GDP – A Measure of Output The Macroeconomic Perspective Chapter 5.

GDP– A Measure of Output

The MacroeconomicPerspective

Chapter 5

• Measuring the Size of the Economy: Gross Domestic Product

• Adjusting Nominal Values to Real Values

• Tracking Real GDP over Time

• Comparing GDP among Countries

• How Well GDP Measures the Well-Being of Society

Basic Macroeconomics

• Gross Domestic Product (GDP): The market value of final goods and services produced within a country during a specific time period, usually a year.

GDP vs GNP??• GDP: production within a country’s borders

(domestic)

• GNP: production by people of a country (national)

Two Ways of Measuring GDP

What is ProducedExpenditures

• 1. Expenditure Approach:• GDP is the sum of expenditures on final user

goods and services purchased by households, investors, governments, and foreigners.

• There are four components of GDP: • personal consumption purchases C• gross private investment Ig

(including inventories) • government purchases G

(consumption and investment)• net exports ( exports minus imports ) Xn

GDPDollar flow ofexpenditureson final goods

=Dollar flow of

income (and indirect cost) of final goods

=

Measuring GDP

GDP = C + Ig + G + Xn

• (Consumer) Consumption is over half of the GDP.

• (Source: http://bea.gov/iTable/index_nipa.cfm)

(a) Not much change in the C, I or G percents over time.

(b) Exports are added to total demand

(c) Imports are subtracted from total demand.

(d) Exports exceed imports, in the 1960s and 1970s

(Source: http://bea.gov/iTable/index_nipa.cfm)

GDP = C + Ig + G + Xn

2. What is Produced:

Goods and Services (and Structures)• Services 62.1%

• Nondurable goods 16.7%

• Durable goods 13.2%

• Structures 7.4%n

• Inventory Changes 0.6%

Measuring GDP

Goods, Services and the other stuff

• GDP is measured in dollars• Each good produced increases output

by the amount the purchaser pays for the good.

GDP is the sum of total spending on all

goods and services produced during the year.

Stage of productionValue added to the product (equals income created)

Sales Receipts(at each stage of production)

Stage 1: farmer’s wheat

Stage 2: miller’s flour

Stage 3: baker’s bread(wholesale)

Stage 4: grocer’s bread (retail)

$.30

$.65

$.90

$1

by farmer$.30

by grocer$.10

by miller$.35

by baker$.25

• What Does Not Count Toward GDP?• Sales at intermediate stages of production.

Their value is already counted in the final-user good. Including them would result in double counting.

Total consumer expenditure = $1 Total value added = $1

Only final goods and services countOnly final goods and services count

• What Else? • Financial transactions and income transfers.

They do not reflect production. • Production outside the geographic

borders of the country is not counted. • Goods not produced during the

current period are not counted.

Stocks

1955 Chevy

Which are included in this year's GDP? :

• 1. Interest on an AT&T bond - • 2. Social Security payments to retirees -• 3. Services of a painter in painting a house - • 4. Income of a dentist -• 5. Money received from the sale of a 1990 model car- • 6. Monthly allowance of a college student -• 7. Rent for a 2 bedroom apartment -• 8. Money received for selling this year's model car - • 9. Interest on a government bond -

YES

YESNONO

YES

YESYE

SYES

YES

YES YE

SYES

NONO

NONO

NONO

Which?

• 10. A two hour decline in the work week -• 11. Purchase of the AT&T bond -• 12. A $ 2 billion increase in business investments -• 13. Purchasing 100 shares of GM common stock -• 14. Purchase of an insurance policy -• 15. Wages paid to your butler -• 16. Market value of a homemaker's services -• 17. Purchase of the Mona Lisa -

NONO

YES

YES

YES

YESYE

SYES

NONO

NONO

NONO

NONO

2. Resource Cost - Income ApproachGDP is the sum of costs incurred and income (including profits) generated by production of goods and services during the period.

Not covered

Other Measures of GDP

4. Output – by Industry

Add up output by each industrial sector Chemicals + Agriculture + …

Not covered

• Gross National Product (GNP): Output by the “nationals” – citizens of the country, regardless of whether that output is produced domestically or abroad.

