Macroeconomics Chapter 2 National-Income Accounting: Gross Domestic Product (GDP) and the Price Level Macroeconomics Chapter 2

Macroeconomics Chapter 2 Nominal GDP the dollar (or euro, etc.) value of all the goods and services that an economy produces during a specified period, such as a year. Macroeconomics Chapter 2

Macroeconomics Chapter 2 Nominal GDP Flow variable - it measures the dollar amount of goods produced per unit of time, such as a year. GDP in current dollars Services by government: measured by costs Differ from GNP (gross national product): values of goods and service produced by domestic factors of productions. Eg: Japanese plant in China. Then the values of goods are viewed as GDP, not GNP for China, but GNP, not GDP for Japan. Macroeconomics Chapter 2

Macroeconomics Chapter 2

Macroeconomics Chapter 2 Real GDP Calculating Real GDP GDP in constant dollars Multiply each year’s quantity of output of each good by the price of the good in a base year. Chain-weighted real GDP Macroeconomics Chapter 2

Macroeconomics Chapter 2 Calculations (nominal GDP)/(implicit price level) = real GDP or implicit price level = (nominal GDP)/(real GDP) Macroeconomics Chapter 2

GDP as a Welfare Measure GDP does not: Consider change in income distribution Include non-market goods. Assign value to leisure. Consider environmental damage. Macroeconomics Chapter 2

Macroeconomics Chapter 2 Measuring GDP GDP Measured Using: (i) the expenditure approach; (ii) the income approach; (iii) the product approach. Three approaches yield the same value of GDP. Macroeconomics Chapter 2

Macroeconomics Chapter 2 GDP by Expenditure Personal Consumption Expenditures Gross Private Domestic Investment Government purchases of Goods and Services Exports and Imports Macroeconomics Chapter 2

Measuring of GDP: Example Fictional Island Economy Coconut Producer, Restaurant, Consumers, Government Macroeconomics Chapter 2

Macroeconomics Chapter 2 Coconut Producer Macroeconomics Chapter 2

Macroeconomics Chapter 2 Restaurant Macroeconomics Chapter 2

Macroeconomics Chapter 2 After-Tax Profits Macroeconomics Chapter 2

Macroeconomics Chapter 2 Government Macroeconomics Chapter 2

Macroeconomics Chapter 2 Consumers Macroeconomics Chapter 2

Macroeconomics Chapter 2 Expenditure Approach Total spending on all final goods and service in economy. Total expenditure = C + I + G + NX C: personal domestic purchase of goods and service, including durables and nondurables. I: purchase of domestic business of new capital goods. For example, machinery in plants, purchase of new home. G: government consumption outlays. For example, salary of military service, public investment such as national defence. NX=Exports – Imports. Exports are produced within a country, while imports are produced abroad. Macroeconomics Chapter 2

GDP Using Expenditure Approach Macroeconomics Chapter 2

Macroeconomics Chapter 2

Macroeconomics Chapter 2 Income Approach Add up all incomes received by all economic agents contributing to production in an economy. Macroeconomics Chapter 2

Measuring GDP by Income National Income includes: Macroeconomics Chapter 2

GDP Using the Income Approach Macroeconomics Chapter 2

Relationship between GDP and National Income Macroeconomics Chapter 2

GDP Using the Product (Value-added) Approach Sum of value added to goods and service in production across all productive units in economy. Add the value of all goods and service, and subtract the value of all intermediate goods and service used in production Macroeconomics Chapter 2

GDP Using the Product Approach Macroeconomics Chapter 2

National Income by Sector Macroeconomics Chapter 2

Macroeconomics Chapter 2 Prices Consumer Price Index (CPI) Producer Price Index (PPI) Problem of CPI(PPI) substitution quality new production Macroeconomics Chapter 2