Macroeconomic Measurements GDP: Dollar Value of Goods and Services produced per unit of time within the national boundaries. GNP: Dollar Value of Goods and Services produced per unit of time by factors owned by domestic residents. National Income Identity Production = Income = Expenditure Product: Value of Output Income: Value (Cost) of Inputs Expenditures: Value of Purchases Income and Production Production Statement (Firm) Costs Receipts Raw Materials Sales of Product Other Business Inventory Change Expenses (Wages, etc.) Business Profits Gross Value of Inputs Gross Value of Output Production Statement (GDP) Costs Receipts Other Business Sales of Product Expenses Raw Materials Business Profits Value Added from Inputs Inventory Change Value Added to Production Example: Corn, Hogs, and Government Corn Producer Produces and sells $20 worth of Corn Uses NO Raw Materials Pays Workers $5 in Wages Pays $0.50 Interest on preexisting Loan Pays $1.50 in Taxes Hog Producer Produces and sells $30 worth of Bacon Buys $12 worth of needed Feed Corn Pays Workers $4 in Wages Pays $3 in Taxes Government Collects $5.5 in total Taxes Pays $5.5 Wages to Bureaucrat Employees Corn Producer Costs Receipts Raw Materials Sales of Product $0.0 $20.0 Wages $5.0 Inventory Change Interest $0.5 $0.0 Taxes $1.5 Business Profits $13.0 Gross Value of Gross Value of Inputs: $20 Output: $20 Corn Value Added (GDP) Expenditures Receipts Other Business Sales of Product Expenses Raw Materials $7.0 $20.0 Business Profits Inventory Change $13.0 $0.0 Value Added from Value Added to Inputs Production $20.0 $20.0 Hog Producer Costs Receipts Feed Corn Sales of Product $12.0 $30.0 Wages $4.0 Inventory Change Taxes $3.0 $0.0 Business Profits $11.0 Gross Value of Gross Value of Inputs: $30 Output: $30 Hog Value Added (GDP) Expenditures Receipts Wages $4.0 Sales of Product Taxes $3.0 Raw Materials $18.0 Business Profits Inventory Change $11.0 $0.0 Value Added from Value Added to Inputs Production $18.0 $18.0 Government Production Government Costs Raw Materials Receipts Imputed Value $0.0 = Cost of Production Wages $5.5 Gross Value of Gross Value of Inputs: $5.5 Output: $5.5 Government Value Added (GDP) Expenditures Receipts Wages $5.5 Cost of Production Raw Materials $5.5 Value Added from Value Added to Inputs Production $5.5 $5.5 Product Accounting GDP $20 $18 $5.5 = $43.5 Household Activities Receive $14.5 in Wage Income Receive $0.50 in Interest Income Receive $24 in Profit Income Pay $1 in Personal Taxes Spend $8 on Corn Spend $30 on Bacon GDP Income Accounting Costs for Firms Consumers’ Income = Value of Inputs GNP: Compensation of Employees Wage Income ($5+$4+$5.50=$14.50) Benefits Indirect Business Taxes ($4.5) Net Operating Surplus of Businesses Profits ($13+$11=$24) Interest Expenses ($0.50) Depreciation of Fixed Capital GDP GNP Net Factor Income = $43.50 GDP Expenditure Accounting Receipts by Firms Expenditures on GDP Value of Output Consumption: purchases by domestic households of all newly produced goods and services (except new housing). Investment: purchases by domestic firms of all newly produced goods and services household purchases of new housing. Government Spending: purchases by all domestic governments of newly produced goods and services. Net Exports: Exports Imports GDP Consumption ($38) Corn ($8) + Bacon ($30) Investment ($0) Government Spending ($5.50) Net Exports ($0) = $43.50 Quantity and Price Indices: An Example First Year Data Good Quantity Price Food 6 $1 Clothing 3 $2 Entertainment 1 $6 Second Year Data Good Quantity Price Food 8 $2 Clothing 4 $5 Entertainment 3 $10 1st Year GDP: 6 $1 3 $2 1 $6 $18 2nd Year GDP: 8 $2 4 $5 3 $10 $66 $66 $18 GDP Growth Rate 267% $18 Laspeyres Index Values at First Year Prices P1 Q1 : 6 $1 3 $2 1 $6 $18 P1 Q2 : 8 $1 4 $2 3 $6 $34 P1 Q2 Y2 $34 Y 1.89 89% P1 Q1 Y1 $18 Y Paasche Index Values at Second Year Prices P2 Q1 : 6 $2 3 $5 1 $10 $37 P2 Q2 : 8 $2 4 $5 3 $10 $66 P2 Q2 Y2 $66 Y 1.78 78% P2 Q1 Y1 $37 Y Chain-weighted Index Geometric Average Y2 g L @ Year 1 P' s, Y1 Y2 g P @ Year 2 P' s. Y1 Now calculate: g c g L g P (1.89)(1.78) 1.836 Y2 Y 1 . 836 83.6% Y Y1 Chained Chain-weighted Real GDP 1. Pick a Base Year Base Year Real GDP Base Year Nominal GDP 2. Scale Adjacent-years’ Real GDP levels using Geometric Average 3. Chain back to the Base Year Suppose we pick Base Year First Year Y1 $18 Y2 1.836 $18 $33.04 Multi-year Example: 2005 Base Year Y2008 Y2007 Y2006 Y2008 Y2007 Y2006 Y2005 Nominal GDP 2005 Price Measurement Nominal GDP Implicit GDP Deflator: 100 Real GDP Earlier Example with Chain-weighting: $18 P1 100 100 $18 $66 P2 100 199.75 $33.04 Fixed-weight Price Index (CPI and PPI) Value of Base Year Q' s @ Current P' s 100 Value of Base Year Q' s @ Base Year P' s Algebra of Percentage Changes Nominal GDP Price Level Real GDP Percent change in Nominal GDP Percent change in Price Level Percent change in Real GDP z xy dz dx dy yx dt dt dt 1 dz y dx x dy z dt z dt z dt x 1 y 1 But: and , and so: z y z x 1 dz 1 dx 1 dy z dt x dt y dt Cross-Countries Comparisons Real GDP allows comparisons across time. We also want to compare across countries. We require cross-country price comparisons. Consider China’s real GDP: Real GDPChina Real GDPChina Nominal GDPChina Price Level China Now define: U.S. Prices Real GDPChina : Chinese Real GDP measured in equivalent U.S. prices U.S. Prices Real GDPChina Price Level U.S. Real GDPChina Price Level U.S. Nominal GDPChina Price Level China First calculate Nominal GDPChina measured in $’s. Then correct for different price levels. U.N. International Comparisons Program collects such price data. Estimates are incorporated into Penn World Tables. Example: Year 2007 Chinese Nominal GDP: 26.4 Trillion Yuan U.S. Nominal GDP: $13.7 Trillion Exchange Rate: 7.6 Yuan/$ Price Level U.S. 3.333 Price Level China First express Chinese Nominal GDP in $’s: 26.4 Trillion Yuan $ Nominal GDPChina $3.4737 Trillion 7.6 Yuan/$ Next correct for price differences: Price Level U.S. U.S. Prices $ Real GDPChina Nominal GDPChina Price Level China 3.333 $3.4737 Trillion $11.5789 Trillion Purpose of exercise is to construct: U.S. Prices Real GDPChina Chinese Real GDP relative to U.S. U.S. Prices Real GDPU.S. $11.5789 Trillion 0.845 $13.7 Trillion Price level correction can be important: Poor countries often have lower prices. Prices are part of the explanation of their low GDP data. For relative prosperity levels, we must also correct for population. U.S. Prices Real GDPChina China' s Population Chinese per capita Real GDP relative to U.S. U.S. Prices Real GDPU.S. U.S. Population U.S. Prices Real GDPChina U.S. Population U.S. Prices Real GDPU.S. China' s Population 0.845 0.228 0.1926