• National income: Income earned by the nationals (citizens) during a period. It is the sum of employee compensation, self-employment income, rents, interest, and corporate profits. Minus depreciation and taxes

• Personal income: Income received by domestic households and non-corporate businesses. It is available for consumption, saving, and personal taxes. Includes transfers.

• Disposable income: Income available to individuals after personal taxes. Can be spent on consumption or saved.

• The term "real" means adjusted for inflation. • Price indexes are use to adjust data for

inflation. • A price index measures the cost of

purchasing a good (or goods) at a point in time relative to the cost of purchasing the identical good during an earlier (or base) period.

Year $ Spending Index

1 170 _____

2 180 _____

3 Base year 200 _____

4 200 _____

5 224 _____

6 250 _____

7 280 _____

Year $ Spending Index

1 170 _____

2 180 _____

3 Base year 200 _____

4 200 _____

5 224 _____

6 250 _____

7 280 _____

Current year spendingBase year spending

x 100

Creating a price indexCreating a price index

Gross Domestic Product

Complete the following table assuming that Year 1 is the base year.

Year Output Price Money GDP

GDP Index

Real GDP

1 100 $4.00

2 120 4.40

3 110 5.00

4 110 5.20

5 135 5.20

6 140 5.60

Gross Domestic Product

Complete the following table assuming that Year 1 is the base year.

Year Output Price Money GDP

GDP Index

Real GDP

1 100 $4.00 $400 100 $400

2 120 4.40 528 110 480

3 110 5.00 550 125 440

4 110 5.20 572 130 440

5 135 5.20 702 130 540

6 140 5.60 784 140 560

• measures the impact of price changes on the cost of a typical bundle of goods and services purchased by households.

• designed to measure the change in the average price of the market basket of goods included in GDP (a broader price index than the CPI).

2. WPI2. WPI

1. PPI1. PPI

3. MPI3. MPI

CPI and GDP Deflator: 1991-2001• Even though the CPI and the GDP

deflator are based on different market baskets and procedures, they yield similar estimates of the rate of inflation.

YearCPI

(1982-84 = 100)

19961997199819992000

156.9160.5163.0166.6172.2

3.02.31.52.23.4

1.91.71.11.42.2

GDP deflator (2000 = 100)

20022003

179.9184.0

1.62.3

1.71.8

104.1106.0

93.995.496.597.9

100.0

Inflation rate(percent)

Inflation rate (percent)

Source: http://www.economagic.com.

2001 177.1 2.8 2.4102.4

20052006

195.3201.6

3.43.2

3.02.9

112.7116.0

2004 188.9 2.7 2.8109.4

Real GDP2 = Nominal GDP2 * GDP Deflator1

GDP Deflator2

• Data on both money GDP and price changes are essential for meaningful comparisons of output between two time periods.

• The formula for converting the nominal GDP into real GDP is:

Converting Earlier Figures to Current Dollars • For comparisons across time periods, we must

use current dollars.• Done by “inflating” the earlier data for the

increase in the price level.• The formula:

Figurecurrent $ = Figureearlier $ * price indexcurrent year

price indexearlier year

• This will “inflate” the data for earlier years into line with the current purchasing power of the $.

Source: U.S. Department of Commerce.

1996 2001 % increase

Nominal GDP(billions of U.S. $)

Real GDP(billions of 1996 $)

$7,813 $10,208 30.7%

Price index (GDP deflator, 1996 = 100)

100.0 109.4 9.4%

$7,813 $9,331 19.4%

Deriving Real GDP

Like “Deflating” the $


1998 2003 % increase



$8,747 $11,004 25.8%


96.5 106.0 9.8%

$8,747 $10,018 14.5%


20002006% increase



$9,817 $13,247 34.9%


100.0 116.0

16.0%

$9,817 $11,420 16.3%

Interesting Questions 1. The CPI was 177 in 2001 compared to 100 in 1983.

Suppose that the price of a ticket at a local movie theater rose from $4 to $8 between 1983 and 2001. Did the real ticket price increase or decrease? Calculate the 1983 ticket price measured in 2001 dollars.

