MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT The Language of Macroeconomics: The National Income Accounts Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. PowerPoint by Beth Ingram University of Iowa

2-2 Key Concepts Gross Domestic Product Gross National Income Real and Nominal Measures Human Development Index

2-3 Output Nominal GDP Real GDP GDP per capita Measures of Output

2-4 Gross Domestic Product Total value of goods and services produced in a given year Need to know How much was produced (quantity) What the production was worth (price)

2-5 Example -- Company X Production in washers at $ dryers at $400 Production in washers at $ dryers at $450 What is the total quantity produced by Company X in 2002?

2-6 Price as a Yardstick Price provides a common unit in which to value quantities

2-7 Example -- Company X Production in washers at $ dryers at $400 Production in washers at $ dryers at $450 Nominal Production = 200 x $ x $400 = $140,000

2-8 Example -- Company X Production in washers at $ dryers at $400 Production in washers at $ dryers at $450 Nominal Production = 300 x $ x $450 = $225,000

2-9 By how much has production increased between 2002 and 2004? Production in washers at $ dryers at $400 Production in washers at $ dryers at $450 What yardstick should we use?

2-10 If base year is 2002: Production in washers at $ dryers at $400 Production in washers at $ dryers at $450 Real Production (2004) = 300 x $ x $400 = $190,000

2-11 If base year is 2004: Production in washers at $ dryers at $400 Production in washers at $ dryers at $450 Real Production (2004) = 300 x $ x $450 = $225,000

2-12 Chain Weighted Prices Problems with fixed prices Chain weighting as “averaging” of prices

2-13 Example WashersDryers YearPriceQuantityPriceQuantity 2002$500200$ $525250$ $600300$450100

2-14 Nominal GDP WashersDryersValue of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000

2-15 Growth rate (’03 to ’04) using ’03 prices WashersDryers Value of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000 Focus on this column Growth Rate 12.4%

2-16 WashersDryers Value of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000 Focus on this column Growth Rate 12.7% Growth rate (’03 to ’04) using ’04 prices

2-17 Average growth rate WashersDryers Value of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000 Chain Weighted Growth, ’03 – ‘ %

2-18 Similarly for ’02 – ‘03 WashersDryers Value of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000 Chain Weighted Growth, ’02 – ‘ %

2-19 Base year is 2002 WashersDryers Value of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000 Real GDP, x $140,000 = $168,980

2-20 Base year is 2002 WashersDryers Value of Output Using prices from: YearPriceQtyPriceQty $500200$ ,000147,000165, $525250$ ,000177,450199, $600300$ ,000199,500225,000 Real GDP, x $168,980 = $190,102

2-21 Real and Nominal Nominal: measure in current prices Real: measure in constant prices

Nominal GDP Real GDP

2-23 Value-Added $15 pound of coffee

2-24 Market Chain for Coffee Beans Columbian Farmer Coffee ImporterStarbuck’s Barnes and Noble

2-25 Market Chain for Coffee Beans Columbian Farmer Coffee ImporterStarbuck’s Barnes and Noble $4.20 $7.20$9.80 Retail Price $15.00

2-26 Value-Added Sales $5.80 Roasting & Packaging $2.00 Shipping and Importing $3.00 Green Coffee Beans $4.20

2-27 Measures of Output Output Sum of value added in each sector Income Sum of payments to factors of production Expenditure Sum of expenditures on final goods and services

2-28 Measures of Output Output $ $ $ $5.80 Income Payments to labor, management and capital for producing one pound of coffee Expenditure $15 final payment for pound of coffee

2-29 Income = Expenditure Firms Households Goods and Services Labor and Capital

2-30 Income = Expenditure Firms Households Payments for Goods and Services Payments for Labor, Capital

2-31 Expenditures Consumption by individuals (C) Consumption and investment by government (G) Investment by the private sector (I) Exports (X) AD = C + G + I + X

2-32 Output Domestic output (Y) Foreign imports (M) C + G + I + X = Y - M

2-33 GDP and GNI GDP Output produced within a geographic location (US, Italy, etc.) GNI (Gross National Income) Output produced by citizens of a geographic region Value must be remitted back to country

2-34 Example Joe Canadien, citizen of Canada, works in US and sends wages back to Canada US GDP includes Joe’s wagesCanadian GNI includes Joe’s wages

2-35 GDP as welfare measure Does GDP correctly measure production? Is production a good proxy for welfare?

2-36 Measurement Underground economic activity Illegal activities Tax avoidance Non-market transactions Negative consequences of production

2-37 Does Output = Happiness? Is more output better? Human Development Index Table from UNDP website Table Animated comparisons Animated HDI calculator HDI Note that as countries get richer, income per capita plays smaller role

2-38 Comparing HDI and GDP Figure 2.12

2-39 Summary Need for consistent set of data Real and Nominal Variables GDP and GNI Value added = Income = Total Expenditure Human Development Index Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.