1. Measuring the Macroeconomy
Lecture 2

2. Gross National Product
The market value of the goods and services produced within a given period by nationals (residents of a nation). It includes the income earned by nationals abroad. It does not include income earned within the country by foreigners
Income earned by Poles working in London a part of Polish GNP, profit earned by a Japanese owner of Toyota in Wałbrzych part of Japanese GNP
How to avoid double counting (cars + tiers = other parts, materials?)
Counting of value added of each firm only
Value added = firm’s sale minus the value of materials it buys to use in producing its products
Final goods and services = those purchased by their final users
GNP = value of final goods and services
Value of output not sold through market should be estimated (value of services homeowners receive from living in their houses)
But volunteer services, value of housework and do-it-yourself not included
Illegal activities excluded as well (grey or underground economy)
How big it is? Could be 25%?

3. Gross Domestic Product
The total income earned domestically. It includes income earned domestically by foreigners. It does not include income earned by domestic residents abroad.
Some examples: a Ukrainian worker income earned in Poland part of Poland GDP (earned domestically) but not the part of Polish GNP (worker not a Polish national).
The difference between GNP and GDP in most cases rather small. GDP more frequently used as a measure
How to estimate the value of services produced by government not sold through market (defense, police, public education)?
Usually value of public goods = wages paid to public employees

4. How to calculate GDP(Begg, Fisher, Dornbush)
Good
Seller
Buyer
Transactions value
Value added
Final goods
Income of labor and capital
Steel
Steel producer
Machines producer
1 000 -
Cars producer
3 000
Machines
2 000
2.000
Tiers
Tiers producer
500
Cars
household
5 000
1 500
Total transactions value
11 500
GDP
7 000

5. The circular flow GDP = Y (incomes of households) Y = C + I Y = C + S
S = I
I and S equal (closed economy, no government)
GDP ( market prices)= C + I + G (expend. for final goods
Y=GDP ( base prices)= (C+I+G)-Te (indirect taxes)
Personal disposable income=Y+B(transfers)-Td (direct taxes)
Y=C+I+G+X-Z-Te (open economy, X=Exports, Z=Imports

6. Personal Income
An income that households and non-corporate businesses receive
Personal Income=National Income
- corporate profits (retaining earnings + dividends + taxes)
+ transfers (such as social security and welfare benefits)
+ social insurance contributions
+ dividends
+ personal interest income (the interest that households earn)
Disposable Personal Income = Personal Income – Personal Tax and nontax payments

7. Nominal and Real GNP 1982 1989 Cars 100 150 2 4 200 600 300 meat 140 6
output
Price $/unit
Value of output, current $
Value of output current $
Value of output, 1982 ( $)
Value of output 1982 ($)
1982
1989
Cars
100
150 2 4
200
600
300
meat
140 6
400
840
560
1440
860
Nominal GNP
Real GNP

8. The GNP deflator
Distinction between real and nominal GNP = one of most widely used measure of inflation
GNP deflator = the ratio of nominal GNP to real GNP expressed as an index
GNP deflator for 1989 = (1440/860) x 100 = 167,4
Prices increased 67.4% between
Nominal GDP=real GDP x GDP deflator
Nominal GDP measures the dollar value of the output
Real GDP measures the amount of output, the output valued at constant (base year) prices
The GDP deflator measures the price of the typical unit of output relative to its price in the base year

9. The consumer price index
The most popular measure of the level of prices
CPI turns the prices of many goods and services into a single index measuring the overall level of prices
C PI the price of a basket of goods and services relative to the price of this basket in a base year
CPI tells us how much it costs now to buy the basket relative to how much it cost to buy the same basket in a base year
The producer price index measures the price of typical basket of goods bought by firms

10. C PI and GDP deflator
GDP deflator measures the prices of all goods and services produced, CPI prices of goods bought by consumers
GDP deflator includes goods produced domestically, prices of imported goods do not show up
C PI assigns fixed weights to the prices of different goods, GDP deflator assigns changing weights (allows the basket of goods to change over time)