Taking the Nation’s Economic Pulse Macro Chapter 7 Taking the Nation’s Economic Pulse

4 Learning Goals Define gross domestic product and describe the key phrases of the definition List the ways to measure gross domestic product and identify the source of higher income levels Differentiate between real and nominal GDP Examine the limitations of using GDP as a measure of output and income(on your own)

GDP – A Measure of Output

Definition of Gross Domestic Product (GDP): The market value of final goods and services produced within a country during a specific time period.

GDP as a Measure of Both Output and Income

First way to measure GDP: expenditure approach GDP = sum of purchases GDP = Y = C + I + G + X C = consumption; purchases for goods and services by consumers I = investment G = government purchases X = net exports (exports – imports)

Investment ≠ buying stocks and bonds Investment = businesses buying final goods and services to use in their production of another good AND consumers buying houses

Second way to measure GDP: income approach Add up income generated in the production of goods and services

The two methods of calculating GDP are summarized below: Expenditure Approach Resource Cost-Income Approach Personal consumption expenditures Aggregate income: Employee Compensation Income of self-employed Rents Profits Interest + Gross private domestic investment + Government consumption and gross investment + Non-income cost items: Indirect business taxes and depreciation + Net exports of goods and services = GDP Net income of foreigners + = GDP

Key Point: Higher income levels come from (are caused by) more output That is, more output comes first, then higher income comes second

Adjusting for Price Changes and Deriving Real GDP

Nominal (money) _________ = current year data only Real __________ = adjusted for inflation Use a price index to adjust nominal data into real data

These two indexes are used to adjust nominal data to real data. CPI: representative sample of goods bought by households, “market basket” GDP deflator: accounts for almost all goods bought (broader measure than CPI) Inflation = the percentage change in an index

The simplest example Suppose all prices doubled between 1950 and 2000. Then $1 in 1950 would be equal to $2 in 2000. Or, $1 in 2000 would be equal to $0.50 in 1950.

Problems with GDP as a Measuring Rod

Examine the limitations of using GDP as a measure of output and income(on your own)