The Macroeconomic
Perspective
GDP
– A Measure of Output
Chapter 5
• Measuring the Size of the Economy:
Gross Domestic Product
• Adjusting Nominal Values to Real
Values
• Tracking Real GDP over Time
• Comparing GDP among Countries
• How Well GDP Measures the Well-Being
of Society
Basic Macroeconomics
Basic Macroeconomics
Basic Macroeconomics
• Gross Domestic Product (GDP):
The market value of final goods and services
produced within a country during a specific time
period, usually a year.
GDP vs GNP??
• GDP: production within a country’s borders
(domestic)
• GNP: production by people of a country
(national)
Two Ways of
Measuring GDP
Expenditures
What is Produced
Measuring GDP
Dollar flow of
expenditures
on final goods
= GDP =
• 1. Expenditure Approach:
Dollar flow of
income (and indirect
cost) of final goods
• GDP is the sum of expenditures on final user
goods and services purchased by households,
investors, governments, and foreigners.
• There are four components of GDP:
• personal consumption purchases C
• gross private investment
Ig
(including inventories)
• government purchases
G
(consumption and investment)
• net exports ( exports minus imports ) Xn
GDP = C + Ig + G + Xn
•
(Consumer) Consumption is over half of the GDP.
•
(Source: http://bea.gov/iTable/index_nipa.cfm)
GDP = C + Ig + G + Xn
(a)
(b)
(c)
(d)
Not much change in the C, I or G percents over time.
Exports are added to total demand
Imports are subtracted from total demand.
Exports exceed imports, in the 1960s and 1970s
(Source: http://bea.gov/iTable/index_nipa.cfm)
Measuring GDP
2. What is Produced:
Goods and Services (and Structures)
• Services
62.1%
• Nondurable goods
16.7%
• Durable goods
13.2%
• Structures
• Inventory Changes
7.4%n
0.6%
Goods, Services
and the other stuff
• GDP is measured in dollars
• Each good produced increases output by
the amount the purchaser pays for the
good.
GDP is the sum of total spending on all
goods and services produced during the
year.
Only final goods and services count
• What Does Not Count Toward GDP?
• Sales at intermediate stages of production. Their
value is already counted in the final-user good.
Including them would result in double counting.
Stage of production
Sales Receipts
Value added to the product
(at each stage of production)
(equals income created)
Stage 1: farmer’s wheat
by farmer
$.30
$.30
Stage 2: miller’s flour
by miller
$.65
$.35
Stage 3: baker’s bread
(wholesale)
by baker
$.90
$.25
Stage 4: grocer’s bread
(retail)
by grocer
$1
Total consumer expenditure = $1
$.10
Total value added = $1
• What Else?
• Financial transactions and income transfers.
They do not reflect production.
Stocks
• Production outside the geographic
borders of the country is not counted.
• Goods not produced during the 1955 Chevy
current period are not counted.
Which are included in this year's GDP? :
•
•
•
•
•
•
•
•
•
1.
2.
3.
4.
5.
6.
7.
8.
9.
Interest on an AT&T bond YES
NO
Social Security payments to retirees Services of a painter in painting a house - YES
Income of a dentist YES
NO
Money received from the sale of a 1990 model carMonthly allowance of a college student - NO
Rent for a 2 bedroom apartment YES
Money received for selling this year's model carYES
Interest on a government bond NO
Which?
•
•
•
•
•
•
•
•
10. A two hour decline in the work week - NO
11. Purchase of the AT&T bond NO
12. A $ 2 billion increase in business investmentsYES
13. Purchasing 100 shares of GM common stock NO
14. Purchase of an insurance policy - YES
15. Wages paid to your butler YES
16. Market value of a homemaker's services - NO
17. Purchase of the Mona Lisa NO
Other Measures of GDP
2. Resource Cost - Income Approach
GDP is the sum of costs incurred and income
(including profits) generated by production of
goods and services during the period.
Not covered
4. Output – by Industry
Add up output by each industrial sector
Chemicals + Agriculture + …
Not covered
• Gross National Product (GNP):
Output by the “nationals” – citizens
of the country, regardless of whether that output is
produced domestically or abroad.
