CHAPTER 6 Measuring GDP, Economic Growth, and Inflation

ECONOMICS 5e

Michael Parkin

CHAPTER

6

Measuring GDP,

Economic Growth, and

Inflation

Chapter 23 in Economics

Learning Objectives

• Distinguish between the stocks of capital and wealth and the flows of production, income, investment and saving

• Explain why aggregate income, expenditure, and product are equal

• Explain how GDP is measured

Copyright © 2000 Addison Wesley Longman, Inc.

Slide 6-2

Learning Objectives (cont.)

• Explain how the Consumer Price Index

(CPI) and GDP deflator are measured

• Explain how the shortcomings of the CPI and the GDP deflator as measures of inflation


Slide 6-3


• Explain how real GDP is measured

• Explain the shortcomings of real GDP growth as a measure of improvements in living standards


Slide 6-4

Learning Objectives


•

Explain why aggregate income, expenditure, and product are equal

•

Explain how GDP is measured


Slide 6-5

Gross Domestic Product

Gross domestic product (GDP) is the value of the aggregate production of goods and services in a country during a given time period.


Slide 6-6


Flows and Stocks

1) A flow is the quantities per unit of time.

2) A stock is a quantity that exists at a point in time.


Slide 6-7


Flows and Stocks (cont.)

Capital is the key macroeconomic stock.

Capital

The plant, equipment, buildings, and inventories of raw materials and semifinished goods that are used to produce other goods and services.


Slide 6-8


Depreciation

The decrease in the stock of capital that results from wear and tear and obsolescence.

Otherwise known as capital consumption.


Slide 6-9


Gross Investment

The total amount spent on adding to the stock of capital and on replacing depreciated capital.

Net Investment

The amount spent on adding to the stock of capital.

Gross Investment minus depreciation.


Slide 6-10

Capital and Investment


Slide 6-11

Learning Objectives





Slide 6-12


Wealth

Another macroeconomic stock.

The value of all the things that people own.

Related to their earnings (a flow).


Slide 6-13


Consumption Expenditure

The amount spent on consumption goods and services.

Saving

The amount of an income after meeting consumption expenditures.


Slide 6-14


Income, Expenditure, and the Value of

Production

1) Households sell their labor, capital, land, and entrepreneurship to firms.

2) Firms sell consumer goods and services.

3) Firms buy and sell capital goods.

4) Firms borrow to finance investment.


Slide 6-15


Government

Government purchases are purchases of goods and services by governments.

• Paid for with tax revenue.

Net taxes are taxes paid to governments minus transfer payments received from governments and minus interest payments from the government on its debt.


Slide 6-16


Rest of World Sector

Net exports is the value of exports minus the value of imports.


Production can be valued by what:

• Buyers pay for it.

• It costs producers to make it.


Slide 6-17

The Circular Flow of

Income and Expenditure


Slide 6-18

Learning Objectives





Slide 6-19


Expenditure Equals Income:

Y = C + I + G + NX


Slide 6-20


How Investment is Financed

1) National saving is the amount of saving by households and businesses plus government saving

National saving = S + (T – G)

2) Borrowing from the rest of the world


Slide 6-21


Measuring U.S. GDP

1) Expenditure Approach

2) Income Approach


Slide 6-22


Expenditure Approach

Uses data on consumption expenditure, investment, government purchases, and net exports


Slide 6-23


Expenditure Approach (cont.)

Personal consumption expenditures are the expenditures by households on goods and services produced in the United States and the rest of the world


Slide 6-24



Gross domestic investment is expenditure on capital equipment and buildings by firms and expenditure on new homes by households.

Also, it includes the change in inventories.


Slide 6-25



Government purchases of goods and services are the purchases of goods and services by all levels of government.

