Measurement - Chapter 2 - Southampton · Measurement Chapter 2 ... Other Measurement Issues...
Transcript of Measurement - Chapter 2 - Southampton · Measurement Chapter 2 ... Other Measurement Issues...
MeasurementChapter 2
Topics in Macroeconomics 2
Economics DivisionUniversity of Southampton
February 2009
Chapter 2 1/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Gross Domestic Product
Gross Domestic Product (GDP)Dollar value of final output produced during a given period oftime within the borders of a country
(Log) Real GDP Per Capita (year 2003 pounds)
3.5
3.6
3.7
3.8
3.9
4.0
4.1
4.2
4.3
4.4
1900
1906
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1972
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Year
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g R
GD
P p
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cap
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Chapter 2 3/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Approaches to Measure GDP
◮ Product approachSum of value added to goods and services in productionacross all productive units in the economy
◮ Expenditure approachAdds all spending on goods and services in the economy
◮ Income approachAdds up all incomes received by economic agentscontributing to production
NOTE: All three measures must add up to the same value(up to measurement error of course)
Chapter 2 4/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
A Simple Economy
Consider an economy composed of the following agents:◮ A corn producer
Uses labour to produce corn◮ A pig producer
Uses corn and labour to grow pigs◮ Consumers
Supply labour, consume corn and pigs, provide loans◮ A government
Taxes firms and workers, uses labour to producegovernment supplied goods or services
Chapter 2 6/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Producer 1
Corn Producer
Total revenue £20 millionWages £5 millioninterest on loans £0.5 millionTaxes £1.5 million
◮ Produces 10 million bushels of corn which are sold for £2per bushel
◮ From these 6 million bushels are sold to the pig producerand 4 million to consumers
◮ Pays wages of £5 million to workers (who are theconsumers)
◮ Pays £0.5 million in interest on a loan (to some consumers)◮ Pays £1.5 million in taxes to the government
Chapter 2 7/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Producer 2
Pig Producer
Total revenue £30 millionCost of feed corn £12 millionWages £4 millionTaxes £3 million
◮ Buys 6 million bushels of corn from the corn producer at £2per bushel—These are intermediate goods
◮ Pays wages of £4 million to workers◮ Pays £3 million in taxes to the government◮ Sells all its production to consumers (20 million kg at £1.50
per kilo)
Chapter 2 8/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Producers: After-Tax Profits
After-Tax Profits
Corn producer £13 millionPig producer £11 million
Total £24 million
After-Tax Profits = Total revenue- Wages- Interest- Cost of intermediate inputs- Taxes
Before-Tax Profits = 24 + 4.5 = £28.5 million
Chapter 2 9/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
The Government
Government
Tax revenueFrom producers £4.5 millionFrom consumers £1 million
Wages £5.5 million
◮ The Government collects taxes from consumers andproducers
◮ Uses the tax revenue to pay government workers (someconsumers) to build a bridge
Chapter 2 10/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Consumers / Workers
Consumers
Wage income £14.5 millionInterest income £0.5 millionTaxes £1 millionProfits distributed byproducers
£24 million
◮ Consumers work for the producers and government,earning a total of £14.5 million in wages
◮ Receive £0.5 million in interest from the corn producer◮ Pay £1 million in taxes to the government◮ Receive after-tax profits of £24 million from producers
(consumers own the production units)
Chapter 2 11/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
GDP Using the Product or Value Added Approach
GDP Using the Product Approach
Value added—corn £20 millionValue added—pigs £18 millionValue added—government £5.5 millionGDP £43.5 million
◮ GDP is the sum of value added to goods and services inproduction across all productive units in the economy
◮ We need to subtract intermediate goods to avoid doublecounting
◮ Value added for the government is problematic: usually setto the cost of the inputs since we don’t have market pricesfor most goods produced by the government
Chapter 2 12/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
GDP Using the Expenditure Approach
GDP Using the Expenditure Approach
Consumption (C) £38 millionInvestment (I) £0Government expenditures (G) £5.5 millionNet exports (NX ) £0GDP £43.5 million
GDP = Total Expenditures = C + I + G + NX
◮ Consumers spend all their income (£8 million on corn and£30 million on pigs)
◮ The government spends all its income◮ There is no investment nor international trade in this
example
Chapter 2 13/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
GDP Using the Income Approach
GDP Using the Income Approach
Wage income £14.5 millionBefore-tax profits £28.5 millionInterest income £0.5 millionGDP £43.5 million
GDP = Total Income = Y = C + I + G + NX
◮ GDP is also the sum of all incomes received by economicagents contributing to production
Chapter 2 14/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Gross National Product (GNP)
