Measuring GDP Mod. 10-11 s.2018
US Macro economic goals- full employment = 95%, price stability, low inflation=2% per yr,
Real GDP growth, growth of the economy = 3% per yr
*GDP = Total market value of all new, final goods and services produced with in a nation in a year.
GROSS, DOMESICALLY, PRODUCED
Ultimately measured at the market price, as produced a reasonable price is assigned to it, this leads to GDP
revisions when the market price is found to vary from the assigned value.
New, produced this year, selling an old refrigerator for $50 is not part of GDP.
Final, intermediate goods are not counted, hamburger sold to McDonalds is not counted, it will be counted as
part of the final good (Big Mac). Hamburger sold to a household is a final good as it will not be resold.
And, a house started in one year completed in the next is counted as the latter year’s production. This is fair as it
happens to the same extent to each year’s GDP.
Produced, counted when it is produced, not when it is sold. (estimated prices of unsold adjusted when sold)
in a Nation’s borders, this is the domestic, in your house, we don’t care who produced it, we care where it was
produced.
in a year, even if only one quarter year’s production is being measured, it will be expressed at a yearly rate.
To understand how we calculate GDP it is helpful to See the circular flow which shows Our National
Accounts of Economic activity. See handout on Circular Flow.
TWO MAIN WAYS TO APPROACH (Calculate) GDP (approach is a good term as getting it exact is not
possible) From Krugman, Value Added approach not commonly used.
1. *INCOME APPROACH:
W + π + i + R + IBT + CCA = GDP
NI = 13.713 (2012)
W = wages , salaries, benefits, pensions, health insurance etc.
9.574
π = Profits of business whether corporate or private, distributed or not pre-tax 3.103
i = Interest received
.533
R = Rents and Royalties received for use of patent or copyright
.445
IBT = Indirect business tax,
CCA = Capital consumption allowance (aka depreciation – factories and equipment getting worn out)
2.004 trillion
Notice WπiR doesn’t include CCA or IBT. Both are included in the cost of what was produced. If the economy
is in equilibrium then what was produced equals what is sold.
Calculating GDP using the Expenditure Approach
The Most Important Equation to remember for calculating GDP
GDP = C + I + G + (X – M)
2. *EXPENDITURE APPROACH: C + I + G + X - M = GDP =
$15.467 trillion Q1 2012 annualized
C = Consumption by households
+
I = Investment, planned and unplanned
+
G = GP, Gov. purchases of goods and services
+
X = exports
M = imports
11.007 12
2.04712
3.017 12
2.152 12
2.756 12
a. C =
b. I =
*Planned investment + unplanned investment = Total investments – CCA = Net Investments
Planned Investment = planned capital expansion + planned inventory change
Unplanned Investment = typically unplanned changes in the inventory level, either up or down.
“unsold” production is assumed to be purchased by the manufacturer for inventory, therefore it is “sold”.
Planned
Investment in
Raw materials
inventory
+
Investment in
Plant, land,
machinery,
equipment
+
Planned Investment in
finished product
inventory
= PI
c. G or GS = (all government – federal, state, local)
GS = 5.409 trillion 2012 annualized
Transfer payments = $2.384 trillion 3% in food stamps
Non-military to foreign nations 3.6 billion .00026% 2007
GP = $2.609 trillion 07 GS-TP (-interest) = GP
*NATIONAL DEBT: Sum of all yearly Budget Deficits less sum of all Budget Surpluses
T > GS
T < GS
SURPLUS (flow) + a negative number (DEFICIT) (flow) = NATIONAL DEBT (stock)
Flow is per time period. Amount per year. Stock is stationary, a lump sum, a total (period).
Current National Debt $16.582 trillion, Reagan started with just under 1 Trillion ended with 3 Trillion
Mid 1980’s, and again in early 2000’s deficits ran as high as 6.1% of GDP (unified), actual was higher
National debt has an average maturity of 5 years.
*BUDGET DEFICIT/surplus/balanced budget: Government borrowing ARROW
Transparency of 1967-07, Surpluses of Clinton turn into Bush deficits
*BUDGET DEFICIT = T < GS or net Taxes < GP
NT < GP
T<G
Presidents like the Unified Budget
T + SS payroll tax – GS + SS benefits
SS payroll tax – SS benefits = $160 billion/yr
Makes the current budget deficit look smaller
*BUDGET SURPLUS = T > G, NT > GP
*BALANCED BUDGET = T = G
Gov Purchases
GOV
Net Taxes
Gov. borrowing
*CROWDING OUT see handouts on crowding out and Loanable funds market now?/after break?
THREE POTENTIAL SAVERS Households, Firms, and Government (as of yet, we ignore foreign)
Same THREE POTENTIAL BORROWERS approach financial markets to borrow money
Households are limited as to how much they can pay by their incomes, how high an interest rate
Firms are limited to profitability of the purpose of the loan, how high an interest rate
Government faces no limit to how much they can pay to borrow. Gov always gets what they want.
