Chapter 2 Measurement

Measuring GDP: The National Income and Product Accounts What is GDP and How Do We Measure It? GDP: Value of Domestically Produced Output Commerce Department’s National Income and Product Accounts (NIPA) Business, Consumer, and Government Accounting The Equivalence of Three Methods Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

A Simple Fictional Island Economy Sectors: a coconut producer, a restaurant, consumers, and a government Coconut producer: produces 10 million coconuts, each sold at $2. 6 million go to the restaurant, remaining 4 go to the consumers. Restaurant: sells $30 million meals Government: provides protection from attacks from other islands. It collects taxes ($4.5 million from firms, 1 million from consumers). Consumers: work for the business and government, receive interest, pay taxes. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.1 Coconut Producer Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.2 Restaurant Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.3 After-Tax Profits Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.4 Government Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.5 Consumers Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

The Product Approach Value Added: VA = total revenue – the value of intermediate goods Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.6 GDP Using the Product Approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

The Expenditure approach GDP = Consumption (C) + Investment (I) + Government Expenditure (G) + Net Exports (NX=X-IM) Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.7 GDP Using the Expenditure Approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

The Income approach GDP = Wage Income + After-Tax Profits + Interest Income + Taxes Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.8 GDP Using the Income Approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Add in Inventory Investment Suppose now the coconut producer produces 13 million instead 10 million, but only sell out 10 million. What is GDP now? Answer: $49.5 million. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Add in International Trade Suppose now the restaurant imports additional 2 million coconuts from other islands at $2 each. What is GDP now? Answer: $39.5 million. Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

What is GNP? GNP = GDP + NFP NFP: Net Factor Payments = Factor payments to US citizens - Factor payments to foreigners Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

What does GDP Leave Out? Nonmarket activity: home production, leisure, …… Underground economy: illegal drug trade, baby-sitting, …… Valuing Government Production GDP is not green Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.9 Gross Domestic Product for 2002 Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Nominal and Real GDP and Price Indices Nominal GDP: GDP at current price Real GDP: GDP corrected for inflation Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.10 Real GDP: Example Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Change = (GDP2-GDP1)/GDP1 = 225% Real GDP Nominal GDP GDP1 = $130, GDP2 = $292 Change = (GDP2-GDP1)/GDP1 = 225% Real GDP Base year 1: RGDP1 = $130, RGDP2 = $176 Change (g1) = 35.4% Base year 2: RGDP1 = $222.50, RGDP2 = $292 Change (g2) = 31.2% Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Chain-Weighting Scheme Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Figure 2.1 Nominal GDP (black line) and Chain-Weighted Real GDP(colored line) for the Period 1947–2003 Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Measures of the Price Level Implicit GDP Price Deflator = (Nominal GDP / Real GDP) * 100 CPI(t) = (Cost of base year quantities at prices of year t / Cost of base year quantities at base year prices) * 100 Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2.11 Implicit GDP Price Deflators: Example Cont’d Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Figure 2.2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line). Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Problems Measuring Real GDP and Prices Substitution Biases: make CPI upward biased. Accounting for Quality Changes: increase in prices maybe reflect the improvement in quality. Inflation is biased upward. Treatment of Newly-Introduced Goods: bias downward GDP growth, upward the inflation Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Homework Find data of GDP deflator and CPI in China (at least from 1978)? Which one is higher? Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Measures of Savings, Wealth, and Capital Flow: a rate (change) per unit of time Saving, Investment, Consumption, … Stock: the quantity in existence of some object at a point in time Capital, Wealth, … Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Private Disposable Income and Private Sector Saving Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Government Surpluses, Deficits, and Government Saving Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Saving, Investment, and the Current Account Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Homework Find data of S/Y, I/Y and CA/Y in China Does S/Y=I/Y+CA/Y hold in China? Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Labor Market Measurement BLS Categories Employed Unemployed: unemployed during the past week but actively searched for work during the last four weeks Not in the Labor Force Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

The Unemployment Rate = Number unemployed / Labor force Participation Rate = Labor force / Total working age population Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Discussion How to measure unemployment rate in China? Migrated workers (农民工) Hidden unemployment in agricultural sector Lay-off (下岗) in SOEs Copyright © 2005 Pearson Addison-Wesley. All rights reserved.