• National income:
Income earned by the nationals (citizens) during a
period. It is the sum of employee compensation,
self-employment income, rents, interest, and
corporate profits. Minus depreciation and taxes
• Personal income:
Income received by domestic households and noncorporate businesses. It is available for
consumption, saving, and personal taxes. Includes
transfers.
• Disposable income:
Income available to individuals after personal
taxes. Can be spent on consumption or saved.
• The term "real" means adjusted for inflation.
• Price indexes are use to adjust data for
inflation.
• A price index measures the cost of purchasing a
good (or goods) at a point in time relative to the
cost of purchasing the identical good during an
earlier (or base) period.
Creating a price index
Year
1
$ Spending
170
Index
_____
2
180
Current year spending
3 Base
Base year
year spending
200
_____
x 100
_____
4
200
_____
5
224
_____
6
250
_____
7
280
_____
Gross Domestic Product
Complete the following table assuming that Year 1 is the base year.
Year
Output
Price
1
100
$4.00
2
120
4.40
3
110
5.00
4
110
5.20
5
135
5.20
6
140
5.60
Money
GDP
GDP
Index
Real GDP
Gross Domestic Product
Complete the following table assuming that Year 1 is the base year.
Year
Output
Price
Money
GDP
GDP
Index
Real
GDP
1
100
$4.00
$400
100
$400
2
120
4.40
528
110
480
3
110
5.00
550
125
440
4
110
5.20
572
130
440
5
135
5.20
702
130
540
6
140
5.60
784
140
560
• measures the impact of price changes on the
cost of a typical bundle of goods and services
purchased by households.
• designed to measure the change in the
average price of the market basket of goods
included in GDP (a broader price index than
the CPI).
1. PPI
2. WPI
3. MPI
CPI
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
(1982-84 = 100)
156.9
160.5
163.0
166.6
172.2
177.1
179.9
184.0
188.9
195.3
201.6
Inflation rate
GDP deflator
Inflation rate
(percent)
(2000 = 100)
(percent)
3.0
2.3
1.5
2.2
3.4
2.8
1.6
2.3
2.7
3.4
3.2
93.9
95.4
96.5
97.9
100.0
102.4
104.1
106.0
109.4
112.7
116.0
1.9
1.7
1.1
1.4
2.2
2.4
1.7
1.8
2.8
3.0
2.9
Source: http://www.economagic.com.
• Even though the CPI and the GDP deflator
different market
baskets and
CPI are
andbased
GDPonDeflator:
1991-2001
procedures, they yield similar estimates of
the rate of inflation.
• The formula for converting the nominal GDP
into real GDP is:
GDP Deflator1
Real GDP2 = Nominal GDP2 *
GDP Deflator2
• Data on both money GDP and price changes are
essential for meaningful comparisons of output
between two time periods.
Converting Earlier Figures to Current Dollars
• For comparisons across time periods, we must use
current dollars.
• Done by “inflating” the earlier data for the
increase in the price level.
• The formula:
Figurecurrent $ = Figureearlier $ *
price indexcurrent year
price indexearlier year
• This will “inflate” the data for earlier years into
line with the current purchasing power of the $.
Deriving Real GDP
1996
2001
% increase
Nominal GDP
Price index
Real GDP
(billions of U.S. $)
(GDP deflator, 1996 = 100)
(billions of 1996 $)
$7,813
$10,208
30.7%
100.0
109.4
9.4%
$7,813
$9,331
19.4%
Source: U.S. Department of Commerce.
1998
2003
% increase
Nominal GDP
Price index
Real GDP
(billions of U.S. $)
(GDP deflator, 2000 = 100)
(billions of 1998 $)
$8,747
$11,004
25.8%
96.5
106.0
9.8%
$8,747
$10,018
14.5%
Nominal GDP
Price index
Real GDP
(billions of U.S. $)
(GDP deflator, 2000 = 100)
(billions of 2000 $)
$9,817
$13,247
34.9%
100.0
116.0
16.0%
Source: http://www.economagic.com.
2000
2006
% increase
Like “Deflating” the $
Source: http://www.economagic.com.
$9,817
$11,420
16.3%
Interesting Questions
1. The CPI was 177 in 2001 compared to 100 in 1983.
Suppose that the price of a ticket at a local movie
theater rose from $4 to $8 between 1983 and 2001.
Did the real ticket price increase or decrease?
Calculate the 1983 ticket price measured in 2001
dollars.
