Download Real GDP

© 2007 Thomson South-Western
Macro vs. Micro Economics
Microeconomics is the study of how individual
households and firms make decisions and how
they interact with one another in markets.
– Prices and selection of products
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.
– Inflation
– Unemployment
– Economic Growth
© 2007 Thomson South-Western
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?
© 2007 Thomson South-Western
Macro, Micro…or Neither!
© 2007 Thomson South-Western
THE ECONOMY’S INCOME AND
EXPENDITURE
• 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.
© 2007 Thomson South-Western
THE ECONOMY’S INCOME AND
EXPENDITURE
• 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.
© 2007 Thomson South-Western
Figure 1 The Circular-Flow Diagram
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
MARKETS
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
© 2007 Thomson South-Western
THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• GDP is the total market value of all final
goods and services produced within a
country in a given period of time.
© 2007 Thomson South-Western
THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• The equality of
income and
expenditure can be
illustrated with the
circular-flow diagram.
MARKETS
Spending
FOR
GOODS AND SERVICES
•Firms sell
Goods and
Goods
and services •Households buy services
bought
sold
Revenue
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
Labor, land,
MARKETS
and capital
FOR
FACTORS OF PRODUCTION
•Households sell Income
Wages, rent,
•Firms buy
and profit
= Flow of inputs
and outputs
= Flow of dollars
Factors of
production
© 2007 Thomson South-Western
THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “GDP is the Market Value . . .”
– Output is valued at market prices.
• “. . . Of All. . .”
– Includes all items produced in the economy and legally sold
in markets (not counted within households or for illegal sales).
• “. . . Final . . .”
– It records only the value of final goods, not intermediate
goods (the value is counted only once and inventory is
temporary).
• “. . . Goods and Services . . .”
– It includes both tangible goods (food, clothing, cars) and
intangible services (haircuts, housecleaning, doctor visits).
© 2007 Thomson South-Western
THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• “. . . Produced . . .”
– It includes goods and services currently produced, not
transactions involving goods produced in the past.
• “ . . . Within a Country . . .”
– It measures the value of production within the geographic
confines of a country.
• “. . . In a Given Period of Time.”
– It measures the value of production that takes place within
a specific interval of time, usually a year or a quarter (three
months).
© 2007 Thomson South-Western
THE COMPONENTS OF GDP
• GDP includes all items produced in the
economy and sold legally in markets.
• What Is Not Counted in GDP?
– GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
– It excludes items produced and sold illicitly, such
as illegal drugs, gambling or prostitution. (AKA
Grey or Black economies)
© 2007 Thomson South-Western
THE COMPONENTS OF GDP
• Question.
– Which contributes more to GDP – the production of a pound
of hamburger or the production of a pound of caviar? Why?
© 2007 Thomson South-Western
THE COMPONENTS OF GDP
GDP (Y) is the sum of the following:




Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
Y = C + I + G + NX
© 2007 Thomson South-Western
THE COMPONENTS OF GDP
• Consumption (C):
• The spending by households on goods and services,
with the exception of purchases of new housing.
This includes education.
• Investment (I):
• The spending on capital equipment (used in the
future to produce more goods/services), inventories,
and structures, including new housing.
• Many people think education should be included
here. What do you think?
© 2007 Thomson South-Western
THE COMPONENTS OF GDP
• Government Purchases (G):
– The spending on goods and services by local, state,
and federal governments. Example?
– Does not include transfer payments because they
are not made in exchange for currently produced
goods or services. Example?
• Net Exports (NX):
– Exports minus imports.
– Can this be negative?
© 2007 Thomson South-Western
THE COMPONENTS OF GDP
• Which component of the GDP is the largest?
© 2007 Thomson South-Western
The components of U.S. GDP
• 2007, GDP of the United States = $14 trillion
• GDP per person = $45,838
–
–
–
–
Consumption = $32,225 per person
Investment = $7,061 per person
Government purchases = $8,912 per person
Net exports = –$2,360 per person
17
© 2007 Thomson South-Western
1
GDP and its components
Gross domestic product, Y
Consumption, C
Investment, I
Government purchases, G
Net exports, NX
Total
(in billions of dollars)
Per person
(in dollars)
Percent
of total
$13,843
9,732
2,132
2,691
–712
$45,838
32,225
7,061
8,912
–2,360
100%
70
15
19
-5
This table shows total GDP for the U.S. economy in 2007 and the breakdown of GDP
among its four components.
When reading this table, recall the identity Y = C + I + G + NX.
18
© 2007 Thomson South-Western
ACTIVE LEARNING
1
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
D. General Motors builds $500 million worth of cars,
but consumers only buy $470 million worth of them.
© 2007 Thomson South-Western
ACTIVE LEARNING
1
Answers
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.
20
© 2007 Thomson South-Western
ACTIVE LEARNING
1
Answers
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
Current GDP and investment do not change, because
the computer was built last year.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million of them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
21
© 2007 Thomson South-Western
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.
© 2007 Thomson South-Western
REAL VERSUS NOMINAL GDP
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.
© 2007 Thomson South-Western
Table 2 Real and Nominal GDP
© 2007 Thomson South-Western
Table 2 Real and Nominal GDP
© 2007 Thomson South-Western
Table 2 Real and Nominal GDP
Again….what is the difference between the Real and the Nominal GDP?
Why is the Real GDP helpful to know?
© 2007 Thomson South-Western
Real GDP
• Real GDP is a measure of the economy’s
production of goods and services.
• This will reflect the economy’s ability to satisfy
people’s needs and desires.
• Comparing different periods of Nominal GDP
will show the growth/decline but how much of
it was due to price changes will not be known.
• Comparing the same for Real GDP will show
the change in actual production.
© 2007 Thomson South-Western
Real vs. Nominal GDP
• In the Weimar years in
Germany, when
inflation went up
thousands of percent,
what was happening
with Nominal GDP?
Real GDP?
• Which measure is more
useful?
© 2007 Thomson South-Western
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 portion of the rise in nominal
GDP that is attributable to a rise in prices rather
than a rise in the quantities produced.
© 2007 Thomson South-Western
The GDP Deflator
• The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
© 2007 Thomson South-Western
The GDP Deflator
• Nominal GDP is converted to real GDP as
follows:
Real GDP20XX
Nominal GDP20XX

