Title: Ch. 5 : MEASURING GDP AND ECONOMIC GROWTH
1Ch. 5 MEASURING GDP AND ECONOMIC GROWTH
- Define GDP
- Circular flow model
- Relationship between aggregate expenditure and
aggregate income. - Measurement of real GDP and the GDP deflator
- Real GDP as a measure of economic growth and the
limitations of our measure
2Gross Domestic Product
- GDP gross domestic product
- the market value of all final goods and services
produced in a country by domestically located
resources in a given time period. - This definition has four parts
- Market value
- Final goods and services
- sales of intermediate goods not counted
- Produced within a country by domestically
located resources - In a given time period
- Inventory changes between periods for partially
completed products
3Gross Domestic Product
- GDP and the Circular Flow of Expenditure and
Income - GDP measures the value of production
- equals total expenditure on final goods
- equals total income from production.
- The circular flow diagram illustrates the
equality of income, expenditure, and the value of
production.
4Suppose that inventories are 20 billion at the
end of 2008 and 24 billion at the end of 2009,
this means that 4 billion of goods
- Produced in 2008 were not sold in 2008
- Produced in 2009 were not sold in 2009
- Produced in 2008 were sold in 2009
5Suppose that inventories are 20 billion at the
end of 2008 and 15 billion at the end of 2009,
this means that 5 billion of goods
- Sold in 2008 were produced prior to 2008
- Sold in 2009 were produced prior to 2009
- Produced in 2009 were unsold in 2009
6Circular FlowRedexpenditures, Blueincome,
Greenborrowing/lending/taxes
7Circular Flow Notation
- YTotal income
- Cconsumption
- Iinvestment
- Ggovernment purchases
- X-Mexports-imports (net exports
- Tnet taxestaxes-transfers
- Shousehold saving
8Circular Flow
- For any given sector, inflowsoutflows
- Household sector
- YCST
- Factor markets
- YCIG(X-M)
- Government
- T-Ggovernment lending (borrowing)
9Circular Flow
- Rest of World
- X-MU.S. lending (borrowing) with rest of world
- Financial markets
- S government budget surplus (deficit) lending
(borrowing) with rest of world -
10Gross Domestic Product
- Two ways to measure GDP
- Expenditure Approach
- Aggregate expenditure C I G (X-M)
- Income Approach
- Aggregate income Y Wages Rent Interest
Profit - Because Income and expenditure approach both
measure GDP - Y C I G (X-M)
11Expenditure Components of US GDP 2008 (billions
of )
12Gross Domestic Product
- Financial Flows
- Y C S T
- Y C I G (X-M)
-
- ST IG(X-M)
13Gross Domestic Product
- How Investment Is Financed
- The last equation could also be reorganized as
- I S (T-G) (M-X)
- Investment is financed from three sources
- Private saving, S
- Government budget surplus, (T G)
- S (T-G) is national saving
- Borrowing from the rest of the world (M X).
14Gross Domestic Product
- Gross vs. Net Domestic Product
- Gross means before accounting for the
depreciation of capital. - Net Domestic Product GDP Capital Consumption
Allowance.
15Stocks versus flows
- Wealth
- a stock representing the value of all the things
that people own - Saving
- A flow that is the source of changes in the stock
of wealth. - Capital
- A stock representing the plant, equipment, and
inventories of raw and semi-finished materials
that are used to produce other goods - Investment
- A flow representing the purchases of new capital
- Depreciation (capital consumption)
- A flow representing the decrease in the capital
stock that results from wear and tear, and
obsolescence.
16Stocks vs flows
- Wealth(t)Wealth(t-1)saving
- Capital(t)Capital(t-1) gross
investment-depreciation - Capital(t-1) net investment
17If wealth is 26 trillion at the end of 2008 and
27.3 trillion at the end of 2009, then saving was
- 1.3 trillion during 2008
- 1.3 trillion during 2009
- -1.3 trillion during 2008
- -1.3 trillion during 2009.
18If capital is 8 trillion at the end of 2008 and
7.7 trillion at the end of 2009
- Gross investment is .3 trillion in 2009
- Gross investment is .3 trillion in 2009
- Net investment is .3 in 2009
- Net investment is -.3 trillion in 2009
19Gross Domestic Product
- The relationships among capital, gross
investment, depreciation, and net investment.
20Investment and Depreciation
- Depreciation is included in
- GDP
- Gross profits
- Gross Investment
- Depreciation is removed from
- Net National Product
- Net profits
- Net investment
- Investment plays a central role in the economy.