Does not include transfer payments


Slide 6-26



Net exports of goods and services are the value of exports minus the value of imports


Slide 6-27

GDP: The Expenditure Approach

Item

Amount in 1996

(billions of

Symbol dollars

Percentage of GDP

Personal consumption expenditures

Gross private domestic investment

Government purchase of goods and services

Net exports of good and services

Gross domestic product

C

G

NX

Y

I

5, 152

1,116

1,407

–99

7,576

68.0

14.7

18.6

– 1.3

100.0


Slide 6-28


Expenditures Not in GDP

1) Intermediate goods and services

2) Used goods

3) Financial assets


Slide 6-29


Income Approach

• Measures GDP by summing the incomes that firms pay households for the resources they hire.

• Compensation of employees is the payment for labor services.

• Includes net wages and salaries plus taxes withheld on earnings plus fringe benefits such as social security and pension fund contributions.


Slide 6-30


Income Approach (cont.)

• Net interest is the interest households receive on loans they make minus the interest households pay on their own borrowing.

• Rental income is the payment for the use of land and other rented inputs.


Slide 6-31



• Corporate profits are the profits of corporations.

• Proprietors’ income is a combination of all of these.


Slide 6-32


Net Domestic Income at Factor Cost

The sum of the five categories of income

We must convert factor cost to market prices.


Slide 6-33



Indirect taxes are taxes paid by consumers when they buy goods and services

Due to this additional cost, the market price is greater than the factor cost value for measuring GDP.


Slide 6-34



Subsidies are payments by the government to a producer.

• Due to this payment, the factor cost is greater than the market price for measuring

GDP.

We must convert from Net Domestic

Product to Gross Domestic Product.


Slide 6-35



• Net profit of businesses--profit after subtracting depreciation—is a component of aggregate incomes.

• To get gross domestic product, we must add depreciation to aggregate income.


Slide 6-36

GDP: The Income Approach

Item

Compensation of employees

Net Interest

Rental Income

Corporate Profits

Proprietors’ income

Indirect taxes less subsidies

Capital consumption

(depreciation)

Gross domestic product

Amount in 1996

(billions of dollars

4,449

405

127

650

518

569

858

7,576


Percentage of GDP

58.7

5.4

1.7

8.6

6.8

7.5

11.3

100.0

Slide 6-37


Valuing the Output of Industries

Value added is the value of a firm's production minus the value of the intermediate goods that the firm buys from other firms.


Slide 6-38

Value Added and

Final Expenditure

Farmer

Miller

Baker

Grocer

Consumer

Farmer’s value added

Value of wheat

Miller’s value added

Value of flour

Wholesale value of bread

Bakers value added

Grocer’s value added

Value added

Intermediate expenditure

Final expenditure

Retail value of bread;

Final Expenditure on bread


Slide 6-39

100

80

60

Aggregate Expenditure,

Output, and Income

NX

G GDP

Depreciation

I

Indirect taxes less subsidies

Proprietor’s incomes

Interest

C

Profits

Rent

Wages and other labor income

40

20

0


Aggregate expenditure

GDP Aggregate income

Slide 6-40






Slide 6-41

The Price Level and Inflation

The inflation rate is the percentage change in the price level from one year to the next.

Two Main Price Indexes

• Consumer Price Index

• GDP Deflator


Slide 6-42


Consumer Price Index

• Measures the average level of prices of the goods and services that a typical urban family buys.

• Published monthly by the Bureau of Labor

Statistics

• Must use a base period (1982-1984)


Slide 6-43

The CPI:

A Simplified Calculation

Base-period basket

Base Period Current period

Price Expenditure Price Expenditure

5 pounds of oranges $0.80/pound

6 haircuts $11.00 each

100 bus rides

Total expenditure

$1.40 each

$4 $1.20/pound

$66 $12.50 each

$140

$210

$1.50

$6

$75

$150

$231

CPI =

$210.00

$210.00

 100 = 100

$231.00

$210.00

 100 = 110


Slide 6-44


The GDP Deflator

Measures the average level of prices of all the goods and services that are included in GDP

GDP deflator =

Nominal GDP

Real GDP

 100


Slide 6-45





Slide 6-46


Nominal GDP is GDP valued in the current year’s prices.

