Lecture 12:Measuring GDP

Lecture 12:Measuring GDP

What is the circular flow of income and expenditure?

How are GDP, real GDP, and the average price level measured?

What are the shortcomings of each measure of economic performance?

We will be adding some slides to todays talk

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Direction for Next Week

Have seen that Unemployment and Inflation are the twin evils inflation: see pgs 127-128 for

discussion of index calculation

Today GDP as a barometer of the economys well-being

Next. How is GDP determined??

Your Weekend

Parkin Chapter 6 and 7 EIA 7, There is nothing else to do!!!!!!!

Economic Barometers The U.S. Department of Commerce

publishes GDP statistics every quarter (three months). These statistics are a barometer of the economy, telling us: how fast it has grown the rate of inflation

Companies use this data to forecast future demand for their products.

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Gross Domestic Product

Gross domestic product (GDP) is the dollar value of total production of goods and services in a country during a calendar year.

you can plot the time path of GDP in EIA

the easiest way to understand GDP is to use a circular flow diagram.

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The Circular Flow ofIncome and Expenditure

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Sectors of the Economy

The economy has four sectors: households firms governments the rest of the world

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Markets of the Economy

The economy has three aggregate markets: factor markets

goods and services markets (heart) financial markets

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Gross domestic product is the value of aggregate production in a country during a year.

GDP can be valued one of two ways: By what buyers pay for it By what it costs producers to make it

These two ways of adding up GDP always give the same answer.

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Aggregate Expenditure

The total amount that buyers pay for the goods produced is aggregate expenditure.

Aggregate expenditure includes: Consumption (C) Investment (I) Government purchases (G) Net exports (NX)

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Injections and Leakages

Leakages from the circular flow of spending and income are saving, net taxes, and imports.

Injections into the circular flow include investment, government purchases, and exports.

Injections always equal leakages. why is this important?

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The Expenditure Approach

The expenditure approach measures GDP by collecting data on: consumption expenditure (C) investment (I) government purchases (G) net exports (NX)

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Expenditure Equals Income

Y = C + I + G + NX

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Measuring U.S. GDP

1) Expenditure Approach

2) Income Approach

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Expenditure Approach Uses data on consumption expenditure,

investment, government purchases, and net exports

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Expenditure Approach Personal consumption expenditures are

the expenditures by households on goods and services produced in the United States and the rest of the world

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Expenditure Approach Gross domestic investment is

expenditure on capital equipment and buildings by firms and expenditure on new homes by households. Also, it includes the change in inventories.

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Expenditure Approach Government purchases of goods and

services are the purchases of goods and services by all levels of government.

• Does not include transfer payments

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Expenditure Approach Net exports of goods and services are

the value of exports minus the value of imports

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GDP in 1997

Item Amount(billion $)

% ofGDP

Consumption (C) 5,628 68.7

Investment (I) 1,133 15.3

Government (G) 1,275 17.4

Net exports (NX) -98 -1.4

GDP (Y) 7,938 100.0

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Expenditures Not in GDP

Aggregate expenditure equals GDP. However, not all the things that people and

businesses buy are included in this final expenditure.

Spending not part of GDP includes: Intermediate goods and services Used goods Financial securities

Why are these excluded?

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Value Added andFinal Expenditure

Value addedFarmer Farmer’s

value added

Final expenditure

Intermediate expenditure

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Value addedFarmer

Miller

Farmer’svalue added

Value of wheat

Miller’svalue added Final

expenditure


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Value addedFarmer

Miller

Baker


Value of wheat

Valueof flour

Miller’svalue added

Bakersvalue added

Final expenditure


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Value addedFarmer

Miller

Baker

Grocer


Value of wheat

Valueof flour

Wholesalevalue of bread


Bakersvalue added

Grocer’s value added

Final expenditure


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Value addedFarmer

Miller

Baker

Grocer

Consumer


Value of wheat

Valueof flour

Wholesalevalue of bread

Retail value of bread;Final Expenditure on bread


Bakersvalue added

Grocer’s value added

Final expenditure


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Intermediate Goodsand Services

Intermediate goods and services are the goods and services that firms buy from each other and use as inputs in the goods and services they eventually sell to final users.

The way a good is counted depends on its use. Ice cream sold to you is a final good, while ice cream sold to a restaurant is an intermediate good.

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Used Goods

Expenditure on used goods (previously owned goods) is not part of GDP because these goods were counted as GDP in the period in which they were originally produced.

However, the services of sales people and firms who sell used goods are included in GDP.

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Financial Securities

Firms often sell financial securities such as stocks and bonds to finance purchases of capital goods.

Since GDP already includes the amount spent on producing new capital goods, it would be double counting to include the amount raised financing the purchase.

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Aggregate Expenditure, Income, and GDP

Aggregate expenditure equals aggregate income.

The Department of Commerce uses both approaches to estimate GDP because their estimates are based on samples of information.

They can check one aggregate against the other.

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We will use the aggregate expenditureapproach in any calculation of GDP onan exam.

Distinguishing Real and Nominal GDP

Ck out EIA Real gdp = Nom gdp / price index economic well-being is increased with an

increase in real gdp so we have to subtract price inflation from nominal gdp growth.

the numbers you see reported in the WSJ are inflation adjusted numbers or real gdp

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The U.S. GDP Balloon

1996

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GDPdeflator

1996

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GDPdeflator

19961992

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Limitations of GDP as a measure of well-being

see pages 132-133 in your text GDP is used as a measure of

economic well-being. Think of GDP as output (or aggregate income). When GDP increases the total economic pie increases so presumably each individual has the opportunity to consume a bigger piece of the pie

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But is GDP a good measure of well-being?

? overadjustments for inflation. confusing quality changes with inflation

household production underground economic activity quality of life issues

health, liesure, pollution, political freedom.

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Lecture 12:Measuring GDP

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