 100
GDP deflator20XX
© 2007 Thomson South-Western
Table 2 Real and Nominal GDP
© 2007 Thomson South-Western
The GDP Deflator
• So if the GDP Deflator was 171 in 2006, that
means that the price level increased by 71
percent as compared to the base year of the
index.
© 2007 Thomson South-Western
Figure 2 Real GDP in the United States
Billions of
2000 Dollars
$10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1970
1975
1980
1985
1990
1995
2000
2005
© 2007 Thomson South-Western
IS GDP A GOOD MEASURE OF
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.
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the happiness
or quality of life, however.
© 2007 Thomson South-Western
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.
– Does these have value?
© 2007 Thomson South-Western
International differences in GDP and the
quality of life
• Rich countries - Higher GDP per person
– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries - Lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
37
© 2007 Thomson South-Western
International differences in GDP and the quality of life
• Low GDP per person
–
–
–
–
–
–
–
–
–
Higher rates of infant mortality
Higher rates of maternal mortality
Higher rates of child malnutrition
Less common access to safe drinking water
Fewer school-age children are actually in school
Fewer teachers per student
Fewer televisions; Fewer telephones
Fewer paved roads
Fewer households with electricity
© 2007 Thomson South-Western
38
3
GDP and the quality of life
Country
United States
Japan
Germany
Russia
Mexico
Brazil
China
Indonesia
India
Pakistan
Bangladesh
Nigeria
Real GDP per
person (2005)
Life
expectancy
Adult literacy
(% of population)
Internet usage
(% of population)
$41,890
31,267
29,461
10,845
10,751
8,402
6,757
3,843
3,452
2,370
2,053
1,128
78 years
82
79
65
76
72
72
70
64
65
63
47
99%
99
99
99
92
89
91
90
61
50
47
69
63 %
67
45
15
18
19
9
7
3
7
0.3
4
The table shows GDP per person and three other measures of the quality of life for
twelve major countries.
39
© 2007 Thomson South-Western
Life expectancy (years)
GDP and Life Expectancy in 12 countries
Indonesia
China
Japan
U.S.
Mexico
Germany
Brazil
Pakistan
India
Russia
Bangladesh
Nigeria
Real GDP per capita
40
© 2007 Thomson South-Western
GDP and Literacy in 12 countries
China
Russia
Germany
Adult Literacy
(% of population)
Mexico
Japan
U.S.
Brazil
Indonesia
Nigeria
India
Pakistan
Bangladesh
Real GDP per capita
41
© 2007 Thomson South-Western
GDP and Internet Usage in 12 countries
Internet Usage
(% of population)
Japan
Pakista
n
Nigeria
U.S.
Germany
Brazil
Indonesia
Mexico
Russia
China
India
Bangladesh
Real GDP per capita
42
© 2007 Thomson South-Western
More issues with GDP
• GDP can vary depending upon the “market basket” used
to calculate prices. Ie. Prices of potatoes vs. eggs.
• Black market, bartering, etc.
• Externalities such as the environment, subsistence
production and domestic work
• Volunteer work
• Counts work that produces no net change or that results
from repairing harm, ie. Natural disasters
• Sustainable growth…bubbles.
• Economic surplus
© 2007 Thomson South-Western
Alternatives
•
•
•
•
•
Gross National Product
Net National Product
Personal Income
Genuine Progress Indicator
Gross National Happiness (Bhutan)
© 2007 Thomson South-Western
What is happening in Korea?
• GDP (purchasing power parity):
$1.278 trillion (2008 est.)
• GDP (official exchange rate):
$857.5 billion (2008 est.)
• GDP - real growth rate:
2.5% (2008 est.)
• GDP - per capita (PPP):
$26,000 (2008 est.)
• GDP - composition by sector:
agriculture: 3%
• industry: 39.5%
• services: 57.6% (2008 est.)
For Comparison – US
GDP - per capita (PPP):
$14.29 tril. (2008 est.)
GDP - composition by
sector:
agriculture: 1.2%
industry: 19.6%
services: 79.2%
(2008 est.)
© 2007 Thomson South-Western
What is happening in Korea?
• Rank Order - GDP (purchasing power parity) #15
• Rank Order - GDP - per capita (PPP) - #52
© 2007 Thomson South-Western
• Does the study of the GNP mean anything? Is
this information actually useful beyond coffee
table discussions and this class?
© 2007 Thomson South-Western
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.
© 2007 Thomson South-Western
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.
© 2007 Thomson South-Western
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.
© 2007 Thomson South-Western
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, are not measured by GDP.
© 2007 Thomson South-Western