Measuring the Macroeconomy Lecture 2

Gross National Product The market value of the goods and services produced within a given period by nationals (residents of a nation). It includes the income earned by nationals abroad. It does not include income earned within the country by foreigners Income earned by Poles working in London a part of Polish GNP, profit earned by a Japanese owner of Toyota in Wałbrzych part of Japanese GNP How to avoid double counting (cars + tiers = other parts, materials?) Counting of value added of each firm only Value added = firm’s sale minus the value of materials it buys to use in producing its products Final goods and services = those purchased by their final users GNP = value of final goods and services Value of output not sold through market should be estimated (value of services homeowners receive from living in their houses) But volunteer services, value of housework and do-it-yourself not included Illegal activities excluded as well (grey or underground economy) How big it is? Could be 25%?

Gross Domestic Product The total income earned domestically. It includes income earned domestically by foreigners. It does not include income earned by domestic residents abroad. Some examples: a Ukrainian worker income earned in Poland part of Poland GDP (earned domestically) but not the part of Polish GNP (worker not a Polish national). The difference between GNP and GDP in most cases rather small. GDP more frequently used as a measure How to estimate the value of services produced by government not sold through market (defense, police, public education)? Usually value of public goods = wages paid to public employees

How to calculate GDP(Begg, Fisher, Dornbush) Good Seller Buyer Transactions value Value added Final goods Income of labor and capital Steel Steel producer Machines producer 1 000 - Cars producer 3 000 Machines 2 000 2.000 Tiers Tiers producer 500 Cars household 5 000 1 500 Total transactions value 11 500 GDP 7 000

The circular flow GDP = Y (incomes of households) Y = C + I Y = C + S S = I I and S equal 2 000 (closed economy, no government) GDP ( market prices)= C + I + G (expend. for final goods Y=GDP ( base prices)= (C+I+G)-Te (indirect taxes) Personal disposable income=Y+B(transfers)-Td (direct taxes) Y=C+I+G+X-Z-Te (open economy, X=Exports, Z=Imports

Personal Income An income that households and non-corporate businesses receive Personal Income=National Income - corporate profits (retaining earnings + dividends + taxes) + transfers (such as social security and welfare benefits) + social insurance contributions + dividends + personal interest income (the interest that households earn) Disposable Personal Income = Personal Income – Personal Tax and nontax payments

Nominal and Real GNP 1982 1989 Cars 100 150 2 4 200 600 300 meat 140 6 output Price $/unit Value of output, current $ Value of output current $ Value of output, 1982 ( $) Value of output 1982 ($) 1982 1989 Cars 100 150 2 4 200 600 300 meat 140 6 400 840 560 1440 860 Nominal GNP Real GNP

The GNP deflator Distinction between real and nominal GNP = one of most widely used measure of inflation GNP deflator = the ratio of nominal GNP to real GNP expressed as an index GNP deflator for 1989 = (1440/860) x 100 = 167,4 Prices increased 67.4% between 1982-89 Nominal GDP=real GDP x GDP deflator Nominal GDP measures the dollar value of the output Real GDP measures the amount of output, the output valued at constant (base year) prices The GDP deflator measures the price of the typical unit of output relative to its price in the base year

The consumer price index The most popular measure of the level of prices CPI turns the prices of many goods and services into a single index measuring the overall level of prices C PI the price of a basket of goods and services relative to the price of this basket in a base year CPI tells us how much it costs now to buy the basket relative to how much it cost to buy the same basket in a base year The producer price index measures the price of typical basket of goods bought by firms

C PI and GDP deflator GDP deflator measures the prices of all goods and services produced, CPI prices of goods bought by consumers GDP deflator includes goods produced domestically, prices of imported goods do not show up C PI assigns fixed weights to the prices of different goods, GDP deflator assigns changing weights (allows the basket of goods to change over time)