When government borrows it takes away money that other wise would have been used by HH or firms
d. X-M (Net Exports) -2.7% for 2009
X = $1.445 trillion 12% of GDP
23% of all goods produced in US
M =$2.204 trillion goods and services 17% of GDP
27% of all goods consumed in US $1.8 trillion
*BALANCE OF TRADE:
*Balance of trade
*Trade deficit
*Trade surplus
Looking at X -M GOODS only is the Merchandise account. TRADE, like kids.
X = M this is of the Merchandise account (goods)
X<M
X>M
Sourced from NIPA, Bureau of Economic Analysis, tables 1.1.5, and 3.1
LEAKAGES AND INJECTIONS = S+T+M = G+I+X
Example
A third approach, or method, is making a move to be included, VALUE ADDED. If a nation
uses a Value Added Tax this is easy.
See text p. 107, figure 10.3.
Add up each step of production to get GDP.
*Per capita GDP not size of GDP determines standard of living.
What improves, how traditionally we have used GDP measures. Transparency
LIMITATIONS OF GDP
1. ONLY MEASURES MARKET ACTIVITY
2. PLACES NO VALUE ON LEISURE
3. REPAIRING DISASTERS COUNTS AS A POSITIVE
4. ECOLOGICAL COSTS ARE NOT SUBTRACTED
5. COSTS WHICH GIVE US NO PLEASURE ARE COUNTED
COUNTED
Farmer buys tractor
Business inventories increased
Gov. purchases new submarine
Hair cut at barber
Cost of a divorce lawyer
Cost of burglar alarm
Prison building/ staffing
Day care for child
Meal at McDonalds
Clean up of oil spill
NOT COUNTED
student gets gov scholarship
mechanic fixes own radiator
plumber buys two year old truck
sale of shares of stock
cashing a US bond
Soc Sec check going to retiree
Clean air
Raising your own child
Granma’s Thanksgiving day meal preparation
Pleasure of a vacation day
MISSES: underground economy (drugs, extortion, prostitution), all products count equally, Income distribution,
household work, Government services value are counted at cost, no producer surplus measure
-------------------------------------------------------------------------------------------------------------------------------------Our ultimate goal is to measure GDP. There are two methods used to approach GDP. But first a definition:
Expenditure method GDP = $15,540 Income method GNI = $15,717
GDP = total market value of all, new, final, goods and services produced in a year within a nation.
* GDP about 15.467 trillion (2012) per capita = $46,870(12)
- CCA Capital consumption allowance (depreciation) 2.004 trillion (2012)
NNP Called NNP for years because we used GNP, still called that
- IBT
Indirect Business taxes (taxes paid by firms, property/excise/sales/X-M tax)
- S.D.
Statistical discrepancy (things don’t all add up the same starting from top or bottom) 73 billion
*NP = NI we convert at this point from production to income $13.713 trillion (2012)
- Social security paid by both er and ee 950 billion
- Corporate profit taxes 2000 b
- Undistributed corporate profits
INVESTMENT
+ Transfer payments 2.384 trillion (2012)
Personal Income 13.228 trillion (2012)
IN
- Personal income taxes 1.118 trillion fed. (2012)
*Disposable Income about 11.686 trillion (income after taxes)
MACRO
- Necessities of life
Discretionary Income
IS
IMPORTANT TERMS
NNP or NDP
NP = NI
Disposable Income
BUYING
CAPITAL
EQUIPMENT
Do Circular Flow adding G, Financial Markets, and Exports and Imports
*CROWDING OUT see handouts on crowding out.
THREE POTENTIAL SAVERS Households, Firms, and Government (as of yet, we ignore foreign)
Same THREE POTENTIAL BORROWERS approach financial markets to borrow money
Households are limited as to how much they can pay by their incomes, how high an interest rate
Firms are limited to profitability of the purpose of the loan, how high an interest rate
Government faces no limit to how much they can pay to borrow. Gov always gets what they want.
When government borrows it takes away money that other wise would have been used by HH or firms
*BALANCE OF PAYMENTS: = Current account balance ( merchandise, services, transfers)
Now that we have Crowding out, Budget deficits/surpluses, National debt, and Trade deficits let us weave them
together.
S = 10% of GDP
THIS IS NOT NECESSARY FOR THE AP EXAM
S = 11% of GDP
Graph shows the quantity of money available to be borrowed
It is a combination of household saving (about 5% of GDP)
and Inflows from foreigners (also about 5% of GDP exactly equal
D = hh + Firms
to our current account deficit.).
In 1998 the only demanders of this were households and firms,
Government was silent as it was running a “balanced budget”.
