Transcript ch.2.nipa.ppt

Intermediate Macro:
Measuring GDP
Jeffrey H. Nilsen
Inflation and Unemployment
Ch. 12
Monetary Policy
Fiscal Policy
Ch. 14
Ch. 15
Business Cycles
IS-LM, AD-AS
Classics (RBC)
Keynesians
Open Economy
Asset Market
Ch. 7
Ch. 8
Ch.
Ch.
Ch.
Ch.
9
10
11
13
Labor Market
Ch. 3
Measurement
Ch. 2
Growth
Ch. 6
Goods Market
Ch. 4, Open 5
 Macro: study of structure and performance of
national economies and the policies gov’t tries
to use to affect economic performance.
 http://video.ft.com/3705256588001/Big-daybig-week-for-US-indicators/Markets
GDP defined
within the 3 approaches
 Expenditure App: GDP: total spending
on final goods & svcs by domestic
households (C), domestic firms (I), gov’t
(G) and foreigners (NX)
 Product App GDP: mkt value of final
goods & svcs newly produced within
nation’s borders
 Income App GDP: total incomes of
workers (wages), firms (profits) & gov’t
(taxes)
Expenditure
App
Apple Co
Total Rev.
35
Sales to Public
10
Sales to JC
25
Juice Co
40
25 (paid to AC)
 Net Exports: Add EX since foreigners’
purchases of BG goods adds to output
 Subtract IM: spending C, I, G includes
imports
 Omit transfers (e.g. U benefits) since
they’re not exchanged for services
 Spent by purchasers of final goods
(example only consumers: GDP = 50)
Product App

Mkt value of
final goods & svcs
newly produced within nation’s borders
Mkt value (weigh goods by their price so e.g. 5 cars count
more than 5 shoes)



Ignore non-market goods, e.g. housekeeping
Underground economy: try to adjust for unreported transactions
Gov’t services (not sold at market price): value at cost of provision

Newly produced: not e.g. resale of old house (although
include value of real estate agent’s services)

Final goods & services: Ignore intermediate goods (inputs
used up producing goods in same period as produced).
Examples of “surprising” final goods:


Car sold as taxi not used up in period produced: a capital good
(creates other goods)
Inventory investment: (change in inventory over period) e.g.
baker’s 1000 flour rises to 1100 (unused output [of mill] that will
add to future output)
Product App
(Add up Value Added)
 Value Added =
sales revenues
– cost of
intermediate
goods
 AC: 35 – 0
 JC: 40 – 25
 GDP = 50, again
Apple Co
Total Rev.
35
Sales to Public
10
Sales to JC
25
Juice Co
40
25 (paid to AC)
GNP = GDP + NFP
GNPBG
BG workers fgn
pay
“-“
Fgn workers
BG pay
GNP: output produced
by a nation’s factors,
wherever located
GDPBG
BG Factors
in BG
GDP: output produced
within nation’s borders,
whoever produces it
NFP
NFP = pay to BGers
abroad less
pay to foreigners in BG
GDP =
NFP =
GDP + NFP =
bg-citizens’-pay + my-bg-pay
your-us-pay
– my-bg-pay
GNP
Income App
 GDP again 50
Apple Co
Total Rev.
35
Sales to JC
25
Wages Paid
15
Taxes Paid
5
Profit 35 – 15 – 5 = 15
Juice Co
40
25 (paid to AC)
10
2
40 – 25 – 10 – 2 = 3
Building Disposable Income
from National Income
Note: text ignores VAT (USA has no VAT)
Saving: current income less
spending on current needs
S PRIV  GNP  T  TR  INTGov  C



