP.
imports minus exports.
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Test Yourself
6. To compute real GDP when given
nominal GDP we must also know
a. nothing else, since real GDP and
nominal GDP are generally equal.
b. the value of consumption spending.
c. the value of gross investment.
d. the value of the GDP chain-type price
index.
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The End!
Next Chapter 6
“Unemployment"
©2004 Prentice Hall Publishing
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