Gross National Product (GNP)Pound value of final output produced by domestic factors ofproduction, regardless of where production takes place
Net Factor PaymentsIncome paid to domestic factors of production by the rest of theworld - Income paid to foreign factors of production by thedomestic economy
GNP = GDP + Net Factor Payments
Chapter 2 15/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
IntroductionAn Example
Problems with Measures of GDP
Problems and things that are left out of GDP measures◮ Inequality◮ Non-market activity (home production)◮ Underground economy◮ Problems with value-added of the government and service
sector
Chapter 2 16/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Nominal vs Real GDP
◮ Nominal GDP◮ Measures GDP in the current year in terms of current prices
◮ Real GDP at constant prices (base-year prices)◮ Measures GDP in the current year in terms of prices of a
base year◮ One problem with this measure is that the base year used
matters◮ Chain-weighted Real GDP
◮ Essentially uses a “rolling” base year (eg. average price oftwo consecutive years)
Chapter 2 18/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Data for the Example
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Price £1.00 £0.80 £1.25 £1.60 £2.00 £2.00
◮ Nominal GDP in 2002: 50*£1.00 + 100*£0.80 = £130◮ Nominal GDP in 2003: 80*£1.25 + 120*£1.60 = £292◮ Nominal GDP in 2004: 100*£2.00 + 160*£2.00 = £520
Chapter 2 20/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Nominal GDP and GDP Growth
Nominal GDP and GDP Growth
2002 2003 2004
Nominal GDP (£) 130 292 520GDP growth (%) 124.6 78.1
◮ GDP Growth from 2002 to 2003 = 292/130 - 1◮ GDP Growth from 2003 to 2004 = 520/292 - 1
Chapter 2 21/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Real GDP at Constant Prices: Base-Year = 2002
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Price £1.00 £0.80 £1.25 £1.60 £2.00 £2.00
◮ Real GDP in 2002 (this is nominal GDP from before): £130◮ Real GDP in 2003: 80*£1.00 + 120*£0.80 = £176 (these
are 2002 £)◮ Real GDP in 2004: 100*£1.00 + 160*£0.80 = £228
Chapter 2 22/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Real GDP at Constant Prices: Base-Year = 2003
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Price £1.00 £0.80 £1.25 £1.60 £2.00 £2.00
◮ Real GDP in 2002: 50*£1.25 + 100*£1.60 = £222.5 (theseare 2003 £)
◮ Real GDP in 2003 (this is nominal GDP from before): £292◮ Real GDP in 2004: 100*£1.25 + 160*£1.60 = £381
Chapter 2 23/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Real GDP at Constant Prices: Base-Year = 2004
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Price £1.00 £0.80 £1.25 £1.60 £2.00 £2.00
◮ Real GDP in 2002: 50*£2.00 + 100*£2.00 = £300 (theseare 2004 £)
◮ Real GDP in 2003: 80*£2.00 + 120*£2.00 = £400◮ Real GDP in 2004 (this is nominal GDP from before): £520
Chapter 2 24/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Real GDP at Base-Year Prices
Real GDP at Base-Year Prices
2002 2003 2004Base Year = 2002Real GDP (£) 130 176 228Real GDP growth (%) 35.4 29.5
Base Year = 2003Real GDP (£) 222.5 292 381Real GDP growth (%) 31.2 30.5
Base Year = 2004Real GDP (£) 300 400 520Real GDP growth (%) 33.3 30.0
Chapter 2 25/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Chain-Weighted Real GDP: Average Prices
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Price £1.00 £0.80 £1.25 £1.60 £2.00 £2.00
◮ Average prices from 2002 to 2003:Apples: £1.125Oranges: £1.20
◮ Average prices from 2003 to 2004:Apples: £1.625Oranges: £1.80
Chapter 2 26/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Chain-Weighted Real GDP
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Avg Price £1.125 £1.20 £1.625 £1.80
◮ Real GDP using 2002–2003 rolling prices:2002: 50*£1.125 + 100*£1.20 = £176.252003: 80*£1.125 + 120*£1.20 = £234.00
◮ Real GDP growth from 2002 to 2003: 32.8%◮ Real GDP growth from 2003 to 2004: 30.2%
Chapter 2 27/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Chain-Weighted Real GDP at 2002 Constant Prices
Chain-Weighted Real GDP
2002 2003 2004
Real GDP (£) 176.25 234.00 304.67GDP growth (%) 32.8 30.2
◮ 2002: £176.25 (this is Real GDP using 2002–2003 rollingprices)
◮ 2003: £176.25*(1 + 32.8%) = £234.00◮ 2004: £234.00*(1 + 30.2%) = £304.67
Chapter 2 28/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Nominal and Real (Chain-Weighted) GDP [Canada]
Chapter 2 29/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Chain-Weighted Real GDP: Average Growth Rates
Real GDP Growth at Base-Year Prices
2002-2003 2003-2004Base Year = 2002 Real GDP growth (%) 35.4 29.5
Base Year = 2003 Real GDP growth (%) 31.2 30.5
Base Year = 2004 Real GDP growth (%) 33.3 30.0
◮ Average growth rate from 2002 to 2003:g2002−2003
c =
√1.354 ∗ 1.312 = 1.3333
◮ Average growth rates from 2003 to 2004:g2003−2004
c =
√1.305 ∗ 1.30 = 1.302
Chapter 2 30/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Chain-Weighted Real GDP at 2002 Constant Prices
Chain-Weighted Real GDP
2002 2003 2004
Real GDP (£) 130.00 173.29 225.62GDP growth (%) 33.3 30.2
◮ 2002: £130.00 (this is Real GDP using 2002 prices)◮ 2003: £130.00*(1 + 33.3%) = £173.29◮ 2004: £173.29*(1 + 30.2%) = £225.62
Chapter 2 31/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Nominal and Real (Chain-Weighted) GDP [U.K.]
