Introduction to Macroeconomics Chapter 4 Measuring Output of the Macroeconomy.
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Transcript of Introduction to Macroeconomics Chapter 4 Measuring Output of the Macroeconomy.
![Page 1: Introduction to Macroeconomics Chapter 4 Measuring Output of the Macroeconomy.](https://reader035.fdocuments.in/reader035/viewer/2022062304/56649d225503460f949f8856/html5/thumbnails/1.jpg)
Introduction to Macroeconomics
Chapter 4
Measuring Output of the Macroeconomy
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Introduction to Macroeconomics
Chapter 4. Measuring the Macroeconomy
1. Measuring Total Output2. How to Measure GDP3. GDP Accounting Complications4. Nominal and Real GDP5. Measuring Price Changes6. Empirical Applications
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Introduction to Macroeconomics
1. Measuring Total Output
• Monetary Measure of Value
• GDP versus GNP
• Omissions from GDP - does not measure social welfare
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Introduction to Macroeconomics
1. Measuring Total Output Monetary Measure of Value
Quantity times Price equals Market Value
Cars 1,000 x $20,000 = $20,000,000
Dolls 10,000 x $ 10 = $ 100,000
Total Value of Output = $20,100,000
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Introduction to Macroeconomics
1. Measuring Total Output GDP versus GNP
• Nominal Gross Domestic Product (GDP) - the market value of final goods and services (i.e., sold to final consumers) produced by a nation during a specific period, usually 1 year.
• Nominal Gross National Product (GNP) - the market value of final goods and services produced by labor and property supplied by the residents of a nation during a specific period, usually 1 year.
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Introduction to Macroeconomics
1. Measuring Total Output Omissions from GDP
GDP is a poor measure of social welfare:• Leisure• Home and volunteer labor
(non market production)• Depletion of nonrenewable resources• Unregulated pollution• Distribution of income• Differences in preferences
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Introduction to Macroeconomics
2. How to Measure GDP
• Circular Flow
• Expenditure Approach
• Income Approach
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Introduction to Macroeconomics
2. How to Measure GDP Circular Flow of Income and Expenditures
Households BusinessFirms
Resources
Income
Goods and Services
Expenditures
Solid Lines - Flow of MoneyDashed lines - Flow of Goods and Services
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Introduction to Macroeconomics
2. How to Measure GDP Expenditure Approach
• GDP = Consumption Spending (C)
+ Private Domestic Investment (I)
+ Government Spending (G)
+ Exports - Imports (net exports, NX)
• GDP = C + I + G + NX
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Introduction to Macroeconomics
2. How to Measure GDP Expenditure Approach: Expenditure Shares
Consumption69.9 %
Government Spending18.8 %
Investment15.2 %
2002 U.S. Nominal Gross Domestic Product
Net Exports = - 4.1 % (not shown in slide)
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Introduction to Macroeconomics
2. How to Measure GDP Expenditure Approach: Consumption
40%
45%
50%
55%
60%
65%
70%
75%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1999U.S. 68.2 %Japan 60.1 %
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Introduction to Macroeconomics
2. How to Measure GDP Expenditure Approach: Government
0%
5%
10%
15%
20%
25%
30%
35%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1999U.S. 17.6 %Japan 18.4 %
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Introduction to Macroeconomics
2. How to Measure GDP Expenditure Approach: Investment
0%
5%
10%
15%
20%
25%
30%
35%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1999U.S. 17.9 %Japan 20.0 %
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Introduction to Macroeconomics
2. How to Measure GDP Expenditure Approach: Net Exports
-6%
-4%
-2%
0%
2%
4%
6%
1959 1969 1979 1989 1999
Per
cen
t o
f G
DP
U.S.
Japan
1999U.S. - 3.7 %Japan 1.5 %
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Introduction to Macroeconomics
2. How to Measure GDP Income Approach
• National Income = GDP (with corrections)
• Personal Income = National Income (with corrections)
• Personal Income - Personal income taxes - Social Security withholding = Disposable Personal Income
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Introduction to Macroeconomics
3. GDP Accounting Complications
• Double Counting
• Depreciation
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Introduction to Macroeconomics
3. GDP Accounting Complications Double Counting
• Intended for “final” use– excludes intermediate products
• Value Added– excludes used goods
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Introduction to Macroeconomics
3. GDP Accounting Complications Depreciation
Gross Investment
- Depreciation
= Net Investment
Gross Domestic Product (GDP)
- Depreciation
= Net Domestic Product (NDP)
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Introduction to Macroeconomics
4. Nominal and Real GDP
• Definitions
• Sample Problem
• GDP Growth
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Introduction to Macroeconomics
4. Nominal and Real GDP Definitions
• 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
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Introduction to Macroeconomics
4. Real GDP Sample Problem
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
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Introduction to Macroeconomics
4. Real GDP Definition of Nominal GDP
Nominal GDP
= Current year Quantities
x Current year Prices
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Introduction to Macroeconomics
4. Real GDP Sample Problem: 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
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Introduction to Macroeconomics
4. Real GDP Sample Problem: 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
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Introduction to Macroeconomics
4. Real GDP Definition of Real GDP
Real GDP
= Current year Quantities
x Base year Prices
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Introduction to Macroeconomics
4. Real GDP Sample Problem: 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
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Introduction to Macroeconomics
4. Real GDP Sample Problem: 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
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Introduction to Macroeconomics
4. Real GDP Sample Problem: GDP Growth
• Growth in Nominal GDP= (160 - 127) • 100 = 26%
127
• Growth in Real GDP= (143 - 127) • 100 = 13%
127
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Introduction to Macroeconomics
5. Measuring Price Changes
• Price index
• GDP deflator
• Consumer price index
• Problems with price indexes
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Introduction to Macroeconomics
5. Measuring Price ChangesPrice indexes
• Price Index: a measure of the change in the average level of prices
• GDP Deflator– Base-year prices– Quantities variable– Imports excluded
• Consumer Price Index– Base year quantities– Prices variable– Imports included
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Introduction to Macroeconomics
5. Measuring Price ChangesGDP deflator
GDP Deflator = Nominal GDP • 100
Real GDP
1992 GDP Deflator = 127• 100 = 100.0
127
1994 GDP Deflator = 160 • 100 = 111.9
143
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Introduction to Macroeconomics
5. Measuring Price ChangesInflation
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
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Introduction to Macroeconomics
5. Measuring Price ChangesProblems 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
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Introduction to Macroeconomics
6. Empirical Applications
• Use Real rather than Nominal values
• Compare Per Capita rather than Aggregates
• Compare Growth Rates rather than Levels
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Introduction to Macroeconomics
6. Empirical Applications Compare Per Capita rather than Aggregates
Real GDP Per Capita, 1929 - 2002
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
1929 1939 1949 1959 1969 1979 1989 1999
Ch
ain
ed
19
96
Do
llars
Source: Bureau of Economic Analysis (www.bea.doc.gov)
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Introduction to Macroeconomics
6. Empirical Applications Compare growth rates rather than levels
10-year Changes in Real GDP Per Capita
0.59%
4.59%
2.39%
3.03%
2.19% 2.05%1.78%
0%
1%
2%
3%
4%
5%
1930-1939
1940-1949
1950-1959
1960-1969
1970-1979
1980-1989
1990-1999
An
nu
al A
ve
rag
e P
erc
en
t C
ha
ng
e
Source: Bureau of Economic Analysis (www.bea.doc.gov)