Real GDP is GDP in a base year (1992) scaled up by the growth rate of real GDP since the base year.


Slide 6-47


Real GDP Growth: A Chain-Weighted

Measure

The chain-weighted output index is an index number that measures the growth rate of real

GDP.


Slide 6-48

Calculating a Chain-Weighted

Output Index

Item 1992 quantities 1992 prices

1992 quantities valued at 1992 prices 1993 prices

1992 quantities valued at 1993 prices

Oranges 50

Video games 5

$1.00

$10.00

$50

$50

A = $100

$2.00

$8.00

$100

$40

D = $140


Slide 6-49


Output Index




Oranges 45

Video games 7

$1.00

$10.00

$45

$70

B = $115

$2.00

$8.00

$90

$56

E = $146


Slide 6-50


Output Index




Oranges 45

Video games 7

$1.00

$10.00

$45

$70

B = $115

$2.00

$8.00

$90

$56

E = $146

Output index C = B/A = 1.150 F = E/D = 1.043

Chain-weighted output index

1 .

150 x 1 .

= 1.095


Slide 6-51


Output Index




Oranges 45

Video games 7

$1.00

$10.00

$45

$70

$2.00

$8.00

$90

$56

B = $115 E = $146

Output index C = B/A = 1.150 F = E/D = 1.043

Chain-weighted output index

1 .

150 x 1 .

= 1.095

Growth rate in 1993 using chain-weighted output index 9.5 percent


Slide 6-52


The GDP Deflator can now be calculated.

GDP deflator =

$146

$109.5

 100 = 133.33


Slide 6-53

The U.S. GDP Balloon

GDP deflator

1992


1998

Slide 6-54






Slide 6-55

The Biased CPI

The sources of bias are:

1) New goods bias.

2) Quality change bias.

3) Commodity substitution bias.

4) Outlet substitution bias.


Slide 6-56

The Biased CPI

In 1996, a Congressional Advisory

Commission on the CPI said the CPI overstates inflation by 1.1 percentage points.

The GDP deflator uses price indexes to estimate quantities, so it too is somewhat biased.


Slide 6-57

The Biased CPI

The three primary consequences of the bias are:

1) It distorts private contracts

2) It increases government outlays

3) It biases estimates or real earnings


Slide 6-58

Two Measures of Inflation


Slide 6-59





Slide 6-60

The Limitations of Real GDP

Real GDP and growth rates of real GDP are used for:

1) Economic welfare comparisons.

2) International comparisons of GDP.

3) Business cycle assessment and forecasting.


Slide 6-61


Economic Welfare

A comprehensive measure of the general state of economic well-being.

Economic welfare depends upon a variety of other factors.


Slide 6-62


Factors Not Accounted for by Real GDP

1) Overadjustment for inflation.

2) Household production.

3) Underground economic activity.

4) Health and life expectancy.


Slide 6-63


Factors Not Accounted for by Real GDP

(cont.)

5) Leisure time.

6) Environmental quality.

7) Political freedom.


Slide 6-64


International Comparisons of GDP

• The real GDP of one country must be converted into the same currency units as the real GDP of the other.

• The same prices must be used to value the goods and services in the countries being compared.


Slide 6-65


Two Views of

Real GDP in China

Slide 6-66


The End

Slide 6-67

CHAPTER 6 Measuring GDP, Economic Growth, and Inflation

ECONOMICS 5e

Michael Parkin

6

Measuring GDP,

Economic Growth, and

Inflation

•

•

National saving = S + (T – G)

We must convert factor cost to market prices.

Related documents

Products

Support

CHAPTER 6 Measuring GDP, Economic Growth, and Inflation

ECONOMICS 5e

Michael Parkin

6

Measuring GDP,

Economic Growth, and

Inflation

•

•

National saving = S + (T – G)

We must convert factor cost to market prices.

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