Intermediate Macro:Measuring GDP

Jeffrey H. Nilsen

Macro: study of structure and performance of national economies and the policies gov’t tries to use to affect economic performance.

Approaches to Count up GDP Expenditure App: GDP: total spending

on final goods & svcs by domestic households (C), domestic firms (I), gov’t (G) and foreigners (NX)

 Product App GDP: mkt value of final goods & svcs newly produced within nation’s borders

Income App GDP: total of incomes of workers (wages), firms (profits) & gov’t (taxes)

ExpenditureApp

Net Exports: Add EX since foreigners’ purchases of BG goods adds to output Subtract IM since C, I, G count spending

on imports

Omit transfers (e.g. U benefits) since they’re not exchanged for services

Spent by purchasers of final goods: consumers: GDP = 50

Apple Co Juice CoTotal Rev. 35 40 Sales to Public 10 Sales to JC 25 25 (paid to AC)

Product App Mkt value of final goods & svcs newly produced within

nation’s borders Mkt value (weigh goods by their prices, e.g. car counts more

than same # of shoes) Ignore non-market goods, e.g. child-rearing For underground economy, try to adjust for unreported transactions For gov’t services (not sold at market price), value at cost of

providing Newly produced: eg. not resold house (but include value of

real estate agent’s services) Final goods & services: Ignore intermediate goods (inputs

used up producing goods in same period as produced). Examples of “strange” final goods: Car sold as taxi not used up in period produced: a capital good

(creates other goods) Inventory investment: rise in inventory in period, e.g. baker’s 1000

flour rises to 1100 (unused output that augments future output)

Product App (Add up Value Added) Value Added =

sales revenues – cost of intermediate goods

GDP = 50, again

Apple Co Juice CoTotal Rev. 35 40 Sales to Public 10 Sales to JC 25 25 (paid to AC)

GNP = GDP + NFP

NFP = pay to BGers abroad less pay to foreigners in BG

GDP = bg-citizens’-pay + my-bg-pay NFP = your-us-pay – my-bg-pay GNP = GDP + NFP

BG Factors in BGFgn workers

BG pay

BG workers fgn pay

GDPBG

“-“NFP

GNPBG

Income App

GDP again 50 Apple Co Juice CoTotal Rev. 35 40 Sales to JC 25 25 (paid to AC) Wages Paid 15 10 Taxes Paid 5 2 Profit 35 – 15 – 5 = 15 40 – 25 – 10 – 2 = 3

National Incometo Disposable Income

(represents spending power)

Note: text ignores VAT (USA has no VAT)

Saving is current income less spending on current needs

CINTTRTGNPS GovPRIV PRIVDI

GINTTRTS GovGOV

GOVPRIVNAT SSS = Y + NFP – C –

G= (C + I + G + NX) + NFP – C –

G

GOVPRIV SNFPNXIS CA

Uses of Savings Identity

GOVPRIV SNFPNXIS CA

What can be done with private savings ?

I: lend to domestic firms wanting to buy new capital goods

(- SGOV): lend to government wanting to spend more than it receives in tax revenues

CA surplus: lend to foreigners who want to purchase your goods (more than you want to buy their’s)

Savings is “flow” that augments the “stock” that is wealth

National Wealth: BG’s stock of physical assets + NFA (net foreign assets): BG-owned

assets abroad less foreign-owned assets in BG

NB: Domestic financial assets NOT wealth (since offsetting liabilities)

Wealth rises with positive savings or if value of existing assets rises

Nominal & Real GDP

Nominal is measured at current market P (adds up values of many different goods)

Real is measured in base-year prices (to neutralize effect of price changes for comparison over time)

Nominal GDP: Y 1Y 2Y computers 5 10 bikes 200 250P computers $1,200 $600 bikes $200 $240value (PY) computers _______ _______

bikes _______ _______ total value (GDP) _______ _______

Nominal GDP: Y 1 Y 2Y computers 5 10 bikes 200 250P computers $1,200 $600 bikes $200 $240value (PY) computers $6,000$6,000

bikes $40,000 $60,000 total value (GDP) $46,000 $66,000

Real GDP (Y 1 prices) Y 1 Y 2units computers 5 10 bikes 200 250P computers $1,200 ---- bikes $200----value computers ____________

bikes ______ ______ real GDP ______ ______

Real GDP (Y 1 prices) Y 1 Y 2units computers 5 10 bikes 200 250P computers $1,200 ---- bikes $200 ----value computers $6,000$12,000

bikes $40,000 $50,000 real GDP $46,000 $62,000

Price Index measures average price level: GDP deflator

GDP deflator: amount to divide nominal Y to get real Y

“Variable weight index” nominal Y uses each good’s current P (if PORANGE rises, nominal Y reflects the actual quantity sold)

GDPreal

GDPnominaldeflGDP .

Y

YPdeflGDP

.

“Fixed weight price index”: uses P of same basket (until it’s revised) Base period: year when CPI = 100

(currently 1982) Expenditure base period: year when

basket components chosen (currently 2005)

Price Index measures average price level: CPI

pricesyearbaseatbasketvalue

pricescurrentatbasketvalueCPI

Calculating Growth Rates

Y growth: (Yt+1 - Yt)/Yt

Price level growth: (Pt+1 - Pt)/Pt

Practice Question 1 1. The primary factor that caused most

economists to lose their faith in the classical approach to macroeconomic policy was

(a) the high levels of unemployment that occurred during the Great Depression.

(b) the presence of both high unemployment and high inflation during the 1970s.

(c) the theoretical proof that classical ideas were invalid.

(d) the evidence that classical ideas were useful during economic booms, but not during economic recessions.

These questions are taken from 2012 exam 1

Practice Question 2 2. The Bigdrill inc. drills for oil, which it

sells for $200 million to Bigoil inc. to be made into gas. Bigoil inc’s gas is sold for a total of $600 million. What is the total contribution to the country’s GDP from Bigdrill and Bigoil?

(a) $200 million (b) $400 million (c) $600 million (d) $800 million

3. In 2002, private saving was $1590 billion, investment was $1945 billion, and the current account balance was –$489 billion. From the uses-of-saving identity, how much was government saving?

(a) –$134 billion (b) –$844 billion (c) $844 billion (d) $134 billion

4. Intermediate goods are (a) capital goods, which are used up in

the production of other goods but were produced in earlier periods.

(b) final goods that remain in inventories.

(c) goods that are used up in the production of other goods in the same period that they were produced.

(d) either capital goods or inventories.