1. Lecture 5 – The Macroeconomic Perspective II
School of Natural and Social Sciences
Department of Economics and Business, Lehman College
Lecture 5 – The Macroeconomic Perspective II
"Quarterly gross domestic product compared to Federal Funds Rate" by Wikideas1 is in the Public Domain, CC0
Alexander Núñez Torres, PhD
Assistant Professor,
Department of Economics and Business
These slides are based on Principles of Macroeconomics by Steven A. Greenlaw and Timothy Taylor - OpenStax (2017). Unless otherwise noted, they are licensed under an Attribution-NonCommercial-ShareAlike 4.0 International.

2. Schedule Concepts related to Gross Domestic Product Calculating GDP
Expenditure approach
Income approach
Nominal versus Real GDP
Contrast nominal GDP and real GDP
Explain GDP deflator
Calculate real GDP based on nominal GDP values
Limitations of the GDP Concept
GDP and Social Welfare
The Informal Economy

3. Concepts related to Gross Domestic Product
National Income and product accounts (NIPA)
Data Collected and published by the government describing the various components of national income and output in the economy.
Data are complied by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce
We are going to discuss some of the variables of the national income and product accounts
NIPA do not explain how the economy works, but they do show the key parts and how they are connected.
Gross Domestic Product
The total market value of all final goods and services produced within a given period by factors of production located within a country. Is the total market value of a country’s output.

4. Concepts related to Gross Domestic Product
What is the difference between intermediate goods and final goods? Any examples?

5. Concepts related to Gross Domestic Product
Exclusion of Used Goods and Paper Transactions
GDP is concerned only with new, or current production. Old output is not counted in current GDP because it was already counted when it was produced.
GDP does not count transactions in which money or goods change hands or in which no new goods and services are produced.
For example:
1) Selling a car to a friend does not add value to the GDP
2) Selling the same car to a dealer, GDP will increase by the amount of the dealer’s markup over what they pay for it

6. Concepts related to Gross Domestic Product
Exclusion of Output produced abroad by domestically owned factors of production
GDP is the value of output produced by factors of production located within a country
Gross National Product (GNP). GDP includes only what the country produces within its borders. GNP adds what domestic business and labor abroad produces, and substracts any payments that foreign labor and business located in the United States send home to other countries.
In other words, GNP is based on what a country’s citizens and firms produces, wherever they are located, GDP is based on what happens within a certain country’s geographic boundaries

7. Calculating GDP
Expenditure approach: A method of computing GDP that measures the total amount spent on all final goods and services during a given period.
Income approach: A method of computing GDP that measures the income – wages, rents, interest, and profits – received by all factors of production in producing final good and services

8. Calculating GDP: Expenditure approach
𝐺𝐷𝑃=𝐶+𝐼+𝐺+(𝐸𝑋 −𝐼𝑀)
There are four main categories of expenditure:
Personal consumption expenditures (C): household spending on consumer goods.
Gross private domestic investment (I): spending by firms and households on new capital – that is, plant, equipment, inventory, and new residential structures
Government purchases/consumption and gross investment (G)
Net exports (EX – IM): net spending by the rest of the world, or export (EX) minus imports (IM)

9. Macroeconomic Concerns: GDP
Gross Domestic Product (GDP)
For the following table with the components of Gross Domestic Product. What is the value of GDP? What is the value of net exports?
Concept
Amount
Government Purchases
$ 120 Billion
Depreciation
$ 40 Billion
Consumption
$ 400 Billion
Business Investment
$ 60 Billion
Exports
$ 100 Billion
Imports

10. Macroeconomic Concerns: GDP
Concept
Amount
Government Purchases
$ 120 Billion
Depreciation
$ 40 Billion
Consumption
$ 400 Billion
Business Investment
$ 60 Billion
Exports
$ 100 Billion
Imports
Gross Domestic Product (GDP)
For the following table with the components of Gross Domestic Product. What is the value of GDP? What is the value of net exports?
𝑮𝑫𝑷=𝑪+𝑰+𝑮+ 𝑬𝑿 −𝑰𝑴
𝑮𝑫𝑷=$𝟒𝟎𝟎+$𝟔𝟎+$𝟏𝟐𝟎+ $𝟏𝟎𝟎−$𝟏𝟐𝟎
𝑮𝑫𝑷=$𝟓𝟔𝟎 𝑵𝒆𝒕 𝑬𝒙𝒑𝒐𝒓𝒕𝒔=−𝟐𝟎 𝑩

11. Calculating GDP: Expenditure approach
Personal Consumption Expenditures (C)
Expenditures by consumers on goods and services
Durable goods: Goods that last a relatively long time, such as cars and household appliances.
Nondurable goods: Goods that are used up fairly quickly, such as food and clothing.
Services: Are the things we buy that do not involve the production of physical things, such as legal and medical services and education.

