Measuring Measuring the the

MacroeconoMacroeconomymy

Source:Text Source:Text and Taylor and Taylor and Moosa and Moosa

(2002)(2002)Chapters 21 & 6

Respectively

Gross Domestic ProductGross Domestic Product

GDP is a measure of the value of all final goods and services newly produced in a country during some period of time.

What? What? Where? Where?

When? When? How?How?

ProductProduct WeightWeight ValueValue

Adding Unlike ProductsAdding Unlike Products

7 tapes+ 3 CDs

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$10 per tape$25 per CD

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$70 worth of tapes+ $75 worth of CDs

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$145 of tapes & CDs

Table 6.1

Intermediate & Final Intermediate & Final GoodsGoods

Intermediate goodsGoods that undergo further processing before being sold to consumers

Final goodsNew goods that undergo no further processing before being sold to consumers

Double counting problem

Three Ways to Measure Three Ways to Measure GDPGDP

Spending approach

Income approach

Production approach

Spending CategoriesSpending Categories

Consumption» Purchases of final

goods & services by individuals

Investment» Business fixed

investment» Inventory investment» Residential

investment

Government purchases» Purchases by

Federal, State & local governments of new goods & services

Net exports

Trade TerminologyTrade Terminology

ExportsThe total value of goods & services that people in one country sell to people in other countries

ImportsTotal value of purchases of goods & services from people in other countries

Net exportsThe value of exports minus the value of imports

Trade balanceAlias for net exports

Consumption $333.4Investment 113.4Government purchases 124.0Net exports -4.8GDP $566.0

Australian Spending in Australian Spending in 19981998

Table 6.2

The Spending ApproachThe Spending Approachin Symbolsin Symbols

If YY = GDP

CC = Consumption

II = Investment

GG = Government purchases

XX = Net exports

thenY = C + I + G + XY = C + I + G + X

CC, , II & & GG as a Share of as a Share of GDPGDP

59

20

22

0102030405060708090

100110

Pe

r C

en

t o

f G

DP

CC

II

GG

Fig 6.3

Excess spendingover production= trade deficit

Stocks and FlowsStocks and Flows

FlowsFlowsRate in

Rate outYCIGXS

StocksStocksWater level

Money stockCapital

InventoryDebt levelPopulation

Wealth

The Income ApproachThe Income Approach

Labour incomeThe sum of wages, salaries and supplements paid to workers

Capital incomeThe sum of profits, rental payments and interest payments

Aggregate Income &Aggregate Income &GDP in 1998GDP in 1998

Labour income $270.3 Capital and mixed 230.8equals GDP at factor cost 501.1 Indirect taxes less subsidies 64.9equals GDP $566.0

Table 6.3

Gross Versus NetGross Versus Net

DepreciationThe amount by which physical capital wears out over time

InvestmentGross investment - depreciation

= net investment GDP versus NDP

Y

X

GC

The Circular FlowThe Circular Flow

Fig 6.4

Tr

Tax

ConsumersGovernmentI

C+GC+I+G

C+

I+G

+X

Rest of theworld

Firms

Ex PostEx Post Relationships Relationships

GDP = GDP = ProductionProduction

ororOutputOutput

= Income= Income

= Spending = Spending (Consumption+Investmen(Consumption+Investment+Gov. Spending+Net t+Gov. Spending+Net Export)Export)Y = C + I + G + XY = C + I + G + X

IncomeIncome

National incomeThe sum of labour income and capital income

Personal incomeIncome paid directly to individuals; includes labour income, transfer payments and the part of capital income that is paid out to individuals

Value AddedValue Added

The value of the firm’s production minus the value of the intermediate goods used in production.

Calculating Value Calculating Value AddedAdded

Coffeegrower

Coffeeroaster

Coffeeshipper &wholesaler

Coffeeretailer

PRetail

Fig 6.5

VAG

VARo

VASW

VARe

$ Retail price = sum of all values Retail price = sum of all values addedadded

Sector/ActivitySector/Activity Gross Value AddedGross Value Added($Billion)($Billion)

Australia’s GDP in 1998 Australia’s GDP in 1998 ......

Agriculture, forestry & fishingMiningManufacturing industryElectricity, gas and waterConstructionWholesale tradeRetail tradeAccommod., cafes & restaurantsTransport and storageCommunication services

17.526.171.213.632.829.030.012.230.617.2

Table 6.4 ...

