Measuring the Macroeconomy Source:Text and Taylor and Moosa (2002) Chapters 21 & 6 Respectively

Gross Domestic Product GDP is a measure of the value of all final goods and services newly produced in a country during some period of time. What? What? Where? Where? When? When? How?

Product WeightValue Adding Unlike Products 7 tapes + 3 CDs _____________________________ ?????? $10 per tape $25 per CD ___________________________________________ $70 worth of tapes + $75 worth of CDs ______________________________________________________________________ $145 of tapes & CDs Table 6.1

Intermediate & Final Goods l Intermediate goods Goods that undergo further processing before being sold to consumers l Final goods New goods that undergo no further processing before being sold to consumers l Double counting problem

Three Ways to Measure GDP l Spending approach l Income approach l Production approach

Spending Categories l Consumption »Purchases of final goods & services by individuals l Investment »Business fixed investment »Inventory investment »Residential investment l Government purchases »Purchases by Federal, State & local governments of new goods & services l Net exports

Trade Terminology l Exports The total value of goods & services that people in one country sell to people in other countries l Imports Total value of purchases of goods & services from people in other countries l Net exports The value of exports minus the value of imports l Trade balance Alias for net exports

Consumption$333.4 Investment Government purchases Net exports -4.8 GDP$566.0 Australian Spending in 1998 Table 6.2

The Spending Approach in Symbols Y If Y = GDP C C = Consumption I I = Investment G G = Government purchases X X = Net exports then Y = C + I + G + X

C, I & G as a Share of GDP C IG Fig 6.3 Excess spending over production = trade deficit

Stocks and Flows Flows Rate in Rate out Y C I G X SStocks Water level Money stock Capital Inventory Debt level Population Wealth

The Income Approach l Labour income The sum of wages, salaries and supplements paid to workers l Capital income The sum of profits, rental payments and interest payments

Aggregate Income & GDP in 1998 Labour income $270.3 Capital and mixed equals GDP at factor cost Indirect taxes less subsidies 64.9 equals GDP $566.0 Table 6.3

Gross Versus Net l Depreciation The amount by which physical capital wears out over time l Investment Gross investment - depreciation = net investment l GDP versus NDP

Y X G C The Circular Flow Fig 6.4 Tr Tax Consumers Government I C+G C+I+G C+I+G+X Rest of the world Firms

Ex Post Relationships GDP = ProductionorOutput = Income = Spending (Consumption+Investment+Go v. Spending+Net Export) Y = C + I + G + X

Income l National income The sum of labour income and capital income l Personal income Income paid directly to individuals; includes labour income, transfer payments and the part of capital income that is paid out to individuals

Value Added The value of the firm’s production minus the value of the intermediate goods used in production.

Calculating Value Added Coffee grower Coffee roaster Coffee shipper & wholesaler Coffee retailer P Retail Fig 6.5 VA G VA Ro VA SW VA Re $ Retail price = sum of all values added

Sector/Activity Gross Value Added ($Billion) Australia’s GDP in Agriculture, forestry & fishing Mining Manufacturing industry Electricity, gas and water Construction Wholesale trade Retail trade Accommod., cafes & restaurants Transport and storage Communication services Table

Sector/Activity Gross Value Added … Australia’s GDP in 1998 Finance and insurance Property and business services Government admin. & defence Education Health and community services Cultural and recreational services Personal and other services Ownership of dwellings Gross value added at basic prices Taxes and subsidies GDP … Table 6.4

SPSP SGSG I Saving and the Circular Flow Fig 6.4 S S - I Y X G C Tr Tax Consumers Government I C+G C+I+G C+I+G+X Rest of the world Firms

Saving l Private saving S P = Y - C - T l Government saving S G = T - G l National saving S = S P + S G S = Y - C - G

Saving, Investment and Net Exports Y = C + I + G + X  Y - C - G = I + X But S = Y - C - G  S = I + X National saving = investment + investment + net exports net exports

Nominal and Real GDP Nominal GDP The value of all goods and services newly produced in a country during some period of time Real GDP The value of all goods and services newly produced in a country during some period of time, adjusted for inflation

Nominal or Real GDP? Nominal GDP in 1999 = 25 x x 2000 = $ Nominal GDP in 2000 = 30 x x 2200 = $ Using 1999 prices: 1999 Real GDP = $ Real GDP = $ Using 2000 prices: 1999 Real GDP = $ Real GDP = $ %  16%15% PricePriceQuantityQuantity CDsTapes $25 $ $30 $

Real GDP Versus Nominal GDP Fig 6.6 Nominal GDP Real GDP in 1998 $

Price Level A measure of the average level of prices of goods and services in the economy Price level indexes: »Consumer price index »GDP deflator

GDP Deflator Measures the level of prices of all goods and services included in real GDP relative to a given base year GDP deflator = nominal GDP / real GDP real GDP = nominal GDP / GDP deflator

Implicit Price Deflator (IPD) A GDP price deflator that the ABS calculates by dividing nominal GDP by the chain volume measure of real GDP

Consumer Price Index A price index equal to the current price of a fixed market basket of consumer goods and services divided by the price of the same basket of goods in a base year

Measures of Inflation Fig 6.7 IDP CPI

Shortcomings of the GDP Measure l Revisions in GDP l Production omitted from GDP »Home work and production »Leisure activity »The underground economy »Product improvements l Omits aspects of wellbeing »Life expectancy »Infant mortality »Car accidents »Social problems »Environmental quality

International Comparisons of GDP l Problem with using market exchange rates for comparisons l Purchasing power parity exchange rates Exchange rates such that the prices of similar baskets of goods in different countries are the same when measured in the same currency

Country Per capita income 1998 Market ER Per capita income 1998 PPP ER 1998 PPP ER Australia Bangladesh Canada Germany India Japan Norway Russia U.K International Comparisons Table 6.5