DI P RIV
SGOV  T  TR  INTGov  G
S NAT  S PRIV  SGOV
= Y
= (C + I + G + NX)
S PRIV  I  
NX
 NFP
  S GOV
CA
+
+
NFP – C – G
NFP – C – G
Uses of Private Savings Identity
S PRIV  I  
NX
 NFP
  S GOV
CA
What can be done with $1 of private savings ?
I: lend to domestic firms wanting to buy new capital goods
(- SGOV): lend to government wanting to spend more than it
receives in tax revenues
CA surplus: lend to foreigners who want to purchase your goods
(more than you want to buy their’s)
Savings is a “flow” augmenting
wealth (a “stock”)
 National Wealth:
 BG’s stock of physical assets +
 NFA (net foreign assets):
 BG-owned assets abroad less
 Foreign-owned assets in BG
 NB: Domestic financial assets NOT
wealth (since offsetting liabilities)
 Wealth rises with positive savings or
if value of existing assets rises
Nominal & Real GDP
 Nominal is measured at current
market P (adds up values of many
different goods)
 Real is measured in base-year prices
(to neutralize effect of price changes
in comparison over time)
Nominal GDP:
Y
P
value (PY)
total value (GDP)
Y1
computers
bikes
computers
bikes
computers
bikes
5
10
200
250
$1,200
$600
$200
$240
_______
_______
_______
_______
_______
Y2
_______
Nominal GDP:
Y
P
value (PY)
Y1
computers
bikes
computers
bikes
computers
bikes
total value (GDP)
5
200
$1,200
$200
$6,000
$40,000
$46,000 $66,000
Y2
10
250
$600
$240
$6,000
$60,000
Real GDP (Y 1 prices)
units
P
value
Y1
computers
5
bikes
200
computers
$1,200
bikes
$200
computers
______
bikes
______
real GDP
______
______
Y2
10
250
------______
______
Real GDP (Y 1 prices)
units
P
value
Y1
computers
5
bikes
200
computers
$1,200
bikes
$200
computers
$6,000
bikes
$40,000
real GDP
$46,000 $62,000
Y2
10
250
-------
$50,000
$12,000
Price Index measures average
price level: GDP deflator
 GDP deflator: amount to
divide nominal Y to get real Y
nominal GDP
real GDP
P Y
GDP defl. 
Y
GDP defl. 
 “Variable weight index”
nominal Y uses each good’s
current P (if PORANGE rises,
nominal Y reflects the actual
quantity sold)
Price Index measures average
price level: CPI
value basket at current prices
CPI 
value basket at base year prices
 “Fixed weight price index”: uses P of
same basket (until it’s revised)
 Base period: year when CPI = 100
(currently 1982)
 Expenditure base period: year when
basket components chosen (currently
2005)
Calculating Growth Rates
(always in percentages)
 Y growth: (Yt+1 - Yt)/Yt
 Price level growth: (Pt+1 - Pt)/Pt
 Interest rates or returns: (end price –
start price)/start price
Practice Multiple Choice 1
 1. The primary factor that caused most
economists to lose their faith in the classical
approach to macroeconomic policy was
 (a) the high levels of unemployment that
occurred during the Great Depression.
 (b) the presence of both high unemployment and
high inflation during the 1970s.
 (c) the theoretical proof that classical ideas were
invalid.
 (d) the evidence that classical ideas were useful
during economic booms, but not during economic
recessions.
These questions are taken from 2012 exam 1
Practice Question 2
 2. Bigdrill inc. drills for oil, which it sells
for $200 million to Bigoil inc. to be made
into gas. Bigoil inc’s gas is sold for a
total of $600 million. What is the total
contribution to the country’s GDP from
Bigdrill and Bigoil?
 (a) $200 million
 (b) $400 million
 (c) $600 million
 (d) $800 million
 3. In 2002, private saving was $1590
billion, investment was $1945 billion,
and the current account balance was –
$489 billion. From the uses-of-saving
identity, how much was government
saving?
 (a) –$134 billion
 (b) –$844 billion
 (c) $844 billion
 (d) $134 billion
 4. Intermediate goods are
 (a) capital goods, which are used up in
the production of other goods but were
produced in earlier periods.
 (b) final goods that remain in
inventories.
 (c) goods that are used up in the
production of other goods in the same
period that they were produced.
 (d) either capital goods or inventories.
Example short answer
 1. The country of Old Jersey produces milk and
butter. It’s published this data, where quantities
are in gallons and prices are $ per gallon.

2003
2004
 Good
Qty Price
Qty Price
 Milk
500 $2
900 $3
 Butter 2000 $1
3000 $2
 (a)
From 2003 to 2004, nominal GDP grew
 (b)
From 2003 to 2004, use 2003 as base
year to find real GDP growth