Measurement of Economic Variables

Gross domestic product (GDP)

• GDP is the dollar value of all final goods and services produced by a domestic economy in a years time.

Fair model

• FAIRMODEL site

Gross National Product (GNP)

• GNP=Income earned by U.S. residents

• GNP=GDP-payments to foreigners who own assets located in the U.S. +

payments to U.S. residents who own foreign assets

GDP=Household income in this class

• NNP=GNP-IBT– GNP=Gross National Product– IBT = Indirect Business Taxes (sales tax)– NNP=Net National product\

Assume IBT = 0, so

NNP=GDP

• NI=NNP-CCA = GDP - CCA– NI = National Income– CCA = Capital Consumption Allowence

(depreciation)

Assume CCA = 0

NI=NNP=GDP

• Assume no foreign sector, no retained earnings, no corporate taxes

• GDP = NI = Household Income=Y

Source of Household Income

Uses of Household Income

• Y=C+S+T– C=Consumption– S=Household Saving– T=Taxes

YD=Y-T

YD = Disposable Income

Spending

• AE=C +Ir + G– AE = Aggregate Expenditures– C = Household spending– Ir = Realized Investment (Business spending)– G = Government spending

AE = GDP = Y

Value Added

• VA = Value Added

• = Revenue – Cost of Materials

Value Added.xls

• Sum of VA at each stage of production = price of a good

• Sum of VA for all firms = final price of all output.

• Sum of VA for all firms = GDP

• VA automatically eliminates double counting of output.

• Profits = Revenue – Costs

• Profits = Revenue –

• Wages – Rent – Interest –

• Cost of Materials

• Profits + Wages + Rent + Interest =

• Revenue – Cost of Materals

• Profits + Wages + Interest + Rent = VA

• Sum (Profits+Wages+Interest+Rent) =• Sum(VA)

• Sum (Profits+Wages+Interest+Rent)=GDP

• Sum(Household Income) = GDP

Planned Spending

• Firms may spend more than they plan to (inventories build up)

• Actual Expenditures=C + Ir + G

• Planned Expenditures = C + I + G

Real vs Nominal GDP

1 2 3

1

2

3

Real Output =

bushels of wheat

new cars

gallons orange juice

nQ Q Q Q

Q

Q

Q

Real vs Nominal GDP

•

1 2 3

1

2

3

Real output

bushels of wheat

new cars

gallons of orange juice

nQ Q Q Q

Q

Q

Q

Nominal GDP

• If Nominal GDP doubles is that due to P increases or Q increases ?

1 1 2 2 3 3Nominal GDP

Nominal GDP Real GDP

PQ PQ PQ

P

Two ways to estimate prices

• Directly by constructing price indexes

• Indirectly by computing the implicit price deflator

Price index for groceries

• Market basket (in base year of 1960)– 1 dozen eggs– 2 chickens– 3 pounds hamburger – Other things a typical family might buy

Price of basket =$100 in 1960

Price of basket = $200 in 1970

Price index

• The market basket does not change so any difference must be due to prices.

• Price indexes however miss– Substitution effect– New goods– Quality changes– Discount stores

Computing real GDP using price index

•

Nominal GDPReal GDP

P

Implicit price deflator

• Can get good estimate of Nominal GDP– Nominal GDP = Sum of Value Added

• Estimate real GDP by determining what people buy now using base year prices– If year 2000 is the base year compute real

GDP by determining what year 2003 GDP would have cost in 2000

Implicit price deflator

•

Nominal GDP

Real GDPP

Unemployment

• Overview of BLS Statistics on Employment and Unemployment