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
 yx
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