Intermediate Macro: Measuring GDP Jeffrey H. Nilsen

Macro: study of structure and performance of national economies and the policies govt tries to use to affect economic performance.

Approaches to Count up GDP Expenditure App: GDP: total spending on final goods & svcs by domestic households (C), domestic firms (I), govt (G) and foreigners (NX) Product App GDP: mkt value of final goods & svcs newly produced within nations borders Income App GDP: total of incomes of workers (wages), firms (profits) & govt (taxes)

Expenditure App Net Exports: Add EX since foreigners purchases of BG goods adds to output Subtract IM since C, I, G count spending on imports Omit transfers (e.g. U benefits) since theyre not exchanged for services Spent by purchasers of final goods: consumers: GDP = 50 Apple CoJuice Co Total Rev Sales to Public 10 Sales to JC2525 (paid to AC)

Product App Mkt value of final goods & svcs newly produced within nations borders Mkt value (weigh goods by their prices, e.g. car counts more than same # of shoes) Ignore non-market goods, e.g. child-rearing For underground economy, try to adjust for unreported transactions For govt services (not sold at market price), value at cost of providing Newly produced: eg. not resold house (but include value of real estate agents services) Final goods & services: Ignore intermediate goods (inputs used up producing goods in same period as produced). Examples of strange final goods: Car sold as taxi not used up in period produced: a capital good (creates other goods) Inventory investment: rise in inventory in period, e.g. bakers 1000 flour rises to 1100 (unused output that augments future output)

Product App (Add up Value Added) Value Added = sales revenues – cost of intermediate goods GDP = 50, again Apple CoJuice Co Total Rev Sales to Public 10 Sales to JC2525 (paid to AC)

GNP = GDP + NFP NFP = pay to BGers abroad less pay to foreigners in BG GDP = bg-citizens-pay + my-bg-pay NFP = your-us-pay – my-bg-pay GNP = GDP + NFP BG Factors in BG Fgn workers BG pay BG workers fgn pay GDP BG - NFP GNP BG

Income App GDP again 50 Apple CoJuice Co Total Rev Sales to JC2525 (paid to AC) Wages Paid 1510 Taxes Paid 52 Profit 35 – 15 – 5 = 1540 – 25 – 10 – 2 = 3

National Income to Disposable Income (represents spending power) Note: text ignores VAT (USA has no VAT)

Saving is current income less spending on current needs = Y + NFP – C – G = (C + I + G + NX)+ NFP – C – G

Uses of Savings Identity What can be done with private savings ? I: lend to domestic firms wanting to buy new capital goods (- S GOV ): 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 theirs)

Savings is flow that augments the stock that is wealth National Wealth: BGs 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 for comparison over time)

Nominal GDP: Y 1Y 2 Y computers 510 bikes P computers $1,200$600 bikes $200$240 value (PY) computers _______ _______ bikes _______ _______ total value (GDP) _______ _______

Nominal GDP: Y 1Y 2 Y computers 510 bikes P computers $1,200$600 bikes $200$240 value (PY) computers $6,000$6,000 bikes $40,000$60,000 total value (GDP) $46,000$66,000

Real GDP (Y 1 prices) Y 1Y 2 units computers 510 bikes P computers $1, bikes $ value computers ____________ bikes ____________ real GDP ____________

Real GDP (Y 1 prices) Y 1Y 2 units computers 510 bikes P computers $1, bikes $ value computers $6,000$12,000 bikes $40,000$50,000 real GDP $46,000$62,000

Price Index measures average price level: GDP deflator GDP deflator: amount to divide nominal Y to get real Y Variable weight index nominal Y uses each goods current P (if P ORANGE rises, nominal Y reflects the actual quantity sold)

Fixed weight price index: uses P of same basket (until its revised) Base period: year when CPI = 100 (currently 1982) Expenditure base period: year when basket components chosen (currently 2005) Price Index measures average price level: CPI

Calculating Growth Rates Y growth: (Y t+1 - Y t )/Y t Price level growth: (P t+1 - P t )/P t

Practice Question 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. The Bigdrill inc. drills for oil, which it sells for $200 million to Bigoil inc. to be made into gas. Bigoil incs gas is sold for a total of $600 million. What is the total contribution to the countrys 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.