e
dr
an
w
MEASURING THE
y
ud
st
CHAPTER Z
t
no
2914122
15 00
m
co
.
es
MACRO ECONOMY
Overview
The importance
The composition
a GDP and
how its measured
of GDP and how it has changed over time
How to use GDP to measure he evolution a living standards over time
How to use GDP to measure differences in living standards across countries
2 1 Introduction
It
was
really hard to
the extent
measure
of the
Great
Depression
so
kusnete and his
Department of Commerce developed
the NationalIncome and Product Accounts
The national income accounting providesandrewstudynotes.com
a systematic method for aggregating the production into a
buddies at
the Us
single overall economic activity
National accounting
how its performing
It
also shows that
total production total income total spending
the state of the economy and will Provides a picture or
This chapter discusses the central elements and how these are treated
Provides a snapshot of
2 2 Measuring the State of the Economy
Thekey measure
i
in an economy
over
GDP defined as the market value of he final goods and services produced
a
certain period of time
Production Expenditure Income
The
Prin tiple
is straightforward
employs workers GDP can
the production
approach
Consider a farm owned
be measured
as the
An alternative way is
long as all he pitted tangerines
by
Homer
produces tangerines
total tangerines produced in
a period
and
his is
to measure his total sales my expenditure approach As
are sold these two measures will be eaval
andrewstudynotes.com
theincome both the worker's wages and
Homer's
Homer's prorit
profitThe income approach
All the productions
are all
Paid
y
ud
st
an income
everyone as
t
no
to
all
the leftover is
w
adds
are Paid a wage and
e
dr
an
Finally the workers
a national accounting
Productionexualsexpenditr­esincome
hey give
Theseraciest different ways to calculate GDP and are defined so
is in
Profits
a Quotation maun
as the profit referred to
by economists
identical values
economic Proeits are
different for normal usage from microeconomics we learn that unless firms have some specialprice
setting abilities in a Perceit lompetition economic profits is zero
We now look
at each approach to GDP in turn
The Expenditure Approach to GDP
The national income accounts divide he
Thisbreakdown appears in
one a
identity
y
It
goods and services purchased intoseveral categories
he fundamental accounting eavations called the national
andrewstudynotes.com
Gt NX
income
7
where
Y
GDP
C
Consumption
I
Investment
6 Government purchases
NX net exports exports
Representing
imports
the expendinriapproach this elevation shows mat goods
and services can serve
direerentpurposes it can be consumed invested by me private sectors Purchased bythe government
or shipped abroad for foreigners to use
Starting in 2015 the US
Products
also includes a
new category or investment called intellectual Poorerty
IPP This category includes R D spending on durable intangible goods such
software and musil
andrewstudynotes.com
as
m
co
.
es
This example illustrates the fundamental Principle
y
ud
st
GDP
t
no
its this thats recorded in
producing store
w
spending although spending also includes transter payments As purchases are actually
e
dr
an
One should distinguish between government Purchases and spending Purchases are included in
balance When export
on
and import Another common name is me trade
the trade balance is negative
c import
Theres some discussion
export
and theres a trade deficit
how the historical GDP for ha us
Theres a point in me
rising trade deficit and
consumption
in hu US According to me date a part
orwhy he tradedeficit it intreasing is becausetheres a rise in consumption A trade deficit essentially
means that the US is essentially borrowing from me rest of the world Theremust be eventually
Paid whish will show up as trade surpluses at which time there will be less space for
Gov
Purchases
investment
and consumption
An increase
in consumption could also be caused by different reasons Consuming now means
andrewstudynotes.com
consuming less in the future and this is maybe because either consumers believe mat the Us will
be richer in the future
The Income
Table 7.2
and benefits
or that theres easy credit and consumers save too little
Approach to GDP
Shows the income approach to GDP
Net operating
surplus
is
just
a
A large Part
fancy way
is
compensations
or sayingprofit
andrewstudynotes.com
to employees wages
m
people trade internationally ii e
co
.
es
Finally
Finally indirect business taxes include sales
away to
and property tax
m
co
.
es
paid by the Private sector
t
no
compensate for his depreciation
depreciation Some of the income are put
Process
y
ud
st
wear and tear on capital is called
not completely used in the production
w
The
are
e
dr
an
Capital refers to inputs to the Production Mat
The Production Approath to GDP
Ifs important to note that computing GDP as
theres no double counting Suppose
to
100 mil or cars
mane
a
the value of goods and services in the economy
here GDP only increases
by
We can view his in two ways first only the final sales
Each
a GDP equal to
Producer creates an amount
value added is calculating
each producer
by subtracting
the
10 mil
an automobile
factory
100 mil
of goods and services are counted
value added
intermediate Products from
Thesteel company Produces
go mil
10 mil to
steel company sells
during production This
therevenue generated by
while the automobile produces
too did
andrewstudynotes.com
Another point is that
only new production counts A dealerbugs a car for 17 sells to a
family for 20 The Wil 20 doesnt count towards GDP as it doesnt rant as new production
instead
he prosit a servile ii e binding a
car for me
raming does scent so
3
Whats Included GDP and What Not
By seeing
whats not included in GDP we
arent included in
measuring GDP as
in the market
It
can see some of its limitations Domestic worms
it only includes goods and services that
are transacted
also omits the health of a nation's people Conventional measures dont incorporate
way to Quantitatively
A potentially
a
measure me change in health
significant limitation is that it doesnt include thangs in environmental resources
Extracting nonrenewable materials increases GDP but the reduction of the resources isnt deduited
andrewstudynotes.com
look at thegap
andrewstudynotes.com
m
countries its way beyond in other welfare measures
way richer than other
co
expectenly and leisure Essentially it shows that even though the US is
.
