MACRO E conomics Unit 3: Measuring Growth using GDP “The stock market and economy are two different things..” -- Milton Friedman “The annual labour of.

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Presentation transcript:

MACRO E conomics Unit 3: Measuring Growth using GDP “The stock market and economy are two different things..” -- Milton Friedman “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life..” -- Adam Smith

MACRO E conomics What Drives Long-run Growth? More Resources Capital Accumulation Technology Institutions Creativity

MACRO E conomics Gross Domestic Product, GDP, measures market value of all final goods and services produced during a year within a country.

MACRO E conomics GDP ignores free, household production, barter, and underground goods.

MACRO E conomics GDP has to estimate many transactions such as depreciation, rental income, and in-kind payments.

MACRO E conomics GDP data is very timely. But it’s the best we have.

MACRO E conomics GDP can be measured by counting either spending or income. National Income Identity: GDP = GDI Q = Y

MACRO E conomics GDI counts wages + returns to capital (profits, rent, interest) – the payments for production. We use “Y” for GDI.

MACRO E conomics Using expenditure approach, GDP = C + I + G + (X – M) Also called “Aggregate Expenditure” or “Aggregate Demand”

MACRO E conomics C, Personal Consumption spending includes durables, non-durables, and services.

MACRO E conomics I, Investment Spending, includes: New bldg & equip by firms New residential construction Net Change in Inventories

MACRO E conomics Think of “change in inventory” as unplanned Investment. GDP = C + I planned + I unplanned + G + (X-M) Change in inventory I

MACRO E conomics I, Investment, does NOT count household durables, existing buildings/machines, or financial assets. X X

MACRO E conomics G, Government Purchases, includes all levels of government, but excludes transfer payments.

MACRO E conomics (X-M) is Net Exports, or the difference between eXports and iMports.

MACRO E conomics To make GDP more meaningful we need to adjust for inflation and population.

MACRO E conomics Nominal GDP is this year’s production at this year’s prices – GDP as observed.

MACRO E conomics “Real GDP” estimates the total volume of physical goods by adjusting nominal GDP to account for changes in price level.

MACRO E conomics Use a price index to convert from Nominal GDP to Real GDP.

MACRO E conomics GDP growth rates usually reported quarterly as annual percentage rate.

MACRO E conomics Per Capita GDP adjusts for changes or differences in population.

MACRO E conomics The GDP “gap” measures the difference between actual and estimated potential.