CHAPTER 6

Macroeconomic Measurements,Part II: GDP and Real GDP

ECONOMICS, 5eRoger Arnold

ECONOMICS, 5eRoger Arnold

MACROECONOMIC MACROECONOMIC QUESTIONSQUESTIONS

A Nation's IncomeA Nation's Income– The most central issue of macroeconomics is an The most central issue of macroeconomics is an

economy's total production of goods and economy's total production of goods and servicesservices

– A nation's income is the total of all the incomes A nation's income is the total of all the incomes of the people that live thereof the people that live there

MACROECONOMIC MACROECONOMIC QUESTIONSQUESTIONS

Gross Domestic Product (GDP)Gross Domestic Product (GDP)– The dollar value of total output of goods and The dollar value of total output of goods and

services is called nominal GDPservices is called nominal GDP» Part of the increases in GDP reflect inflationPart of the increases in GDP reflect inflation

» Adjusting GDP for inflation gives real GDPAdjusting GDP for inflation gives real GDP

MACROECONOMIC MACROECONOMIC VARIABLESVARIABLES

DefinitionsDefinitions– Real gross domestic productReal gross domestic product is a measure of a is a measure of a

country's total output of final markets goods country's total output of final markets goods and services during some yearand services during some year

– Nominal gross domestic productNominal gross domestic product is the dollar is the dollar value of a country's output of final market value of a country's output of final market goods and services during some yeargoods and services during some year

5

SOURCE: Bureau of Economic Analysis.

C H A P T E R 2C H A P T E R 2 T h e D a ta o f M a c ro e c o n o m ic sT h e D a ta o f M a c ro e c o n o m ic s s lid e 3 1

U .S. Real & N om inal GDP , U .S. Real & N om inal GDP , 19671967 -- 20012001

01 ,0 0 02 ,0 0 03 ,0 0 04 ,0 0 05 ,0 0 06 ,0 0 07 ,0 0 08 ,0 0 09 ,0 0 0

1 0 ,0 0 01 1 ,0 0 0

19 6 5 19 7 0 19 7 5 19 8 0 19 8 5 19 9 0 19 9 5 20 0 0

(bil

lio

ns

of

U.S

. d

oll

ars

)

NG D P (b illio ns o f $ ) R G D P (b i llio ns o f 1 9 9 6 $)

6

Exhibit 4The Circular Flow: Total Purchases (Expenditures) Equal Total Income in a Simple Economy

CIRCULAR FLOW AND CIRCULAR FLOW AND AGGREGATE DEMANDAGGREGATE DEMAND

Types of SpendingTypes of Spending– ConsumptionConsumption, or , or consumer spendingconsumer spending, is , is

spending by people on the final goods and spending by people on the final goods and services for current useservices for current use

CIRCULAR FLOW AND CIRCULAR FLOW AND AGGREGATE DEMANDAGGREGATE DEMAND

Types of SpendingTypes of Spending– InvestmentInvestment refers to spending to create new refers to spending to create new

capital goods, such as machines, equipment, capital goods, such as machines, equipment, inventories, human skills, and knowledgeinventories, human skills, and knowledge

CIRCULAR FLOW AND CIRCULAR FLOW AND AGGREGATE DEMANDAGGREGATE DEMAND

Types of SpendingTypes of Spending– Government purchasesGovernment purchases refers to all spending by refers to all spending by

the government except transfer payment (direct the government except transfer payment (direct payments of money to people)payments of money to people)

CIRCULAR FLOW AND CIRCULAR FLOW AND AGGREGATE DEMANDAGGREGATE DEMAND

Types of SpendingTypes of Spending– ExportsExports are sales of goods and services to are sales of goods and services to

people and firms in other countriespeople and firms in other countries

CIRCULAR FLOW AND CIRCULAR FLOW AND AGGREGATE DEMANDAGGREGATE DEMAND

Types of SpendingTypes of Spending– ExportsExports are sales of goods and services to are sales of goods and services to

people and firms in other countriespeople and firms in other countries– ImportsImports are purchases of goods and services are purchases of goods and services

from people and firms in other countriesfrom people and firms in other countries

CIRCULAR FLOW AND CIRCULAR FLOW AND AGGREGATE DEMANDAGGREGATE DEMAND

Types of SpendingTypes of Spending– Net exportsNet exports, or the , or the balance of international balance of international

tradetrade, equals exports minus imports, equals exports minus imports

13

Exhibit 1 The Components of GDP

14

What is the difference between What is the difference between GDP and GNP?GDP and GNP?

GNP is the value of all final goods and GNP is the value of all final goods and services produced by citizens of a nation services produced by citizens of a nation regardless of their location.regardless of their location.