2. The CPI was 210 in 2007 compared to 100 in 1983. Suppose
that the price of a ticket at a local movie theater rose
from $4 to $8 between 1983 and 2007. Did the real ticket
price increase or decrease? Calculate the 1983 ticket price
measured in 2007 dollars.
Questions for Thought:
3. Use the following data to answer this question.
Nominal GDP
GDP deflator
9.27
9.87
10.21
104.7
107.0
109.4
(trillions of $)
1999
2000
2001
(1996=100)
a. Calculate the real GDP in 1999, 2000, and 2001
measured in 1996 dollars.
b. What was the percent change in real GDP
between 1999 and 2000? What was the percent
change between 2000 and 2001?
c. What was the inflation rate as measured by the
GDP deflator in 2000 and 2001?
Questions for Thought:
1.
The CPI was 177 in 2001 compared to 100 in 1983. Suppose that the price of a ticket at a local movie
theater rose from $4 to $8 between 1983 and 2001. Did the real ticket price increase or decrease?
Calculate the 1983 ticket price measured in 2001 dollars.
Year
CPI
Nominal Ticket
1983
100
$4
2001
177
$8
2007
210
$8
Real Ticket 1983
Real Ticket 2001
2. Use the following data to answer this question.
Nominal GDP
(trillions of $)
1999
2000
2001
9.27
9.87
10.21
GDP deflator
(1996=100)
104.7
107.0
109.4
Real GDP
(trillions of $)
_______
_______
_______
% change
_______
_______
_______
Inflation
rate
_______
_______
_______
a. Calculate the real GDP in 1999, 2000, and 2001 measured in 1996 dollars.
b. What was the percent change in real GDP between 1999 and 2000? What was the
percent change between 2000 and 2001?
c. What was the inflation rate as measured by the GDP deflator in 2000 and 2001?
GDP Deflator
Real and Nominal GDP
GDP Comparisons
Across Time Periods
and Across Countries
GDP Across Countries
GDP per Capita
Country
Real GDP
Brazil
Canada
2,356
1,488
China
Egypt
Germany
India
12,406
540
3,197
4,684
Japan
Mexico
South Korea
4,628
1,759
1,614
United Kingdom
United States
2,336
16,245
GDP per
Capita
11,875
42,734
9,162
6,545
39,028
3,830
36,266
32,272
15,312
36,941
51,706
Per capita GDP Across Time Periods
U.S. Per Capita GDP
$38,687
(in 2000 U.S. dollars)
$35,769
$28,429
$22,666
$18,391
$11,717
$6,418
1930
$13,840
$7,827
1940
1950
1960
1970
1980
1990
2000
2006
Source: derived from U.S. Department of Commerce data.
• Per capita GDP has steadily risen. In 2000, per capita GDP
was 4.6 times the 1940 figure. What does this mean?
Per Capita GDP Comparisons
Across Countries
• GDP comparisons across countries may be biased
(or vary) because of differences in
• leisure versus time worked,
• size of the underground economy,
• the share of output in the household rather
than the business sector. .
• POPULATION
• There is a strong relationship between per capita
GDP across countries and indicators of living
standards such as life expectancy, infant
mortality, and literacy.
• Shortcomings of GDP:
•
•
•
•
It does not count non-market production.
It does not count the underground economy.
It makes no adjustment for leisure.
It probably understates output increases
because of the problem of estimating
improvements in the quality of products.
• It does not adjust for harmful side effects.
• It does not consider standard of living – GDP
per person
• Great contribution of GDP:
• In spite of its shortcomings, real GDP is a
reasonably accurate measure of short-term
fluctuations in output.
1. Which of the following activities will affect GDP:
a. You pay $600 per month to lease an apartment.
b. You pay $8,000 to purchase a four-year-old car.
c. You have car trouble and have to pay a repair shop
$1,500 to fix the transmission of your car.
d. You pay $5,100 to purchase 100 shares of Microsoft
stock ($50 per share for the stock plus a $100 fee).
e. You sell your 100 shares of Microsoft stock (purchased
for $5,000) for $6,000 minus a $100 brokerage fee.
f. Your aunt sends you $500 to help with your expenses.
g. You earn $500 providing computer services for a
faculty member.
h. You win $500 playing cards with classmates.