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Measuring Economic Activity

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Title: Measuring Economic Activity


1
  • Chapter 19
  • Measuring Economic Activity

2
GDP
  • Gross domestic product is the value, at current
    market prices, of all final goods and services
    produced annually in a given country.
  • Final goods and services are those sold to
    parties who will use them for consumption,
    investment, government purchases, or exports.
  • Not included in GDP
  • Intermediate goods used in production of other
    goods
  • Sales of used goods
  • Most financial transactions

Medical care is a service included as part of
gross domestic product.
3
GDP and Value Added
  • GDP must include only the value of final goods
    and services if it is to measure total production
    without double counting.
  • The value of sales at each stage of production
    can be divided into the value added at that stage
    and the value of purchased inputs.
  • The selling price of the final product (a 100
    table, in this case) equals the sum of the values
    added at all stages of production.

4
Expenditure Approach to GDP
  • Gross domestic product is estimated using the
    expenditure approach.
  • This involves adding together the values of
    expenditures on newly produced final goods and
    services made by all economic units
    CIG(Ex-IM).
  • Net domestic product is derived from gross
    domestic product by excluding the value of
    expenditures made to replace worn-out or obsolete
    capital equipment.

US, 2012
5
National and Domestic Income
  • National and domestic income are measured using
    the income approach.
  • National income is obtain by adding together the
    values of all forms of income earned by a
    countrys residents.
  • Domestic income is derived from national income
    by subtracting receipts of factor income from the
    rest of the world and adding factor income paid
    to the rest of the world.

US, 2012
6
Balance of Payments Accounts (1)
  • Current account transactions consist of imports
    and exports of goods and services, together with
    international flows of factor income and transfer
    payments.
  • The US had a current account deficit of 674
    billion in 2012.

2012, Billions of Dollars
7
Balance of Payments Accounts (2)
  • Capital and financial account transactions
    consist of international borrowing and lending,
    securities transactions, direct investment, and
    official reserve transactions.
  • If all amounts were measured completely and
    accurately, the current account and financial
    account balances would be equal and opposite in
    sign.
  • In practice, there is a statistical discrepancy
    indicating errors and omissions in measurement.

2012, Billions of Dollars
8
Consumer Price Index for a Simple Economy
  • To calculate the consumer price index, divide the
    value of base-year prices valued at current-year
    prices by the value of base-year goods valued at
    base-year prices.
  • In this case, the CPI is 170.

9
How Good Are the GDP Accounts?
  • U.S. national accounts are among the best in the
    world, but they still suffer from major
    limitations
  • Accuracy vs. timeliness
  • Biases in price indexes and changes in quality of
    goods
  • Omission of the underground economy
  • Omission of nonmaterial sources of welfare

The quality of computers has increased rapidly
even as their price has fallen.
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