Sector/ActivitySector/Activity Gross Value AddedGross Value Added

… … Australia’s GDP in Australia’s GDP in 19981998

Finance and insuranceProperty and business servicesGovernment admin. & defenceEducationHealth and community servicesCultural and recreational servicesPersonal and other servicesOwnership of dwellingsGross value added at basic pricesTaxes and subsidiesGDP

35.155.023.525.932.59.7

12.551.2

525.640.4

566.0

… Table 6.4

SPSG

I

Saving and the Circular FlowSaving and the Circular Flow

Fig 6.4

S

S - I

Y

X

GC

Tr

Tax

ConsumersGovernmentI

C+GC+I+G

C+

I+G

+X

Rest of theworld

Firms

SavingSaving

Private saving

SP = Y - C - T

Government saving

SG = T - G

National saving

S = SP + SG

S = Y - C - GS = Y - C - G

Saving, InvestmentSaving, Investmentand Net Exportsand Net Exports

Y = C + I + G + X

Y - C - G = I + X

But S = Y - C - G

S = I + X

National saving = National saving = investment + investment + net exportsnet exports

Nominal and Real GDPNominal and Real GDP

Nominal GDPNominal GDP

The value of all goods and services newly produced in a country during some period of time

Real GDPReal GDP

The value of all goods and services newly produced in a country during some period of time, adjusted for inflation

Nominal or Real GDP?Nominal or Real GDP?

Nominal GDP in 1999 = 25 x 1000 + 10 x 2000 = $45 000Nominal GDP in 2000 = 30 x 1200 + 15 x 2200 = $69 000

Using 1999 prices:1999 Real GDP = $45 0002000 Real GDP = $52 000

Using 2000 prices:1999 Real GDP = $60 0002000 Real GDP = $69 000

53%

16% 15%

19991999 20002000PricePrice PricePriceQuantityQuantity QuantityQuantity

CDsCDsTapesTapes

$25$10

10002000

$30$15

12002200

Real GDP Versus Real GDP Versus Nominal GDPNominal GDP

0

100

200

300

400

500

600

700

1960 1965 1970 1975 1980 1985 1990 1995 2000

Bil

lio

ns

of

do

llar

s

Fig 6.6

Nominal GDPNominal GDP

RealRealGDP in 1998 $GDP in 1998 $

Price LevelPrice Level

A measure of the average level of prices of goods and services in the economy

Price level indexes:» Consumer price index» GDP deflator

GDP DeflatorGDP Deflator

Measures the level of prices of all goods and services included in real GDP relative to a given base year

GDP deflator = nominal GDP / real GDPGDP deflator = nominal GDP / real GDP

real GDP = nominal GDP / GDP deflatorreal GDP = nominal GDP / GDP deflator

Implicit Price Deflator Implicit Price Deflator (IPD)(IPD)

A GDP price deflator that the ABS calculates by dividing nominal GDP by the chain volume measure of real GDP

Consumer Price IndexConsumer Price Index

A price index equal to the current price of a fixed market basket of consumer goods and services divided by the price of the same basket of goods in a base year

Measures of InflationMeasures of Inflation

0

2

4

6

8

10

12

14

16

18

20

1960 1970 1980 1990 2000

Infl

atio

n R

ate

(%

)

Fig 6.7

IDPIDP

CPICPI

Shortcomings of the GDP Shortcomings of the GDP MeasureMeasure

Revisions in GDP Production omitted

from GDP» Home work and

production» Leisure activity» The underground

economy» Product

improvements

Omits aspects of wellbeing» Life expectancy» Infant mortality» Car accidents» Social problems» Environmental

quality

International International ComparisonsComparisons

of GDPof GDP Problem with using market

exchange rates for comparisons Purchasing power parity

exchange ratesExchange rates such that the prices of similar baskets of goods in different countries are the same when measured in the same currency

CountryCountryPer capita incomePer capita income1998 Market ER1998 Market ER

Per capita incomePer capita income 1998 PPP ER1998 PPP ER

AustraliaBangladeshCanadaGermanyIndiaJapanNorwayRussiaU.K.

20 300350

20 02025 850

43032 38034 3302 300

21 400

International International ComparisonsComparisons

20 1301 100

24 05020 8101 700

23 18024 2903 950

20 640

Table 6.5