Chapter 2 -- Measuring Output and The Price Level
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Transcript of Chapter 2 -- Measuring Output and The Price Level
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Chapter 2 -- Measuring Output and The Price Level
Data complied at the National Income and Product Accounts (NIPA)
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Measuring Output -- Gross Domestic Product (GDP)
Gross Domestic Product -- The total market value of all currently produced final goods and services over a period of time.
Nominal GDP -- GDP in current dollars
Real GDP -- GDP in constant dollars.
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Aspects of GDP Definition
“Over a Period of Time” GDP is a flow measure.
“Currently Produced” GDP excludes the following
-- sales of used items -- transfer payments -- purchases of stocks, bonds, or land
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“Market Value” -- the transaction must be recorded and have a specific dollar figure attached GDP excludes
-- illegal purchases -- household production
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Final Goods and Services and Measuring GDP
Example -- Production of a pair of shoes.
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GDP and Making ShoesStep Value Value AddedFarmer 3 3Packing Plant 7 4Tannery 13 6Shoe Manufacturer 25 12Wholesaler 40 15Retailer 75 35Total 163 75
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What Real GDP (Y) Signifies
Total Production or Output of final goods and services
Total Sales on Final Goods and Services (Approximately)
Total IncomeCorrelated With Total Employment
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Computing GDP -- The Expenditure Approach
Operative Equation:
Y = C + I + G + NX
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Consumption (C)
Defined as consumer purchases of final goods and services
components of consumption -- nondurable goods -- durable goods -- serviceslargest component of GDP
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Investment (I)
Business Purchases of New Plant and Equipment
New Residential HousingChanges In Inventories
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Output Versus Sales -- The Approximation
Example -- $18,000 car, produced in 2000, sold in 2001
Year C I G NX Y2000 $0 $18 $0 $0 $182001 $18 -$18 $0 $0 $0
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Investment Goods Versus Intermediate Goods
The Similarity -- Transactions between businesses.
The Conceptual Difference -- Producing Final Goods Versus Being Part of a Final Good
The Operational Difference -- Is it used repeated times?
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Government Purchases of Goods and Services (G)
Not the same as government expenditure (does not include transfer payments)
In the US, the government is a purchaser, not a producer.
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Net Exports (NX)
NX = Exports - Importsexports are all final goods and
servicesGNP versus GDP -- the accounting
of multinational firms
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Real GDP and Quality of Life
Real GDP does not account for the following changes:
-- leisure time -- quality differences -- crime -- environmental impacts
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More Quality of Life Variables Not in Real GDP
-- non-market production activities (I) household production (II) underground economy -- income distribution
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Other Measures of Output or Income
Gross Domestic Product (GDP) – DepreciationNet Domestic Product (NDP) – Indirect Business TaxesNational Income (NI)
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National Income – Undistributed Corporate Profits (Business Saving) – Social Security and Corporate Taxes + Transfer Payments and Interest Personal Income (PI) – Personal Income TaxesDisposable Income (YD)
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Disposable Income and Personal Saving
Define -- Personal Saving (SP) SP = YD - C
Define -- Total Private Saving (S), S = Personal Saving
+ Business Saving
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The “Magic Equation”
Let T = Net Taxes Net Taxes = Tax Revenues - (Transfer
Payments + Interest on the Government Debt)
Then the identity is:
S = I + (G - T) + NX.
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Interpreting the Identity: Saving = Investment
Identity: S = I + (G-T) + NXRearrange Identity Into: S + (T - G) + -NX = I
Special Case: (T - G) = 0, NX = 0 S = I
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Measuring The Price Level
Measures of the Price Level (P) -- GDP Deflator -- Personal Consumption Expenditure (PCE) Deflator
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Measure #1 -- The GDP Deflator
Market Basket -- set of final goods and services that are used to compute GDP.
Chain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).
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Measure #2 – The PCE Deflator
Market Basket -- set of final goods and services that are used to compute Consumption within GDP.
Chain Weighted Measure -- reduces biases associated with fixed weight index (e.g. Consumer Price Index).
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Computing the Inflation Rate
Inflation Rate = Percentage Change or growth in the Price Index (P), such as the GDP Deflator.
Example: Inflation Rate for 2011 Inflation Rate2011 = P2011 – P2010
P2010
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Converting Nominal GDP to Real GDP Example -- find Real GDP 2011
Real GDP2011 = Nominal GDP2011
GDP Deflator2011
Real GDP for other years is computed the same way.
Real GDP Growth = Percentage Change (or growth) in Real GDP.
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Sources to Obtain Macroeconomic DataThe Economic Report of the President (Historical Data) www.gpoaccess.gov/eop/
Economic Indicators (Recent) www.gpoaccess.gov/indicators/
index.html
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More Websites for Macro Data and Informationwww.federalreserve.gov (Federal
Reserve) research.stlouisfed.org/fred2/ (Federal
Reserve Economic Data)bea.gov (Bureau
of Economic Analysis)www.bls.gov (Consumer
Price Index inflation, unemployment rate, labor productivity growth)