Economics

Combined Version Edwin G. Dolan Best Value Textbooks 4 th edition

Chapter 19 Measuring Economic Activity

Dolan, Economics Combined Version 4e, Ch. 19

GDP and Value Added

   GDP must include only the value of

final goods and services

production without double counting.

if it is to measure total The value of sales at each stage of production can be divided into the

value added

at that stage and the value of purchased inputs.

The selling price of the final product (a $100 table, in this case) equals the sum of the values added at all stages of production.

Dolan, Economics Combined Version 4e, Ch. 19

Expenditure Approach to GDP

  Gross domestic product is estimated using the

expenditure approach

.

This involves adding together the values of expenditures on newly produced final goods and services made by all economic units: C+I+G+(Ex-IM) 

Net domestic product

is derived from gross domestic product by excluding the value of expenditures made to replace worn-out or obsolete capital equipment.

US, 2008 Dolan, Economics Combined Version 4e, Ch. 19

National and Domestic Income

   National and domestic income are measured using the

income approach.

National income

is obtain by adding together the values of all forms of income earned by a country’s residents.

Domestic income

is derived from national income by subtracting receipts of factor income from the rest of the world and adding factor income paid to the rest of the world.

US, 2008 Dolan, Economics Combined Version 4e, Ch. 19

Balance of Payments Accounts

   

Current account

transfer payments.

transactions consist of imports and exports of goods and services, together with international flows of factor income and

Capital and financial account

transactions consist of international borrowing and lending, securities transactions, direct investment, and official reserve transactions.

If all amounts were measured completely and accurately, the current account and financial account balances would be equal and opposite in sign.

In practice, there is a

statistical discrepancy

indicating errors and omissions in measurement.

US, 2008 Dolan, Economics Combined Version 4e, Ch. 19

Nominal GDP for a Simple Economy

 In this simple economy in which only three goods are produced, nominal domestic product grew from $1,000 in 2000 to $1,800 in 2010  Because prices also went up, people did not really have 1.8 times as many goods and services in 2010 as in 2000 Insert image of Table 6A1 from p. 163 of macro 3/e Dolan, Economics Combined Version 4e, Ch. 19

Nominal and Real GDP for a Simple Economy

 Multiplying 2010 quantities by 2000 prices gives the value of 2010 GDP that would have existed if prices had not changed.

  This is called

real GDP

for 2010.

The ratio of nominal GDP to real GDP is the

implicit price deflator

Insert image of Table 6A2 from p. 164 of macro 3/e Dolan, Economics Combined Version 4e, Ch. 19

Consumer Price Index for a Simple



Economy

To calculate the

consumer price index

, divide the value of base year prices valued at current-year prices by the value of base-year goods valued at base-year prices  In this case, the CPI is 170 Insert image of Table 6A3 from p. 165 of macro 3/e Dolan, Economics Combined Version 4e, Ch. 19