The 10% of GDP available for saving was borrowed by HH and
Firms, no crowding out. 2000 the gov ran a 1% surplus which shifts the supply curve to the right.
S = 10% of GDP
The forecast for 2004 is a Federal budget deficit of $450 Billion
That is roughly 4.5% of GDP. This estimate does not include the cost
of the war and rebuilding in Iraq. This will
increase the demand for saved money by 4.5% of GDP. Interest rates
should rise due to the increased demand. Let us just say with no
research that interest rates move from 5% to 6% due to the
increased demand.
D’= h+f+g
D=h+f
Now it gets interesting. With a National debt of 6 trillion watch what happens, ceteris paribus.
6,000 billion
x 5%
$300 billion
6,300 billion
x 6%
$380 billion
6,678 billion
x 6.25 %
$417 billion
Could be called the un-virtuous cycle.
W/o a single additional toy for taxpayers
GS and borrowing increase.
Oh gosh… $6,000 billion plus 300b (interest) plus 150b (revenue loss and increased gs)
6,000 billion
6,450 billion
387 + 150 + 6,450 billion = 6,987
x 5%
x 6%
x 7%
300 billion
387 billion
489 billion
How lucky was Bill Clinton? He found himself in a virtuous cycle. W/o cutting any programs or raising taxes,
he found declining interest rates helping to balance the budget and pushing it into surplus.
6,000 billion
x 8%
$480
6,000 billion
x 7%
$ 420
6,000 billion
x 6%
$360
Current Account now equals the shortage in US savings needed to finance the budget deficit.
TRY: adding foreign savings to the mix
KEY LEVEL OF UNDESTANDING
X – M determines inflows and outflows.
UNPLANNED INVESTMENTS ARE UNEXPECTED CHANGES IN INVENTORY LEVELS,
EITHER R/M OR FINISHED PRODUCT (unplanned inventory accumulation or depletion)
GOVERNMENT BORROWING INCREASES INTEREST RATES BEYOND WHAT PRIVATE PARTIES
WOULD HAVE CREATED
CAPITAL INFLOWS AND OUTFLOWS AFFECTED BY X and M
Once again, the business
cycle can be used to show
how we get budget
surpluses/deficits, inflation
and unemployment, how
GDP swells and shrinks,
and how imports and
exports are affected by
cycles of counties.
A recession, contrary to all the popular belief, is defined by the National Bureau of Economic research (NBER) as
“ a significant decline in economic activity spread across the economy, lasting more than a few months, normally
visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
THE INTERNATIONAL SECTOR
Looking at the circular flow diagram’s X, M, and Capital inflows and outflows tells you the story
BEA numbers again 2/29/08
Balance of Trade is the Merchandise Account GOODS -837 billion 07
Balance of payments is the Current Account balance, goods, services, earnings, transfers
CURRENT ACCOUNT (hmmm, will be used up now or currently) Table 1. US international Transactions
All except what is in the Capital account
Exports of goods and services
Imports of goods and services
Dividends, Interest, other profits +650 - 613
Remittances ? (Money sent home)
Unilateral Transfers (Red Cross, Soc. Sec., military
spending, gov. grants/pensions)
CURRENT ACCOUT BALANCE
+$1,446 billion (2007)
-$ 2,204 billion 07
+ 37 billion 07
??
-
89 billion
- 707 billion
07
07
FINANCIAL + CAPITAL ACCOUNT (hmmm, things that will last)
Debt forgiveness, foreign workers’ transfers
Purchases of stocks, bonds, real estate,
buying or building factories +1.860 – 1.055
+ 705 billion 07
(direct foreign investment is building factories)
Errors and Omissions
??
Official reserve account
( Central banks exchanging currencies)
+ 2.4 billion 07
Financial + Capital ACCOUNT BALANCE
+ 707 billion 07
SUM OF CURRENT, AND FINANCIAL BALANCES
The BALANCE OF PAYMENTS = $0
$ 0
Our ultimate goal is to measure GDP. There are two methods used to approach GDP. But first a definition:
MISSES: underground economy (drugs, extortion, prostitution), all products count equally, Income distribution,
household work, Government services value are counted at cost, no producer surplus measure
Ten items to review
1. Crowding out
2. Budget deficit, (flow). National Debt, (stock) (income is a flow, savings is a stock)
(river is a flow, lake is a stock)
3. Two methods of approaching GDP, INCOME and EXPENDITURE, maybe if time permits VA.
4. Balance of Trade (merchandise, goods), Balance of Payments (goods and services, current account)
5. Current Account Balance + Financial Account Balance = ZERO
6. Total Investments = Planned Investments + Unplanned Investments
- minus CCA
Net Investments
7. Two methods of approaching GDP, INCOME and EXPENDITURE, maybe if time permits VA.
8. Leakages v. Injections
9. Investments are by Firms/ Households, come from savings
10. Households EARN income, NP=NI