Macroeconomic%20Measurements,

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ECONOMICS, 5e Roger Arnold
CHAPTER 6 Macroeconomic Measurements, Part II
GDP and Real GDP
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MACROECONOMIC QUESTIONS

• A Nation's Income
• The most central issue of macroeconomics is an
  economy's total production of goods and services
• A nation's income is the total of all the incomes
  of the people that live there

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MACROECONOMIC QUESTIONS

• Gross Domestic Product (GDP)
• The dollar value of total output of goods and
  services is called nominal GDP
• Part of the increases in GDP reflect inflation
• Adjusting GDP for inflation gives real GDP

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MACROECONOMIC VARIABLES

• Definitions
• Real gross domestic product is a measure of a
  country's total output of final markets goods and
  services during some year
• Nominal gross domestic product is the dollar
  value of a country's output of final market goods
  and services during some year

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SOURCE Bureau of Economic Analysis.
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Exhibit 4 The Circular Flow Total Purchases
(Expenditures) Equal Total Income in a Simple
Economy
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CIRCULAR FLOW AND AGGREGATE DEMAND

• Types of Spending
• Consumption, or consumer spending, is spending by
  people on the final goods and services for
  current use

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CIRCULAR FLOW AND AGGREGATE DEMAND

• Types of Spending
• Investment refers to spending to create new
  capital goods, such as machines, equipment,
  inventories, human skills, and knowledge

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CIRCULAR FLOW AND AGGREGATE DEMAND

• Types of Spending
• Government purchases refers to all spending by
  the government except transfer payment (direct
  payments of money to people)

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CIRCULAR FLOW AND AGGREGATE DEMAND

• Types of Spending
• Exports are sales of goods and services to people
  and firms in other countries

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CIRCULAR FLOW AND AGGREGATE DEMAND

• Types of Spending
• Exports are sales of goods and services to people
  and firms in other countries
• Imports are purchases of goods and services from
  people and firms in other countries

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CIRCULAR FLOW AND AGGREGATE DEMAND

• Types of Spending
• Net exports, or the balance of international
  trade, equals exports minus imports

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Exhibit 1 The Components of GDP
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What is the difference between GDP and GNP?

• GNP is the value of all final goods and services
  produced by citizens of a nation regardless of
  their location.
• GDP is the value of all final goods and services
  produced within the border of a nation regardless
  of citizenship.
• GNP GDP net foreign factor income

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Why do we make the distinction about FINAL goods?

• Final goods are in the hands of the ultimate
  user.
• Intermediate goods are inputs into the production
  of final goods.
• We only use final goods to avoid the problem of
  DOUBLE COUNTING
• Alternatively, we can use the value added at each
  stage of production

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What GDP Omits

• Certain Nonmarket Goods and Services
• Underground Activities
• Sales of Used Goods
• Financial Transactions
• Government Transfer Payments
• Leisure

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GDP and Well Being

• GDP is useful in measuring the productive
  capacity of an economy.
• GDP is not necessarily a good measure of
  happiness or well being.
• Measurements of well being often include measures
  of education, access to health care, infant
  mortality, and life expectancy.

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Two Ways of Measuring GDP

• Expenditure approach
• Income approach
• See pages 79-80 in your workbook.

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The Expenditure Approach

• Household sector Consumption
• Business sector Gross private domestic
  investment
• Government sector Government purchases
• Foreign sector Net exports

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The Income Approach gives us NATIONAL INCOME

• Compensation of employees
• Proprietor's Income
• Corporate profits
• Rental income
• Interest

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From National Income to GDP Making Some
Adjustments

• - Income earned from the rest of the world
• Income earned by the rest of the world
• Indirect business taxes
• Capital consumption allowance (depreciation)
• Statistical discrepancy

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From National Income to GDP Making Some
Adjustments

• GDP NI indirect business taxes depreciation
  net foreign factor income
• NI GDP - indirect business taxes - depreciation
  net foreign factor income

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Other National IncomeAccounting Measurements

• Net Domestic Product GDP - Depreciation
• Personal Income National Income - undist. corp.
  profits - Social Security taxes - corp. profits
  taxes transfer pmts. net interest
• Disposable Income Personal Income - Personal
  taxes
• Disposable Income Personal Cons. Personal
  Saving

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Desirable Economic States or Goals

• Price stability
• Low unemployment
• High and sustained economic growth

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MACROECONOMIC MODELS

• Business Cycles
• Business cycles are 2-year to 5-year fluctuations
  around trends in real GDP and other related
  variables

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MACROECONOMIC MODELS

• Business Cycles
• A recession is a large fall in the growth of real
  GDP and related variables
• A depression is an especially large recession

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What Is a Business Cycle?

• Peak
• Contraction (Recession)
• Trough
• Recovery
• Expansion

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Exhibit 7 The Phases of the Business Cycle