Intermediate Macro: Measuring GDP Jeffrey H. Nilsen

 Macro: study of structure and performance of national economies and the policies gov’t tries to use to affect economic performance.  big-week-for-US-indicators/Markets big-week-for-US-indicators/Markets

GDP defined within the 3 approaches  Expenditure App: GDP: total spending on final goods & svcs by domestic households (C), domestic firms (I), gov’t (G) and foreigners (NX)  Product App GDP: mkt value of final goods & svcs newly produced within nation’s borders  Income App GDP: total incomes of workers (wages), firms (profits) & gov’t (taxes)

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

Product App  Mkt value (weigh goods by their price so e.g. 5 cars count more than 5 shoes) Ignore non-market goods, e.g. housekeeping Underground economy: try to adjust for unreported transactions Gov’t services (not sold at market price): value at cost of provision  Newly produced: not e.g. resale of old house (although include value of real estate agent’s services)  Final goods & services: Ignore intermediate goods (inputs used up producing goods in same period as produced). Examples of “surprising” final goods: Car sold as taxi not used up in period produced: a capital good (creates other goods) Inventory investment: (change in inventory over period) e.g. baker’s 1000 flour rises to 1100 (unused output [of mill] that will add to future output) Mkt value of final goods & svcs newly produced within nation’s borders

Product App (Add up Value Added)  Value Added = sales revenues – cost of intermediate goods  AC: 35 – 0  JC: 40 – 25  GDP = 50, again Apple CoJuice Co Total Rev Sales to Public 10 Sales to JC25 25 (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 GDP + NFP = GNP BG Factors in BG Fgn workers BG pay BG workers fgn pay GDP BG “-“ NFP GNP BG GNP: output produced by a nation’s factors, wherever located GDP: output produced within nation’s borders, whoever produces it

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 = – 25 – 10 – 2 = 3

Building Disposable Income from National Income Note: text ignores VAT (USA has no VAT)

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

Uses of Private Savings Identity What can be done with $1 of 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 their’s)

Savings is a “flow” augmenting wealth (a “stock”)  National Wealth: BG’s 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 in 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 good’s current P (if P ORANGE rises, nominal Y reflects the actual quantity sold)

 “Fixed weight price index”: uses P of same basket (until it’s 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 (always in percentages)  Y growth: (Y t+1 - Y t )/Y t  Price level growth: (P t+1 - P t )/P t  Interest rates or returns: (end price – start price)/start price

Practice Multiple Choice 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. Bigdrill inc. drills for oil, which it sells for $200 million to Bigoil inc. to be made into gas. Bigoil inc’s gas is sold for a total of $600 million. What is the total contribution to the country’s 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.

Example short answer  1. The country of Old Jersey produces milk and butter. It’s published this data, where quantities are in gallons and prices are $ per gallon.   Good Qty Price Qty Price  Milk 500 $2 900 $3  Butter 2000 $ $2  (a) From 2003 to 2004, nominal GDP grew  (b)From 2003 to 2004, use 2003 as base year to find real GDP growth