1. Measuring the Nation’s Output
Macroeconomics Pt.1:
Measuring the Nation’s Output

2. A) Intro to Macroeconomics
If Microeconomics dealt with how individuals and businesses influenced the Economy; then, the branch of Economics that deals with the Economy as a whole is called Macroeconomics.
Gross Domestic Product (GDP), how much is produced by businesses within America, is one of the most important measures of National Output in the Economy.
Ultimately, GDP tells us how strong or weak the economy is. Keep in mind, that it includes all goods produced in America, not American goods produced in other countries.
This means that Japanese automobiles produced in Detroit count in GDP even if the owners of the production plant live outside the U.S.
On the other hand, production in U.S.-owned plants located in Mexico, Canada or other countries is not counted in GDP.
Another important statistic that measures the healthiness of the Economy is the National Income and Product Accounts (NIPA).
The NIPA keeps track of the nation’s production of goods, consumption of goods, savings, and investment by the American public. GDP deals with businesses, NIPA deals with the public.

4. GDP = Measure of Final Output

5. Output = GDP

6. B) GDP: Measure of National Output
How GDP is measured is fairly easy to understand. Multiply all of the final goods and services produced in a 12-month period by their prices, and then add them up to get the total dollar value of production.
Figure 1 provides an example. The first column contains three product categories – goods, services, and structures – used in the GDP. The third category includes structures like residential housing, apartments and buildings for business purposes.
The total number of final goods and services produced in the year is in the quantity column, and the price column shows the average price of each product.
To get GDP, we simply multiply the quantity of each good by its price and then add the results, as is done in the last column of the table.
To keep the report as current as possible, GDP is measured by Economists quarterly, or every three months, and then the numbers are revised every 3 months.
GDP is a measure of final output. This means that Intermediate Products – goods used to make other products already counted in GDP – are excluded. Tires on a new car are NOT counted in GDP because the tires were already included in the price.
Secondhand Sales, which are the sales of used goods, are also excluded from GDP because no new production is created. The products were already in existence when they were transferred from one owner to another.
Nonmarket Transactions are Economic activities that do not generate sales and expenditures in the market and also are excluded. For example, GDP does not take into account the value of services when you mow your own lawn, but does include outside lawn care.
Finally, transactions that occur in the Underground Economy, which are Economic activities that are not reported for legal or tax collection purposes, are not counted in GDP. Some of these activities are illegal like gambling, smuggling and the selling of drugs.

7. Quarterly Division of GDP

8. C) Real GDP vs. Current GDP
Because of the way it’s computed, GDP can appear to increase whenever prices go up due to inflation.
For example, if the number of goods produced stays the same from one year to the next, but prices for them go up, then the measurement of GDP will not be entirely accurate.
Therefore, in order to make accurate comparisons over time, GDP should be adjusted for inflation.
To do so, Economists use a set of constant prices in a Base Year – a year’s prices on goods that serves as the basis of comparison for all other years in the future.
This measure is called Real GDP, or the current year’s GDP measured with a set of constant past year base prices. In contrast, Current GDP means that the output in any given year was measured without non-inflated prices that existed in the past.
When the two series are plotted together, as in Figure 2, you can see that Real GDP grows more slowly than Current GDP. The difference in growth rate occurs because Current GDP reflects the distortions of inflation, while Real GDP does not reflect Inflation.
There may be times when we want to adjust GDP growth for population growth. For example, we may want to see how the economy of the country is growing over time compared to its population growth and their consumption of the nation’s goods.
To do so, we use a measurement tool called GDP Per Capita, or GDP output divided by the population’s consumption of goods within the country.

9. Real GDP Trend

10. D) Limitations of GDP
Despite GDP’s advantages, there are several limitations about the measurement of GDP to keep in mind. First, by itself, GDP tells us nothing about what TYPES of things are actually being produced.
For example, if GDP increases by $10 Billion this year, we know that production is growing and jobs and income are generated within the Economy, so we view that growth as a good thing.
However, we might feel differently if we discovered that the extra $10 Billion in GDP output consisted of military nerve gas stockpiles rather than new libraries, parks and teacher salaries.
Second, GDP also tells little about the impact of production on the quality of life. For example, the construction of 10,000 new homes may appear to be a good thing.
However, if these homes are being built on sacred religious lands, these home values might be seen differently by the public.
Finally, some GDP is created by the Govt. using taxpayers dollars that gives the general public little utility or satisfaction. The money spent to open a drug addiction clinic is a good example.
If our society had less drug addiction, our GDP would actually be smaller because of lower Govt. spending to control it but it would leave more money in taxpayers pockets.
By having more money in taxpayers pockets, the pubic could go out and buy more goods, which would allow businesses to make more good and thus increase GDP. But how do we deal with societies problems without hurting GDP?

11. GDP too limited?

12. E) GDP’s Overall Influence
Even with these minor limitations, GDP is still our best measure of overall Economic performance and well-being, because it is perfect measure of the voluntary transactions that take place in the market.
Voluntary transactions occur only when both parties in a transaction think they are better off after they have made the transaction than before it.
This is one reason why GDP is considered an indicator of our overall economic health because it showcases the natural forces of the marketplaces in producing and buying goods, and if the Economy is ultimately growing or shrinking.
Economic growth, as measured by GDP, means that jobs are plentiful and the incomes are rising. A shrinking Economy means that unemployment is high and incomes for families are much smaller.
Such economic trends often influence the decisions of voters. As a result, GDP is the single most important economic statistic compiled today that voters somewhat take into account when they vote.
Because of this, changes in GDP greatly influences elections on all Govt. levels. Whenever the economy is shrinking, the political party in power usually does not fare as well as it would have during a time of economic growth.

13. Rise of GDP?