es
welfare measures such as lice
t
no
Case Study Beyond GDP
This Provides an example of incorporating GDPinto other
y
ud
st
w
e
dr
an
from GDP
while that there are important diorevenies between welfare and GDP
they are Still correlated and
e
dr
an
The study concludes
y
ud
st
w
therefore remains incormative
t
no
Time
m
over
co
.
es
2 3 Measuring Changes
Calculating GDPin a given year is way simpler than comparing different countries
or across
different time Periods
Economists use the word nominal to refer to
a measure
been separated at and use real to refer only to the
actual
fine GDP when Priles and Quantities havent
Quantity of goods and services Nominal and
real GDP are related by a simple eavation
7.23
nominal GDP Price level x real GDP
If
an economy produces 31 Phones to shoo each the nominal is13700 while he real
is 37 Phones
Nominal GDP can increase either because Price level has gone up or real GDP hasgoneup The issue
lies
A
on figuring
which one causes an increase in nominal GDP
Simple Example When Real GDP Doesnt Change
Consider
a simple economy consisting of
apple and
computers
Nominal GDPis therefore
nominal GDP prices of apples Quantity of apples t
Suppose
at
Now in
500
201g apple
Sf
t
900
Computer
lostS
of computers
1 each and 5 computers 5goo each Thenominal is
in 2018 theres no apples
o
prices of computers o a
5
5,000
2 each and computer 1000 each reteris Paribus Nominal for
800 7811001
5
song is
6 ooo
Computer
Nominal GDP increases by
1000 despite
the economy producing the same amount Here he
change in GDP is because theres an increase in Price
To control
the change in priies when multiple goods
are
included we use the same set
andrewstudynotes.com
a
To distinguish nominal from
201gdollars or
wid dollars
y
ud
st
t
no
Where Rec GDP Change
apple costs
3 and
computer still 1000 and the economy Produces 550 apples and 6 computers Calculating the
nominal economy yields
Interms
use
the
Measured in
Producing more
wig prices to find
t 11mg
ftp.es 550
1,6507
6.000
GDP the economy is
or real
GDP we can
7650
Alternatively
we
can use
To calculate real
me real GDP in 2070
o
7.100
6
wig prices real GDP in wig is
change from wig to 72020 is therefore
goods relative to 201g
the same as its nominal GDP 6000 The real
1,700 or
the 2020 Prices real
110018Gooo
GDP
18.31
in 7020 would then lava the nominal GDP
in 2070 7680 Real GDP in long it
asks
So
500
using now pries
the change in
we
get
is
6800
61500
7,680
Thi second example reveals mat
1,150
real GDP dieters depending on whether we use
Quantity Indexes
The method
t Imogen
aspeyres
the initial Roig
or
he final7010Prix
Paasche and Chain Weighting
of computing real GDP changes
using initial poises is caned me
aspeyres Index
In general the dicoerence shouldnt be hav
we're salivating two consecutive years But when dealing with a large period a time
while the final year is called the Paarshe Index
much ie
especially with high inflation his could vary significantly
A third and
it
1
more preferred method is
called the Fisher index
or chain weighting To calculate
compute the first two indexes and calculate the average Using his previous examples we get
18.3t t 17.71 18.01 The chain weighted index therefore says that real GDP is
higher 18 in row man song
2
a
andrewstudynotes.com
m
that in 2070
Consider an example where real GDP does change Suppose
co
.
es
A Second Example
in
w
nominal variables in current dollars and real variables
real variables we measure
e
dr
an
Prices to calculate real GDP each year
of real chain weighted GDP in Tong is
then computed byfinding the level
y
ud
st
t
no
61483
m
co
long is therefore
.
