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Introduction to Macroeconomics. Chapter 20. Measuring the Macroeconomy. Measuring the Macroeconomy. 1. Measuring Total Output 2. How to Measure Total Output 3. GDP Accounting Complications 4. Measuring Price Changes 5. Empirical Applications. 1. Measuring Total Output. - PowerPoint PPT Presentation
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Introduction to Macroeconomics
Chapter 20. Measuring the Macroeconomy
Measuring the Macroeconomy
1. Measuring Total Output
2. How to Measure Total Output
3. GDP Accounting Complications
4. Measuring Price Changes
5. Empirical Applications
1. Measuring Total Output
• Monetary Measure of Value• GDP versus GNP• Omissions from GDP - does not measure
social welfare
2. How to Measure GDP
• Expenditure Approach• Income Approach
Circular Flow of Income and Expenditures
Expenditure Approach
• GDP = Consumption Spending (C) + Private Domestic
Investment (I)
+ Government Spending (G)
+ Exports - Imports (NX)
• GDP = C + I + G + NX
Expenditure Shares
Consumption66.8 %
Government Spending17.5 %
Investment17.5 %
1998 U.S. Nominal Gross Domestic Product
Net Exports = - 1.7 % (not shown in slide)
Consumption Trends
40%
45%
50%
55%
60%
65%
70%
75%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1998U.S. 66.8 %Japan 59.7 %
Government Spending Trends
0%
5%
10%
15%
20%
25%
30%
35%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1998U.S. 17.5 %Japan 18.2 %
Investment Trends
0%
5%
10%
15%
20%
25%
30%
35%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1998U.S. 17.5 %Japan 20.0 %
Net Export Trends
-4%
-2%
0%
2%
4%
6%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan 1998U.S. - 1.7 %Japan 2.1 %
National Income
• National Income with corrections = GDP
• National Income with corrections = Personal Income
• Personal Income - Personal income taxes
- Social Security withholding
= Disposable Personal Income
3. GDP Accounting Complications
• Double Counting– Intended for “final” use
• excludes intermediate products
– Value added• excludes used goods
• Depreciation
Depreciation
Gross Domestic Product (GDP)
- Depreciation
= Net Domestic Product (NDP)
Depreciation of Private Capital Stock
0%
10%
20%
30%
40%
50%
60%
70%
80%
1947 1953 1959 1965 1971 1977 1983 1989 1995 2001
Percent of GrossPrivate Investment
Percent of GDP
4. Measuring Price Changes
• Price Index - a measure of the change in the average level of prices
• GDP Deflator• Consumer Price Index
GDP Deflator
• Nominal GDP– Value of output measured at actual prices
(current dollar output)– Does not correct for inflation
• Real GDP– Value of output based on prices of some base
period (“constant” dollar output)– eliminates effect of inflation
• GDP Deflator
= Nominal GDP ÷ Real GDP
Simple Economy
Average Prices Quantity Sold
1992 1994 % Change 1992 1994
Food $ 12 $ 14 17 % 4 5
Housing 9 10 11 % 3 3
Fun 4 5 25 % 3 4
Machines 20 20 0 % 2 2
Nominal GDP
Current year Quantities
x Current year Prices
1992 Nominal GDP
= 1992 Quantities x 1992 Prices
= 1992 Spending onFood Housing Fun Machines
= 4 • $12 + 3 • $9 + 3 • $4 + 2 • $20
= $48 + $27 + $12 + $40
= $127
1994 Nominal GDP
= 1994 Quantities x 1994 Prices
= 1994 Spending onFood Housing Fun Machines
= 5 • $14 + 3 • $10 + 4 • $5 + 2 • $20
= $70 + $30 + $20 + $40
= $160
Real GDP
Current year Quantities
x Base year Prices
1992 Real GDP
= 1992 Quantities x 1992 Prices
Food Housing Fun Machines
= 4 • $12 + 3 • $9 + 3 • $4 + 2 • $20
= $48 + $27 + $12 + $40
= $127
1994 Real GDP
= 1994 Quantities x 1992 Prices
Food Housing Fun Machines
= 5 • $12 + 3 • $9 + 4 • $4 + 2 • $20
= $60 + $27 + $16 + $40
= $143
GDP Growth
• Growth in Nominal GDP= (160 - 127) • 100 = 26%
127
• Growth in Real GDP= (143 - 127) • 100 = 13%
127
GDP Deflator
GDP Deflator = Nominal GDP • 100
Real GDP
1992 GDP Deflator = 127• 100 = 100.0
127
1994 GDP Deflator = 160 • 100 = 111.9
143
Inflation
Change in Average Level of Prices
= Percent Change in GDP Deflator
Inflation from 1992 to 1994
= (1994 Deflator - 1992 Deflator) • 100
1992 Deflator
= (111.9 - 100.0) • 100 = 11.9%
100.0
Price Indexes
• GDP Deflator– Base-year prices– Quantities variable– Imports excluded
• Consumer Price Index– Base year quantities– Prices variable– Imports included
Problems With Price Indexes
• Substitution bias - changes in relative prices– between goods (butter vs margarine)– between stores (small vs large discounters)
• Quality changes and new products• Chain-weighted indexes
5. Empirical Applications
• Use Real rather than Nominal values• Compare Per Capita rather than
Aggregates• Compare Growth Rates rather than
Levels
