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

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

3. Measures of Output
Output
Nominal GDP
Real GDP
GDP per capita

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)

5. Example -- Company X Production in 2002 Production in 2004
200 washers at $500
100 dryers at $400
Production in 2004
300 washers at $600
100 dryers at $450
What is the total quantity produced by Company X in 2002?

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

7. Example -- Company X Production in 2002 Production in 2004
200 washers at $500
100 dryers at $400
Production in 2004
300 washers at $600
100 dryers at $450
Nominal Production = 200 x $ x $400
= $140,000

8. Example -- Company X Production in 2002 Production in 2004
200 washers at $500
100 dryers at $400
Production in 2004
300 washers at $600
100 dryers at $450
Nominal Production = 300 x $ x $450
= $225,000

9. By how much has production increased between 2002 and 2004?
200 washers at $500
100 dryers at $400
Production in 2004
300 washers at $600
100 dryers at $450
I.e., need to use a common yardstick, so use prices in 2000 or prices in 2004.
What yardstick should we use?

10. If base year is 2002: Production in 2002 Production in 2004
200 washers at $500
100 dryers at $400
Production in 2004
300 washers at $600
100 dryers at $450
Real Production (2004) = 300 x $ x $400 = $190,000

11. If base year is 2004: Production in 2002 Production in 2004
200 washers at $500
100 dryers at $400
Production in 2004
300 washers at $600
100 dryers at $450
Real Production (2004) = 300 x $ x $450 = $225,000

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

13. Example Washers Dryers Year Price Quantity 2002 $500 200 $400 100 2003
$525
250
$420
110
2004
$600
300
$450

14. Nominal GDP Washers Dryers Value of Output Using prices from: Year
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000

15. Growth rate (’03 to ’04) using ’03 prices
Washers
Dryers
Value of Output
Using prices from:
Year
Price
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000
Growth Rate
12.4%
Focus on this column

16. Growth rate (’03 to ’04) using ’04 prices
Washers
Dryers
Value of Output
Using prices from:
Year
Price
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000
Growth Rate
12.7%
Focus on this column

17. Average growth rate Value of Output Using prices from: 2003 2004
Washers
Dryers
Value of Output
Using prices from:
Year
Price
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000
Chain Weighted
Growth, ’03 – ‘04
12.5%

18. Similarly for ’02 – ‘03 Value of Output Using prices from: 2003 2004
Washers
Dryers
Value of Output
Using prices from:
Year
Price
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000
Chain Weighted
Growth, ’02 – ‘03
20.7%

19. Base year is 2002 Value of Output Using prices from: 2003 2004
Washers
Dryers
Value of Output
Using prices from:
Year
Price
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000
Real GDP, 2003
1.207 x $140,000
= $168,980
a) Problem with Base Year is it creates Substitution effect. For instance. If price of computers fall in future than in base year then there will be growing demand of computer in future. Now when we calculate the Real GDP using the price of base year (which is higher) will exaggerate the growth of these items whose price has fallen. Chaining was introduced in US in 1996 to avoid this effect.
b) Chain weight allows gradual change in price.
c) From previous slide: 20.7 % rise in GDP from 2002 to So =1.207

20. Base year is 2002 Value of Output Using prices from: 2003 2004
Washers
Dryers
Value of Output
Using prices from:
Year
Price
Qty
2002
2003
2004
$500
200
$400
100
140,000
147,000
165,000
$525
250
$420
110
169,000
177,450
199,500
$600
300
$450
190,000
225,000
Real GDP, 2004
1.125 x $168,980
= $190,102

21. Real and Nominal Nominal: measure in current prices
Real: measure in constant prices

22. Real GDP
Nominal GDP

23. When Should You Use Nominal GDP Instead?
You must use nominal GDP when your other variables don't exclude for inflation. For example, if you are comparing debt to GDP, you've got to use nominal GDP since a country's debt is also nominal. Here's the U.S. debt to nominal GDP for every year since 1929.

24. Value-Added
$15 pound of coffee

25. Market Chain for Coffee Beans
Columbian Farmer
Coffee Importer
Starbuck’s
Barnes
and
Noble

26. Market Chain for Coffee Beans
Columbian Farmer
Coffee Importer
Starbuck’s
Barnes
and
Noble
$4.20
$7.20
$9.80
Retail Price
$15.00

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

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

29. GDP deflator GDP Deflator= (Nominal GDP/RealGDP) * 100
It is an index of price changes for goods and services included in GDP

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

31. Income = Expenditure Goods and Services Households Firms
This is basically to make the point that goods flow from firms to households and inputs flow from households to firms.
Households
Firms
Labor and Capital

32. Income = Expenditure Payments for Goods and Services Households Firms
Payments for goods and services must equal payments for labor and capital.
Households
Firms
Payments for Labor, Capital

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

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

35. GDP and GNI GDP GNI (Gross National Income)
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

36. Example
Joe Canadien, citizen of Canada, works in US and sends wages back to Canada
US GDP includes Joe’s wages
Canadian GNI includes Joe’s wages

37. GDP as welfare measure Does GDP correctly measure production?
Is production a good proxy for welfare?

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

39. Does Output = Happiness?
Is more output better?
Human Development Index
Table from UNDP website
Animated comparisons
HDI calculator
Note that as countries get richer, income per capita plays smaller role
Note that the animated comparison is long, but is very good. Lots of good comparisons for chapter on growth. The other links give you the chance to calculate the HDI. The Table is a pdf file listing all the countries in categories (high, medium, low HDI).

40. 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.

41. Summary of National Income Accounting
GNP=GDP+ Net foreign Income from abroad
NetNationalProduct(NNP)=GNP-depreciation
National Income(NI)=NNP-indirect tax+subsidies
Personal Income(PI)= NI-corporatetax-undistributed profit-social security contribution+TransferPayment
Diposable Income(DI)= PI- direct tac

42. Closing Remark Robert F. Kennedy University of Kansas March 18, 1968
Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that - that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.  It counts special locks for our doors and the jails for the people who break them.  It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.  It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities.  It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.  Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play.  It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.  It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.