es
The real chain weighted GDP in
Ie
w
such that if it were to grow at Idi it would laval to me 2070 level
X C l t o 1801 7 650 7 X 7,650 1.18 6,483
x
e
dr
an
The level
To illustrate
the issue of a long period of time consider the price of apples and computers in
7960 and 7015 The laspeyres would use the 1960 Prices and the Paas he will use me 2015 prices
In 1960 computer Priles
are relatively
way more expensive
has grown significantly it would Produle
compared to apple
but
as computer output
very fast growth for real GDP using hue Caspeyres
index Using the Paasch index where its less relatively more expensive in 2015 it will Produce
much slower grown Chain weighting provides an average or thesetwo extremes and therefore
a
Provide a better picture
More generally we calculate
gear by year basis To compute from
each year real GDP in 7015 using both 2014 and
the chain index on
1960 2015 we compute real GDP change for
a
7015 Prints Roly using W ly and 7013 and to or
Poise Indexes and Inflation
For each
of
the three indexes theres a
corresponding Price
index Recall the basic formula
for nominal GDP
nominalGDP Pri le level a real GDP
In the
This
7.37
national accounts the equation that satisfies this education is called the GDPdeflator
comes from
the fact that
real GDP
we can calculate real GDP as
notifs
Theres a simple him
to calculate the percentage change by applying the formula in 7.3
in two different gearsThe percentage change in a mathematiial Product is approximately eaves
to thesum of the
percentage changes in each components Applying
Percentage change in
nominal GDP
We
saw
a
percentage changein
to 7.3 yields
Percentage thanges in
real GDP
Price level
above that he chain weighted real GDPchange is 18
change is 77.5
we
can get a price change level of
while he nominal GDP
7.7.5 18 g 51 This is also known as
andrewstudynotes.com
y
ud
st
w
e
dr
an
the inelation rate
32914172
index essentially solves his issue
Bikram
30141
12 57
main downside of chain weighting is mat we must be careful when adding together
the components a real GDP The sum a red chain weighted C I G and Nx doesnt usually
The
add
up to real
different
chain weighted Gop The reason is that dicoerent
components
The important
lesson
is it you are interested in Particular share such as I in GDP look at the
ratio of the nominal GDP as this will add up
the Chain
Case
le youreinterested in
weighted real measures
a discussion on the Federal Reserve Economic Database and how you can use the data
just refer bath
for simple guidance Essentially collect data for me US economicdata
2 4 Comparing Economic Performance
compare the economia performance between
rate first For example in 2014 US GDPis
Suppose
Countries
across
need to figure out the exchang
16.4trillion and China's GDP is Go.g trillionguan
two countries
we
we exchange rate is 6.14yuan for 1 Then
Go g trillion Yuan
Then
real economic growth use
Study The FRED Database
There
To
Prices are used in constructing
we need to
figyuen
Agig trillion
apply the same prices to get
a more
accurate
comparison Otherwise
the Quantities
The right
may bethe same and the GDP diverences is just due to different prices
way to correct this is to use a common set of Priies to calculate real GDP in the economy
a goods
Produced
andrewstudynotes.com
m
relative Priies for goods involving semiconductors were falling rapidlyaround 1st year which
was rapid enough to cause an error using his two other indexes Using a chain weighted
co
of the motivations of the US Doc introducing chain weighted index is because the
.
es
One
t
no
Using Chain Weighted Data
real GPPchina
real Gdp chink
g ÉÉ
price level v s
Figgins
To measure China's
2.57
a
nominal one
date
m
can substitute 2.4 into 2.5
co
We
Prine level v s
Chinese prices
.
es
real 6Drchinariles
Us prices rather than
t
no
China's GDP using
y
ud
st
Say we'd like to compute
7.4
real GDP
w
nominal GDP Price level
GDP
and real
e
dr
an
Recallthe eduction relating nominal
GG
GDP in US prices we need to adjust For me relative Price level of
goods in United States versus China
The rest
of
the boon will use the UN International
Table data set incorporates here Priles to
The dam show mat
Comparisons Program
which the Penn World
ionstrust comparable measures of real GDP
goods in China is about sgt me prines
a goods
in the Us
on average
Therebore
Iii
Plugging
this into 2.6
Igg
o
9 g trillion
e
16.8 trillion
Instead a 40 1 Smaller China's real GDP is about 21
larger than the Us This is kinda makes
sense as even though on a person basis China's GDP is 4 times poorer man the Us China has
6 time the population so the total GDP D roughly the same
In general
rith countries have higher Prices because of higher wages and his translates to
lower Prices
ter serviles
thpractise this means
translating GDPonly on
to largerdioverenies
andrewstudynotes.com
exchange rates will
translate
e
dr
an
Summary
y
ud
st
w
1 National income accounting provides an overall aggregate economic activity where GDP is the
keymeasure It can be viewed as total expenditure totalincome or a total production in an economy
t
no
m
co
T Ct Gf It NX
3 Akey lesson a theincome
.
es
7 The expenditure approach to GDP makes use of the fundamental national income identity
approach
is that labor's share a GDP it relatively stable over
time at about 13
4 In the production approach its only he
waive a final production
that counts Eavivalentry GDP is the
sum a value added at eachstage ee the production
5 Nominal
GDP refers to
the values or GDP measured in current prices in a given year Real GDP
GDP in two different years using her same set of prices Changes in real GDP
therefore reelects changes in Produition instead a changes in Prices
involves
computing
G Chain weighting Provides
a Period as
7 International
a more accurate estimate or changes in real GDP over a large amount
it measures the changes in lath year
comparisons
of GDP involvetwo steps First convert his currencies using theexchange
rate and compare them using the common Prices
30 4 22
13 54
4hr or min
a
andrewstudynotes.com