2. The CPI was 210 in 2007 compared to 100 in 1983. Suppose that the price of a ticket at a local movie theater rose from $4 to $8 between 1983 and 2007. Did the real ticket price increase or decrease? Calculate the 1983 ticket price measured in 2007 dollars.

Questions for Thought:3. Use the following data to answer this

question.

a. Calculate the real GDP in 1999, 2000, and 2001

measured in 1996 dollars.b. What was the percent change in real GDP

between 1999 and 2000? What was the percent change between 2000 and 2001?

c. What was the inflation rate as measured by the

GDP deflator in 2000 and 2001?

Nominal GDP(trillions of $)

GDP deflator(1996=100)

199920002001

9.279.87

10.21

104.7107.0109.4

Questions for Thought:1. The CPI was 177 in 2001 compared to 100 in 1983. Suppose that the price of a ticket at a local

movie theater rose from $4 to $8 between 1983 and 2001. Did the real ticket price increase or decrease? Calculate the 1983 ticket price measured in 2001 dollars.

Year CPI Nominal Ticket Real Ticket 1983 Real Ticket 2001

1983 100 $4

2001 177 $8

2007 210 $8

2. Use the following data to answer this question.

a. Calculate the real GDP in 1999, 2000, and 2001 measured in 1996 dollars.

b. What was the percent change in real GDP between 1999 and 2000? What was the percent change between 2000 and 2001?

c. What was the inflation rate as measured by the GDP deflator in 2000 and 2001?

Nominal GDP(trillions of $)

GDP deflator(1996=100)

199920002001

9.279.87

10.21

104.7107.0109.4

Real GDP(trillions of $)

% change Inflationrate

_____________________

______________

______________

_______ _______

GDP Deflator

Real and Nominal GDP

GDP ComparisonsAcross Time Periods and Across Countries

GDP Across Countries

GDP per Capita

Country Real GDP GDP per Capita

Brazil 2,356 11,875

Canada 1,488 42,734

China 12,406 9,162

Egypt 540 6,545

Germany 3,197 39,028

India 4,684 3,830

Japan 4,628 36,266

Mexico 1,759 32,272

South Korea 1,614 15,312

United Kingdom 2,336 36,941

United States 16,245 51,706

Per capita GDP Across Time Periods

• Per capita GDP has steadily risen. In 2000, per capita GDP was 4.6 times the 1940 figure. What does this mean?

$7,827

$13,840

$22,666

$6,418

$11,717

$18,391

$35,769

$28,429

1930 1950 1970 1990 2000

U.S. Per Capita GDP(in 2000 U.S. dollars)

1940 1960 1980

Source: derived from U.S. Department of Commerce data.

$38,687

2006

Per Capita GDP ComparisonsAcross Countries

• GDP comparisons across countries may be biased (or vary) because of differences in • leisure versus time worked, • size of the underground economy, • the share of output in the household rather

than the business sector. .• POPULATION

• There is a strong relationship between per capita GDP across countries and indicators of living standards such as life expectancy, infant mortality, and literacy.

• Shortcomings of GDP:• It does not count non-market production. • It does not count the underground economy.• It makes no adjustment for leisure.• It probably understates output increases

because of the problem of estimating improvements in the quality of products.

• It does not adjust for harmful side effects.• It does not consider standard of living – GDP

per person• Great contribution of GDP:

• In spite of its shortcomings, real GDP is a reasonably accurate measure of short-term fluctuations in output.

1. Which of the following activities will affect GDP:a. You pay $600 per month to lease an apartment.b. You pay $8,000 to purchase a four-year-old car.c. You have car trouble and have to pay a repair shop

$1,500 to fix the transmission of your car.d. You pay $5,100 to purchase 100 shares of Microsoft

stock ($50 per share for the stock plus a $100 fee).e. You sell your 100 shares of Microsoft stock

(purchased for $5,000) for $6,000 minus a $100 brokerage fee.

f. Your aunt sends you $500 to help with your expenses.

g. You earn $500 providing computer services for a faculty member.

h. You win $500 playing cards with classmates.

GDP – A Measure of Output The Macroeconomic Perspective Chapter 5.

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