Lecture 12:Measuring GDP

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Lecture 12Measuring 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??

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Your Weekend

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

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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

• 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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Gross Domestic Product

• Expenditure Equals Income
• Y C I G NX

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Gross Domestic Product

• Measuring U.S. GDP
• 1) Expenditure Approach
• 2) Income Approach

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Gross Domestic Product

• Expenditure Approach
• Uses data on consumption expenditure, investment,
  government purchases, and net exports

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Gross Domestic Product

• 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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Gross Domestic Product

• 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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Gross Domestic Product

• 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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Gross Domestic Product

• 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
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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 added
Farmers value added
Farmer
Intermediate expenditure
Final expenditure
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Value Added andFinal Expenditure
Value added
Farmers value added
Farmer
Intermediate expenditure
Value of wheat
Millers value added
Miller
Final expenditure
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Value Added andFinal Expenditure
Value added
Farmers value added
Farmer
Intermediate expenditure
Value of wheat
Millers value added
Miller
Final expenditure
Value of flour
Bakers value added
Baker
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Value Added andFinal Expenditure
Value added
Farmers value added
Farmer
Intermediate expenditure
Value of wheat
Millers value added
Miller
Final expenditure
Value of flour
Bakers value added
Baker
Wholesale value of bread
Grocers value added
Grocer
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Value Added andFinal Expenditure
Value added
Farmers value added
Farmer
Intermediate expenditure
Value of wheat
Millers value added
Miller
Final expenditure
Value of flour
Bakers value added
Baker
Wholesale value of bread
Grocers value added
Grocer
Retail value of bread Final Expenditure on bread
Consumer
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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 expenditure approach
in any calculation of GDP on an exam.
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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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The U.S. GDP Balloon
GDP deflator
1996
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The U.S. GDP Balloon
GDP deflator
1996
1992
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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.