Ch. 5 : MEASURING GDP AND ECONOMIC GROWTH

1
Ch. 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

2
Gross Domestic Product

• GDP gross domestic product
• the market value of all final goods and services
  produced in a country in a given time period.
• This definition has four parts
• Market value
• Final goods and services
• Produced within a country
• In a given time period

3
Gross 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.

4
Gross Domestic Product

• Redexpenditures Blueincome
  Greenborrowing/lending/taxes

5
Gross 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)

6
Gross Domestic Product

• Financial Flows
• Y C S T
• Y C I G (X-M)
• ST IG(X-M)
• (G-T) (S-I)-(X-M)
• According to last equality, what are the possible
  consequences of a larger government budget
  deficit?

7
Gross 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).

8
Gross Domestic Product

• Gross vs. Net Domestic Product
• Gross means before accounting for the
  depreciation of capital.
• Net Domestic Product GDP Capital Consumption
  Allowance.

9
Gross Domestic Product

• Stocks 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.

10
Gross Domestic Product

• The relationships among capital, gross
  investment, depreciation, and net investment.

11
Gross Domestic Product

• 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.

12
Measuring U.S. GDP

• The National Income and Product Accounts divide
  incomes into five categories
• Compensation of employees
• Net interest (paid by business)
• Rental income
• Corporate profits.
• Proprietors income.
• The sum of these five income components is net
  domestic income at factor cost.

13
Measuring U.S. GDP

• Two items must be added 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.

14
Expenditure Components of US GDP 2004
15
Real 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.

16
Real GDP and the Price Level

• 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 ________

17
Chain-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.

18
Real 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.

19
Interpreting 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)

20
(No Transcript)
21
Measuring Economic Growth

• We use real GDP to calculate the economic growth
  rate.
• The economic growth rate is the percentage change
  in real GDP from one year to the next.

22

• R-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.

23

• Exchange 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?