Ch2: The Measurement and Structure of the National Economy
Abel and Bernake: Macro Ch2Williamson: Macro Ch2Froyen: Macro Ch2Mankiw: Macro Ch2Mankiw: Principle of Econ Ch23,24,28
Macro VariablesY: national income or GDPP: price level (cost of living) : inflation rater: interest rateu: unemployment rate (Ch3)
The Definition of GDP Gross domestic product (GDP) is a measure of the income and expenditures of an economy.It is the market value of final goods and services newly produced within a country during a fixed period of time.2009GDP12.5(Ch1&2.xls)GNP ( Gross National Product):
The Definition of GDPGDP is the Market Value . . .Output is valued at market prices.(1) traded in the market(2) weighted with market prices. . . Of All Final . . .(1) records only the value of final goods, not intermediate goods: No double counting ()(2) Or (value added)eg, $1$3$6
The Definition of GDP. . . Goods and Services . . . both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). . . . Newly Produced . . .currently produced, not transactions involving goods produced in the past. (No second-hand trade) . . . Within a Country . . .within the geographic confines of a country. . . . In a Fixed Period of Time.within a specific interval of time, usually a year or a quarter (three months).
The measurement of GDP:
Identity: GDP = total output = total income = total expenditureillustrated with the circular-flow diagram.
3 approach:1. Production approach ()Y= output= value-added2. Expenditure approach ( )3. Income approach ( )
The Circular FlowHouseholdsFirms
Output=Income=ExpenditureFor an economy as a whole, income must equal expenditure because:Every dollar of spending by some buyer is a dollar of income for some seller. ()output must equal expenditure because: Unsold output goes into inventory, assuming that firms purchase their unsold output.
Expenditure Approach:The expenditure components of GDP
C: consumptionI: investmentG: government spendingNX: net exportsY = C + I + G + NX
Consumption (C)durable goods last a long time ex: cars, TV sets, furniture, home appliances nondurable goods last a short time ex: food, clothing , fuelservices work done for consumers ex: education, health care, financial services, transportationDefinition: The value of all goods and services bought by households. Includes:
Investment (I)Defn 1: Spending on [the factor of production] capital.Defn 2: Spending on goods bought for future useIncludes:business fixed investment Spending on plant and equipment that firms will use to produce other goods & services.residential fixed investment Spending on housing units by consumers and landlords.inventory investment The change in the value of all firms inventories.
Investment vs. CapitalInvestment is spending on new capital.Example (assumes with depreciation):
t Kt=20, =0.2, It=5Kt+1=?
Stocks vs. FlowsA flow is a quantity measured per unit of time. A stock is a quantity measured at a point in time.
Stocks vs. Flows - Govt budget deficitGovt debtAnnual savingWealth
Government spending (G)G includes all government spending on goods and services..Not all government expenditures are purchases of goods and services: Not in G: payments that are not made in exchange for current goods and servicestransfers, including Social Security payments, welfare, and unemployment benefitsinterest payments on the government debt
Net exports: NX = EX IMNet exports: exports minus importsExports: goods produced in the country that are purchased by foreignersImports: goods produced abroad that are purchased by residents in the country
Table 2.1 Expenditure Approach to Measuring GDP in the United States, 2008
Table 2.1 -, 2009
Taiwan GDP (Y)
What Is Not Counted in GDP?Market value Problem: misses nonmarket items such as homemaking, the value of environmental quality, and natural resource depletion There is some adjustment to reflect the underground economyGovernment services (that arent sold in markets) are valued at their cost of production
GNP vs. GDP Gross National Product (GNP): Total income earned by the nations factors of production.Gross Domestic Product (GDP): Total income earned by domestically-located factors of production.GNP=GDP + (factor payments from abroad) (factor payments to abroad) =GDP+NFP (NFP: net factor payments from abroad)
Income Approach:National income (NI) factors income wages + net interest income+ rental income + profitsNNP (net national product) GNP- depreciationNI NNP-indirect business taxes
Table 2.2 Income Approach to Measuring GDP in the United States, 2008
Numerical example by Williamson
Calculate GDP from each approach
Income approach Personal income (PI) =NI + net Govt transfer to individuals- corporate retained earnings+ interest income on govt bonds =NI + (government transfers to individuals - Social insurance contributions)-(corporate profits- Dividends)+(personal interest income - net interest)Disposable Personal income = PI- personal income tax
Private-sector disposable income Private disposable income () PI+ corporate retained earnings + depreciation= NI + depreciationnet Govt transfer to individuals (TR) + interest income on govt bonds (INT) - personal income tax (Tp) = NNP indirect tax (Tb) + depreciationTR + INT Tp = = = (2.4)
YGDP T indirect taxes (Tb) + personal income tax (Tp)
Private Saving Private Saving= private disposable income consumptionSpvt = (2.6)
Government SavingSgovt = govt receipts - Government outlays = govt tax revenue (T) -[government purchases of goods and services (G) + transfers (TR) + interest payments on government debt (INT)]= net government income government purchases of goods and services= (2.7)net T (T TR INT)
- Govt budget constraint (Govt BC):Govt Surplus and Deficit Sg >0 budget surplus Sg
National Saving Measures of aggregate saving:National Saving= private saving + government savingS = Spvt + Sgovt = [Y + NFP T + TR + INT C] + [T TR INT G]= = (2.8)
S, I and CA Expenditure approach of GDP:
Income approach of GDP:
(2.9) (2.10) current account balance CA NX + NFP
The Uses of Private Saving
S = Spvt + Sgovt (2.11)Private saving is used in three ways:investment (I)government budget deficit (Sgovt)current account balance (CA)
Saving and WealthNational wealth =domestic physical assets + net foreign assetsCountrys domestic physical assets (capital goods and land)Countrys net foreign assets = foreign assets (foreign stocks, bonds, and capital goods owned by domestic residents) minus foreign liabilities (domestic stocks, bonds, and capital goods owned by foreigners)
Saving and WealthSaving S = wealth (wealth: deposits/bonds/stocks/houses/capital goods) = domestic assets + foreign assets = domestic investment +net capital outflow An economys saving can be used to either finance investment at home or to buy assets abroad.National saving (S = I + CA) raises wealthWealth matters because the economic well-being of a country depends on it.
Real vs Nominal GDPNominal GDP values of goods and services at current prices. (Y=PtQt)
Real GDP values of goods and services at constant prices in the base year. (y=P0Qt):the measure of real output
Table 2.3 Production and Price Data
Table 2.4 Calculation of Real Output with Alternative Base Years
The GDP Deflator (GDP=P)The GDP deflator is calculated as follows:
Y=P*y P=Y/y y=Y/PConverting Nominal GDP to Real GDP:2007GDPNT$5516,768GDP=(550,343/96.14)=572,439 (2001)
- Inflation RateThe Inflation Rate When
percentage changes lnpercentage change in Z (growth rate of Z) percentage change in X + percentage change in Y
percentage changesEg:Nominal GDP rises 9% and Real GDP rises 4%, then the inflation rate is approximately 5%.
Growth rates of Nominal GDP and Real GDP