GDP is the value of all final goods and GDP is the value of all final goods and services produced within the border of a services produced within the border of a nation regardless of citizenship.nation regardless of citizenship.

GNP = GDP + net foreign factor incomeGNP = GDP + net foreign factor income

15

Why do we make the distinction Why do we make the distinction about FINAL goods?about FINAL goods?

Final goods are in the hands of the ultimate Final goods are in the hands of the ultimate user.user.

Intermediate goods are inputs into the Intermediate goods are inputs into the production of final goods.production of final goods.

We only use final goods to avoid the We only use final goods to avoid the problem of “DOUBLE COUNTING”problem of “DOUBLE COUNTING”

Alternatively, we can use the value added at Alternatively, we can use the value added at each stage of productioneach stage of production

16

What GDP OmitsWhat GDP Omits

Certain Nonmarket Goods and ServicesCertain Nonmarket Goods and Services Underground ActivitiesUnderground Activities Sales of Used GoodsSales of Used Goods Financial TransactionsFinancial Transactions Government Transfer PaymentsGovernment Transfer Payments LeisureLeisure

17

GDP and Well BeingGDP and Well Being

GDP is useful in measuring the productive GDP is useful in measuring the productive capacity of an economy.capacity of an economy.

GDP is not necessarily a good measure of GDP is not necessarily a good measure of happiness or well being.happiness or well being.

Measurements of well being often include Measurements of well being often include measures of education, access to health measures of education, access to health care, infant mortality, and life expectancy.care, infant mortality, and life expectancy.

Two Ways of Measuring GDPTwo Ways of Measuring GDP

Expenditure approachExpenditure approach Income approachIncome approach See pages 79-80 in your workbook.See pages 79-80 in your workbook.

The Expenditure ApproachThe Expenditure Approach Household sector: ConsumptionHousehold sector: Consumption Business sector: Gross private domestic Business sector: Gross private domestic

investmentinvestment Government sector: Government purchasesGovernment sector: Government purchases Foreign sector: Net exportsForeign sector: Net exports

The Income Approach gives us The Income Approach gives us NATIONAL INCOMENATIONAL INCOME

Compensation of employeesCompensation of employees Proprietor's IncomeProprietor's Income Corporate profitsCorporate profits Rental income Rental income InterestInterest

From National Income to GDP: From National Income to GDP: Making Some AdjustmentsMaking Some Adjustments

- Income earned from the rest of the world- Income earned from the rest of the world + Income earned by the rest of the world+ Income earned by the rest of the world + Indirect business taxes+ Indirect business taxes + Capital consumption allowance + Capital consumption allowance

(depreciation)(depreciation) + Statistical discrepancy+ Statistical discrepancy

From National Income to GDP: From National Income to GDP: Making Some AdjustmentsMaking Some Adjustments

GDP = NI + indirect business taxes + GDP = NI + indirect business taxes + depreciation – net foreign factor incomedepreciation – net foreign factor income

NI = GDP - indirect business taxes - NI = GDP - indirect business taxes - depreciation + net foreign factor incomedepreciation + net foreign factor income

Other National IncomeOther National IncomeAccounting MeasurementsAccounting Measurements Net Domestic Product = GDP - Net Domestic Product = GDP -

DepreciationDepreciation Personal IncomePersonal Income = National Income - undist. = National Income - undist.

corp. profits - Social Security taxes - corp. corp. profits - Social Security taxes - corp. profits taxes + transfer pmts. + net interestprofits taxes + transfer pmts. + net interest

Disposable IncomeDisposable Income = Personal Income - = Personal Income - Personal taxesPersonal taxes

Disposable Income = Personal Cons. + Disposable Income = Personal Cons. + Personal SavingPersonal Saving

Desirable Economic States or Desirable Economic States or GoalsGoals

Price stabilityPrice stability Low unemploymentLow unemployment High and sustained economic High and sustained economic

growthgrowth

MACROECONOMIC MODELSMACROECONOMIC MODELS

Business CyclesBusiness Cycles– Business cyclesBusiness cycles are 2-year to 5-year are 2-year to 5-year

fluctuations around trends in real GDP and fluctuations around trends in real GDP and other related variablesother related variables

MACROECONOMIC MODELSMACROECONOMIC MODELS

Business CyclesBusiness Cycles– A A recessionrecession is a large fall in the growth of real is a large fall in the growth of real

GDP and related variablesGDP and related variables» A depression is an especially large recessionA depression is an especially large recession

What Is a Business Cycle?What Is a Business Cycle? PeakPeak Contraction (Recession)Contraction (Recession) TroughTrough RecoveryRecovery ExpansionExpansion

28

Exhibit 7 The Phases of the Business Cycle