3.5
3.6
3.7
3.8
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4.0
4.1
4.2
4.3
4.4
1900
1906
1912
1918
1924
1930
1936
1942
1948
1954
1960
1966
1972
1978
1984
1990
1996
2002
Year
Lo
g R
GD
P p
er
cap
ita
Chapter 2 32/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Implicit GDP Price Deflator
Implicit GDP Price Deflator =Nominal GDP
Real GDP∗ 100
◮ By convention, the price deflator is 100 in the base year (ifthere is a base year)
◮ Of course, the implicit GDP price deflator depends on themeasure of real GDP
Chapter 2 34/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Implicit GDP Price Deflator
Implicit GDP Price Deflator
2002 2003 2004Base Year = 2002 100 165.9 228.1% increase 65.9 37.5
Base Year = 2003 58.4 100 136.5% increase 71.2 36.5
Base Year = 2004 43.3 73.0 100% increase 68.5 37.0
Chain-weighted 73.8 124.8 170.7% increase 69.2 36.8
Chapter 2 35/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Consumer Price Index (CPI): Base-Year = 2002
Quantities and Prices
2002 2003 2004
Apples Oranges Apples Oranges Apples OrangesQuantity 50 100 80 120 100 160Price £1.00 £0.80 £1.25 £1.60 £2.00 £2.00
◮ CPI in 2002: 100◮ CPI in 2003: 100*(50*£1.25 + 100*£1.60)/130 = 171.2
(71.2% increase from 2002)◮ CPI in 2004: 100*(50*£2.00 + 100*£2.00)/130 = 230.8
(34.8% increase from 2003)
Chapter 2 36/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Inflation from CPI and Implicit GDP Price Deflator
Inflation
2003 2004Base Year = 2002 65.9 37.5
Base Year = 2003 71.2 36.5
Base Year = 2004 68.5 37.0
Chain-weighted 69.2 36.8
CPI 71.2 34.8
Chapter 2 37/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Figure 2.3:Inflation from CPI and Implicit GDP Deflator
Chapter 2 38/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Nominal and Real GDPAn ExamplePrice Indices
Problems measuring Real GDP and the Price Level
◮ Relative prices change over time◮ The quality of goods changes over time◮ New goods appear all the time
Chapter 2 39/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Savings, Wealth, and CapitalLabour Market Measurement
Some Definitions
◮ Private disposable income Y d
Y d= Y + NFP + TR + INT − T
TR: Transfers from the government to the private sectorINT : Interest on government debtT : Taxes
◮ Private sector saving Sp
Sp= Y d − C = Y + NFP + TR + INT − T − C
◮ Government saving Sg
Sg= T − TR − INT − G
◮ National saving SS = Sp
+ Sg= Y + NFP − C − G
S = C + I +G+NX +NFP−C−G = I +NX +NFP = I +CA
Chapter 2 41/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Savings, Wealth, and CapitalLabour Market Measurement
Nation’s Wealth
◮ The set of assets held by the country as a whole◮ Plants, equipment, and structures◮ Housing (and durables?)
◮ Wealth can be accumulated in 2 ways (S = I + CA)◮ Through investment, as addition to the nation’s capital stock◮ Through current account surpluses, as Brits accumulate
claims on foreigners
◮ Wealth and capital are stocks◮ Investment and current account are flows
Chapter 2 42/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Savings, Wealth, and CapitalLabour Market Measurement
Labour Market Measurement
Individuals can be in one of three labour market pools◮ Employed
Worked full-time or part-time during the last week◮ Unemployed
Not employed during the last week butactively searched for work during the last 4 weeks
◮ Out of the labour forceNeither employed nor unemployed
Unemployment rate =Number unemployed
Labour force
Participation rate =Labour force
Total working age population
Chapter 2 44/45 Topics in Macroeconomics
Measuring GDPMeasuring Real GDP
Other Measurement Issues
Savings, Wealth, and CapitalLabour Market Measurement
Labour Market Tightness
◮ Unemployment rate is potentially useful as a measure ofmarket tightness - degree of difficulty firms face in hiringworkers
◮ But there are two potential problems:◮ Discouraged workers◮ Search intensity
Chapter 2 45/45 Topics in Macroeconomics