Chapter 2 -- Measuring
Output and The Price Level
Data complied at the National
Income and Product Accounts
(NIPA)
Measuring Output -- Gross
Domestic Product (GDP)
Gross Domestic Product -- The
total market value of all currently
produced final goods and services
over a period of time.
Nominal GDP -- GDP in current
dollars
Real GDP -- GDP in constant
dollars.
Aspects of GDP Definition
“Over a Period of Time” 
GDP is a flow measure.
“Currently Produced” 
GDP excludes the following
-- sales of used items
-- transfer payments
-- purchases of stocks, bonds,
or land
“Market Value” -- the transaction
must be recorded and have a
specific dollar figure attached 
GDP excludes
-- illegal purchases
-- household production
Final Goods and Services
and Measuring GDP
Example -- Production of a pair of
shoes.
GDP and Making Shoes
Step
Value
Farmer
3
Packing Plant
7
Tannery
13
Shoe
Manufacturer 25
Wholesaler
40
Retailer
75
Total
163
Value Added
3
4
6
12
15
35
75
What Real GDP (Y) Signifies
Total Production or Output of final
goods and services
Total Sales on Final Goods and
Services (Approximately)
Total Income
Correlated With Total Employment
Computing GDP -- The
Expenditure Approach
Operative Equation:
Y = C + I + G + NX
Consumption (C)
Defined as consumer purchases
of final goods and services
components of consumption
-- nondurable goods
-- durable goods
-- services
largest component of GDP
Investment (I)
Business Purchases of New Plant
and Equipment
New Residential Housing
Changes In Inventories
Output Versus Sales -The Approximation
Example -- $18,000 car, produced in
2000, sold in 2001
Year
2000
2001
C
$0
$18
I G NX Y
$18 $0
$0 $18
-$18 $0
$0 $0
Investment Goods Versus
Intermediate Goods
The Similarity -- Transactions
between businesses.
The Conceptual Difference -Producing Final Goods Versus
Being Part of a Final Good
The Operational Difference -- Is it
used repeated times?
Government Purchases of
Goods and Services (G)
Not the same as government
expenditure (does not include
transfer payments)
In the US, the government is a
purchaser, not a producer.
Net Exports (NX)
NX = Exports - Imports
exports are all final goods and
services
GNP versus GDP -- the accounting
of multinational firms
Real GDP and Quality of Life
Real GDP does not account for the
following changes:
-- leisure time
-- quality differences
-- crime
-- environmental impacts
More Quality of Life
Variables Not in Real GDP
-- non-market production activities
(I) household production
(II) underground economy
-- income distribution
Other Measures
of Output or Income
Gross Domestic Product (GDP)
– Depreciation
Net Domestic Product (NDP)
– Indirect Business Taxes
National Income (NI)
National Income
– Undistributed Corporate Profits
(Business Saving)
– Social Security and Corporate Taxes
+ Transfer Payments and Interest
Personal Income (PI)
– Personal Income Taxes
Disposable Income (YD)
Disposable Income and
Personal Saving
Define -- Personal Saving (SP)
SP = YD - C
Define -- Total Private Saving (S),
S = Personal Saving
+ Business Saving
The “Magic Equation”
Let T = Net Taxes
Net Taxes = Tax Revenues - (Transfer
Payments + Interest on the Government
Debt)
Then the identity is:
S = I + (G - T) + NX.
Interpreting the Identity:
Saving = Investment
Identity: S = I + (G-T) + NX
Rearrange Identity Into:
 S + (T - G) + -NX = I
Special Case: (T - G) = 0, NX = 0
 S=I
Measuring The Price Level
Measures of the Price Level (P)
-- GDP Deflator
-- Personal Consumption
Expenditure (PCE) Deflator
Measure #1 -The GDP Deflator
Market Basket -- set of final goods
and services that are used to
compute GDP.
Chain Weighted Measure -reduces biases associated with
fixed weight index (e.g. Consumer
Price Index).
Measure #2 –
The PCE Deflator
Market Basket -- set of final goods
and services that are used to
compute Consumption within
GDP.
Chain Weighted Measure -reduces biases associated with
fixed weight index (e.g. Consumer
Price Index).
Computing the
Inflation Rate
Inflation Rate = Percentage Change or
growth in the Price Index (P), such as
the GDP Deflator.
Example: Inflation Rate for 2011
Inflation Rate2011 = P2011 – P2010
P2010
Converting
Nominal GDP to Real GDP
Example -- find Real GDP 2011
Real GDP2011 = Nominal GDP2011
GDP Deflator2011
Real GDP for other years is computed
the same way.
Real GDP Growth = Percentage
Change (or growth) in Real GDP.
Sources to Obtain
Macroeconomic Data
The Economic Report of the
President (Historical Data)
www.gpoaccess.gov/eop/
Economic Indicators (Recent)
www.gpoaccess.gov/indicators/
index.html
More Websites for
Macro Data and Information
www.federalreserve.gov
(Federal Reserve)
research.stlouisfed.org/fred2/
(Federal Reserve Economic Data)
bea.gov
(Bureau of Economic Analysis)
www.bls.gov
(Consumer Price Index inflation,
unemployment rate, labor productivity
growth)