Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 2 Measurement

Copyright © 2008 Pearson Addison-Wesley. All rights reserved.

Chapter 2

Measurement

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-2

Chapter 2 Topics

• Measuring GDP

• Nominal and real GDP and price indices

• Labor market measurement


GDP

• The dollar value of final outputs produced during a given period of time within the borders of a country.

• Example: published in the National Income and Product Accounts (NIPA) in U.S.


Measuring GDP: The National Income and Product Accounts

• GDP Measured Using: (i) the product approach; (ii) the expenditure approach; (iii) the income approach.

• Three approaches yield the same value of GDP.


National Income Accounting Example

• Fictional Island Economy

• Coconut Producer, Restaurant, Consumers, Government


Table 2.1 Coconut Producer


Table 2.2 Restaurant


Table 2.3 After-Tax Profits


Table 2.4 Government


Table 2.5 Consumers


Measuring GDP Using the Product (Value-added) Approach

• Sum of value added to goods and service in production across all productive units in economy.

• Add the value of all goods and service, and subtract the value of all intermediate goods and service used in production.


Table 2.6 GDP Using the Product Approach


Expenditure Approach

• Total spending on all final goods and service in economy.

• Total expenditure = C + I + G + NX

I: expenditure on goods that are produced, but not consumed as consumption goods. For example, machinery in plants.

NX=Exports – Imports. Exports are produced within a country, while imports are produced abroad.


Table 2.7 GDP Using the Expenditure Approach


Income Approach

• Add up all incomes received by all economic agents contributing to production in an economy.

• Income includes:– Wage incomes– Interest incomes– Corporate incomes (profits)– Taxes net of subsidies on products or factors of

production


Table 2.8 GDP Using the Income Approach


Inventory Investment

• Def: goods produced in the current period, but not consumed.

• Components:– Finished goods– Goods in process– Raw materials.


Inventory Investment

• Back to coconut economy:– If harvest 13M instead of 10M coconuts, and put 3M

in warehouse as inventory, how is GDP affected?– Product approach: 3M*2 – value added in coconut

production.– Expenditure approach: I = 3M*2– Income approach: 3M*2 - after-tax profits received

by coconut producers increase since assets rise.


GNP (gross national product)

• The value of outputs produced by domestic factors of production, no matter whether or not the production takes place within a country.

• Difference from GDP:– Within a country for GDP, no matter who owns the

production unit.– Chinese plants in the U.S. (GNP, not GDP)– American plants in China (not GNP, GDP)


Nominal and Real GDP and Price Indices

• Price index: price of a set of goods and service produced in an economy over a period of time. A general measure of price level.

• Inflation rate: the rate of change in the price level.

• Growth in nominal GDP = Growth in real GDP + Inflation


Table 2.10 Data for Real GDP Example


Chain-Weighting Approach

• Use rolling base year.

• g3= sqrt ( (1+g1)(1+g2) ) - 1

– A geometric average of the growth rates calculated by using year 1 and year 2 as base year.


Figure 2.1 Nominal GDP (black line) and Chain-Weighted Real GDP (colored line) for the Period 1947–2006


Table 2.11 Implicit GDP Price Deflators, Example


Figure 2.2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line)


Figure 2.3 The Price Level as Measured by the CPI and Implicit GDP Price Deflator, 1947–2006

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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 2 Measurement