1. Chapter 2
Measurement

2. Measuring GDP: The National Income and Product Accounts
What is GDP and How Do We Measure It?
GDP: Value of Domestically Produced Output
Commerce Department’s National Income and Product Accounts (NIPA)
Business, Consumer, and Government Accounting
The Equivalence of Three Methods
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3. A Simple Fictional Island Economy
Sectors: a coconut producer, a restaurant, consumers, and a government
Coconut producer: produces 10 million coconuts, each sold at $2. 6 million go to the restaurant, remaining 4 go to the consumers.
Restaurant: sells $30 million meals
Government: provides protection from attacks from other islands. It collects taxes ($4.5 million from firms, 1 million from consumers).
Consumers: work for the business and government, receive interest, pay taxes.
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4. Table 2.1 Coconut Producer
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5. Table 2.2 Restaurant
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6. Table 2.3 After-Tax Profits
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7. Table 2.4 Government
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8. Table 2.5 Consumers
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9. The Product Approach
Value Added: VA = total revenue – the value of intermediate goods
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10. Table 2.6 GDP Using the Product Approach
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11. The Expenditure approach
GDP = Consumption (C)
+ Investment (I)
+ Government Expenditure (G)
+ Net Exports (NX=X-IM)
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12. Table 2.7 GDP Using the Expenditure Approach
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13. The Income approach GDP = Wage Income + After-Tax Profits
+ Interest Income
+ Taxes
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14. Table 2.8 GDP Using the Income Approach
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15. Add in Inventory Investment
Suppose now the coconut producer produces 13 million instead 10 million, but only sell out 10 million. What is GDP now?
Answer: $49.5 million.
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16. Add in International Trade
Suppose now the restaurant imports additional 2 million coconuts from other islands at $2 each. What is GDP now?
Answer: $39.5 million.
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17. What is GNP? GNP = GDP + NFP NFP: Net Factor Payments
= Factor payments to US citizens
- Factor payments to foreigners
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18. What does GDP Leave Out?
Nonmarket activity: home production, leisure, ……
Underground economy: illegal drug trade, baby-sitting, ……
Valuing Government Production
GDP is not green
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19. Table 2.9 Gross Domestic Product for 2002
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20. Nominal and Real GDP and Price Indices
Nominal GDP: GDP at current price
Real GDP: GDP corrected for inflation
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21. Table 2.10 Real GDP: Example
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22. Change = (GDP2-GDP1)/GDP1 = 225% Real GDP
Nominal GDP
GDP1 = $130, GDP2 = $292
Change = (GDP2-GDP1)/GDP1 = 225%
Real GDP
Base year 1: RGDP1 = $130, RGDP2 = $176
Change (g1) = 35.4%
Base year 2: RGDP1 = $222.50, RGDP2 = $292
Change (g2) = 31.2%
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23. Chain-Weighting Scheme
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24. Figure 2.1 Nominal GDP (black line) and Chain-Weighted Real GDP(colored line) for the Period 1947–2003
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25. Measures of the Price Level
Implicit GDP Price Deflator
= (Nominal GDP / Real GDP) * 100
CPI(t) = (Cost of base year quantities at prices of year t / Cost of base year quantities at base year prices) * 100
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26. Table 2.11 Implicit GDP Price Deflators: Example Cont’d
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27. Figure 2.2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line).
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28. Problems Measuring Real GDP and Prices
Substitution Biases: make CPI upward biased.
Accounting for Quality Changes: increase in prices maybe reflect the improvement in quality. Inflation is biased upward.
Treatment of Newly-Introduced Goods: bias downward GDP growth, upward the inflation
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29. Homework
Find data of GDP deflator and CPI in China (at least from 1978)?
Which one is higher?
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30. Measures of Savings, Wealth, and Capital
Flow: a rate (change) per unit of time
Saving, Investment, Consumption, …
Stock: the quantity in existence of some object at a point in time
Capital, Wealth, …
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31. Private Disposable Income and Private Sector Saving
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32. Government Surpluses, Deficits, and Government Saving
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33. Saving, Investment, and the Current Account
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35. Homework Find data of S/Y, I/Y and CA/Y in China
Does S/Y=I/Y+CA/Y hold in China?
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36. Labor Market Measurement
BLS Categories
Employed
Unemployed: unemployed during the past week but actively searched for work during the last four weeks
Not in the Labor Force
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37. The Unemployment Rate = Number unemployed / Labor force
Participation Rate =
Labor force / Total working age population
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38. Discussion How to measure unemployment rate in China?
Migrated workers (农民工)
Hidden unemployment in agricultural sector
Lay-off (下岗) in SOEs
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