- Increases in capital are one source of growth in
potential real GDP - Fluctuations in investment are one source of
fluctuations in real GDP.
21Measuring U.S. GDP
- The National Income and Product Accounts divide
net national income into five categories - Compensation of employees
- Net interest (paid by business)
- Rental income
- Corporate profits.
- Proprietors income.
22Measuring U.S. GDP
- Two items must be added to net domestic income to
get GDP - Indirect taxes minus subsidies are added to get
from factor cost to market prices. - Depreciation (or capital consumption) is added to
get from net domestic product to gross domestic
product.
23Real GDP and the Price Level
- Nominal GDP is the value of final goods and
services produced in a given year when valued at
the same years prices - Real GDP is the value of final goods and services
produced in a given year when valued at constant
(base year) prices.
24Real GDP and the Price Level
Item Quant. Price
2002
Balls 100 1.00
Bats 20 5.00
2003
Balls 160 1.00
Bats 22 10.00
- 2002 NGDP ________
- 2003 NGDP ________
- Growth rate ________
- Base year of 2002
- 2002 RDGP ________
- 2003 RGDP ________
- Growth rate ________
- Base year of 2003
- 2002 RDGP ________
- 2003 RGDP ________
- Growth rate ________
25- For your answers to the next several slides, give
your estimates of GDP to the nearest dollar, do
not include decimals, and do not include signs.
26Nominal GDP in 2002 is _____
27Nominal GDP in 2003 is _____
28Real GDP in 2002 using 2002 as base year is
______.
29Real GDP in 2003 using 2002 as base year is
______.
30Real GDP in 2002 using 2003 as base year is
______.
31Real GDP in 2003 using 2003 as base year is
______.
32Chain-weighted method for real GDP
- Calculate growth rate in real GDP using last
years prices. ______ - Calculate growth rate in real GDP using this
years prices. ______ - Calculate the average of the two growth rates.
This average growth rate is the growth rate of
real GDP from last year to this year. - average growth rate _______
- RGDP (using 2002 as base) _________
- 4. Repeat steps 1, 2, and 3 for each pair of
adjacent years to link real GDP back to the base
years prices.
33Real GDP and the Price Level
- GDP deflator
- Avg. of the prices of the goods in GDP in the
current year expressed as a of the base year
prices.
34Interpreting the GDP-deflator
- The GDP-deflator provides a comparison of current
year prices with base year prices. - If deflator 100, prices are, on average, the
same. - If deflator150, current year prices are, on
average, 1.5 times those in base year (50 percent
higher) - If deflator75, current year prices are, on
average .75 times those in base year. (25
percent lower)
35(No Transcript)
36Nominal and Real GDP
Date Real GDP (2000 ) Nominal GDP
1980 5161.7 2786.6
1990 7112.5 5716.4
2000 9629.4 9629.4
2007 11566.8 13510.9
37The GDP-deflator in 2007 is _____ (give answer
rounded to 1 decimal point e.g. 103.2)
38The prices in 2007 are ____ percent higher than
in 2000. (Give answer rounded to 1 decimal point
and exclude sign e.g. 5.2 is 5.2)
39The prices in 2007 are ____ percent higher than
in 1990. (Give answer rounded to 1 decimal point
and exclude sign e.g. 5.2 is 5.2)
40Measuring Economic Growth
- The economic growth rate is the percentage change
in real GDP from one year to the next.
41R-GDP as a measure of economic welfare.
- Quality improvements
- Household production
- Underground economy
- Health and life expectancy
- Leisure time
- Environment
- Political freedom and social justice
- Exchange rate in comparing across countries.
42If environmental quality worsens, the growth rate
in real GDP will _____ the growth rate in the
standard of living
- Over-state
- Under-state
43If more people begin to hire someone to take care
of home projects instead of doing it themselves,
the growth rate in real GDP will _____ the growth
rate in the standard of living
- Over-state
- Under-state
44Suppose U.S. GDP per capita is higher than that
in Japan. If people in the U.S. average less
hours of work per week than people in Japan, the
extra GDP per capita in the U.S. will be an ____
of how much better off people in the U.S are
compared to those in Japan.
- Overstatement
- Understatement
45Exchange rates and comparisons across countries.
- Using actual exchange rate, U.S. real GDP per
capita 69 Chinese real GDP per capita - Using PPP exchange rate, U.S. real GDP
12Chinese real GDP per capita. - What does this say about actual versus PPP
exchange rate?