Chapter 2
Measurement
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Chapter 2 Topics
• Measuring GDP
• Nominal and real GDP and price indices
• Labor market measurement
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GDP
• The dollar value of final outputs produced
during a given period of time within the borders
of a country.
• Example: published in the National Income and
Product Accounts (NIPA) in U.S.
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Measuring GDP: The National
Income and Product Accounts
• GDP Measured Using: (i) the product approach;
(ii) the expenditure approach; (iii) the income
approach.
• Three approaches yield the same value of GDP.
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National Income Accounting
Example
• Fictional Island Economy
• Coconut Producer, Restaurant, Consumers,
Government
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Table 2.1 Coconut Producer
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Table 2.2 Restaurant
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Table 2.3 After-Tax Profits
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Table 2.4 Government
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Table 2.5 Consumers
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Measuring GDP Using the
Product (Value-added) Approach
• Sum of value added to goods and service in
production across all productive units in
economy.
• Add the value of all goods and service, and
subtract the value of all intermediate goods and
service used in production.
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Table 2.6 GDP Using the
Product Approach
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Expenditure Approach
• Total spending on all final goods and service in
economy.
• Total expenditure = C + I + G + NX
I: expenditure on goods that are produced, but not consumed as
consumption goods. For example, machinery in plants.
NX=Exports – Imports.
Exports are produced within a country, while imports are produced abroad.
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Table 2.7 GDP Using the
Expenditure Approach
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Income Approach
• Add up all incomes received by all economic
agents contributing to production in an economy.
• Income includes:
–
–
–
–
Wage incomes
Interest incomes
Corporate incomes (profits)
Taxes net of subsidies on products or factors of
production
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Table 2.8 GDP Using the
Income Approach
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Inventory Investment
• Def: goods produced in the current period, but
not consumed.
• Components:
– Finished goods
– Goods in process
– Raw materials.
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Inventory Investment
• Back to coconut economy:
– If harvest 13M instead of 10M coconuts, and put 3M
in warehouse as inventory, how is GDP affected?
– Product approach: 3M*2 – value added in coconut
production.
– Expenditure approach: I = 3M*2
– Income approach: 3M*2 - after-tax profits received
by coconut producers increase since assets rise.
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GNP (gross national product)
• The value of outputs produced by domestic
factors of production, no matter whether or not
the production takes place within a country.
• Difference from GDP:
– Within a country for GDP, no matter who owns the
production unit.
– Chinese plants in the U.S. (GNP, not GDP)
– American plants in China (not GNP, GDP)
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Nominal and Real GDP and
Price Indices
• Price index: price of a set of goods and service
produced in an economy over a period of time. A
general measure of price level.
• Inflation rate: the rate of change in the price
level.
• Growth in nominal GDP
= Growth in real GDP + Inflation
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Table 2.10 Data for Real GDP
Example
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Chain-Weighting Approach
• Use rolling base year.
• g3= sqrt ( (1+g1)(1+g2) ) - 1
– A geometric average of the growth rates calculated
by using year 1 and year 2 as base year.
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Figure 2.1 Nominal GDP (black line) and
Chain-Weighted Real GDP (colored line) for
the Period 1947–2006
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Table 2.11 Implicit GDP Price
Deflators, Example
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Figure 2.2 Inflation Rate Calculated from
the CPI (blue line), and Calculated from the
Implicit GDP Price Deflator (black line)
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Figure 2.3 The Price Level as Measured by
the CPI and Implicit GDP Price Deflator,
1947–2006
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