12. Billions of Dollars ($)
Calculating GDP: Table 6.2 Components of U.S. GDP
Billions of Dollars ($)
Percentage of GDP (%)
Personal consumption expenditures (C)
12,820.7
68.84
Durable goods
1,411.0
7.58
Nondurable goods
2,710.4
14.55
Services
8,699.3
46.71
Gross private domestic investment (l)
2,094.4
16.42
Nonresidential
2,316.3
12.44
Residential
705.8
3.79
Change in business inventories
35.1
0.19
Government consumption and gross investment (G)
3,267.8
17.55
Federal
1,231.5
6.61
State and local
2,036.3
10.93
Net exports (EX – IM)
−521.2
−2.80
Exports (EX)
2,214.6
11.89
Imports (IM)
2,735.8
14.69
Gross domestic product
18,624.5
100.0

13. Calculating GDP: Expenditure approach
Gross Private Domestic Investment (I)
Total investment in capital –that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sector)
Nonresidential investment: Expenditures by firms for machines, tools, plants, and so on.
Residential investment: Expenditures by households and firms on new houses and apartment buildings.
Change in business inventories: Inventories are the goods that firms produce now but intend to sell later.
𝐺𝐷𝑃=𝐹𝑖𝑛𝑎𝑙 𝑆𝑎𝑙𝑒𝑠+𝐶ℎ𝑎𝑛𝑔𝑒𝑠 𝑖𝑛 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
Depreciation: the amount by which an asset’s value falls in a given period. Net investment: equals gross investment (total value of all newly produced capital goods: plant equipment, inventory) minus depreciation

14. Billions of Dollars ($)
Calculating GDP: Table 6.2 Components of U.S. GDP
Billions of Dollars ($)
Percentage of GDP (%)
Personal consumption expenditures (C)
12,820.7
68.84
Durable goods
1,411.0
7.58
Nondurable goods
2,710.4
14.55
Services
8,699.3
46.71
Gross private domestic investment (l)
2,094.4
16.42
Nonresidential
2,316.3
12.44
Residential
705.8
3.79
Change in business inventories
35.1
0.19
Government consumption and gross investment (G)
3,267.8
17.55
Federal
1,231.5
6.61
State and local
2,036.3
10.93
Net exports (EX – IM)
−521.2
−2.80
Exports (EX)
2,214.6
11.89
Imports (IM)
2,735.8
14.69
Gross domestic product
18,624.5
100.0

15. Calculating GDP: Expenditure approach
Government Consumption and Gross Investment (G)
Includes expenditures by federal, state, and local governments for final goods and services.
It does not includes government transfer payments or interest payments on the national debt, because neither is a payment for any final goods or services
Net Export (EX-IM)
The difference between exports (sales to foreigners of U.S. –produced goods and services) and imports (U.S. purchases of goods and services from abroad)

16. Billions of Dollars ($)
Calculating GDP: Table 6.2 Components of U.S. GDP
Billions of Dollars ($)
Percentage of GDP (%)
Personal consumption expenditures (C)
12,820.7
68.84
Durable goods
1,411.0
7.58
Nondurable goods
2,710.4
14.55
Services
8,699.3
46.71
Gross private domestic investment (l)
2,094.4
16.42
Nonresidential
2,316.3
12.44
Residential
705.8
3.79
Change in business inventories
35.1
0.19
Government consumption and gross investment (G)
3,267.8
17.55
Federal
1,231.5
6.61
State and local
2,036.3
10.93
Net exports (EX – IM)
−521.2
−2.80
Exports (EX)
2,214.6
11.89
Imports (IM)
2,735.8
14.69
Gross domestic product
18,624.5
100.0

17. Calculating GDP: Income approach
National Income
Is the total income earned by factors of production owned by a country’s citizens. Is the sum of compensation of employees, proprietor’s income, rental income, corporate profits, net interest, indirect taxes minus subsidies, net business transfer payments, and the surplus of the government enterprises
GDP is not exactly National Income!!: GDP measures total production within a country. National Income measures income received by the citizens of the country (regardless where they live)

18. Nominal vs Real GDP Nominal GDP
Is gross domestic product measured in current dollars, the current prices that we pay for goods and services.
The nominal value of any economic statistic means that we measure the statistic in terms of actual prices that exist at the time.
The real value refers to the same statistic after it has been adjusted for inflation (What is inflation!?!?!?)
This is not a desirable measure of production. Nominal GDP can increase because the price level has increased with no change in output.
Example:
Suppose that in Year 1 a firm produces 5 cars valued at $10,000 each. It has contributed $50,000 to GDP. In Year 2 its contribution is $60,000. Has the firm produced more cars?

19. Nominal vs Real GDP Nominal GDP
The BEA creates an index of the average price level to adjust nominal GDP for inflation.
Base year is the year chosen for the weights in a fixed-weight procedure
Fixed-weight procedure A procedure that uses weights from a given base year.
The weight is the importance attached to an item within a group of items.

20. Nominal vs Real GDP: Table 6.5 U.S. Nominal GDP and the GDP Deflator
Year
Nominal GDP
GDP Deflator (2005 = 100)
1960
543.3
19.0
1965
743.7
20.3
1970
1,075.9
24.8
1975
1,688.9
34.1
1980
2,862.5
48.3
1985
4,346.7
62.3
1990
5,979.6
72.7
1995
7,664.0
81.7
2000
10,289.7
89.0
2005
13,095.4
100.0
2010
14,958.3
110.0

21. Nominal vs Real GDP: Calculating the GDP Deflator
Policy makers need not only good measures of how real output is changing but also good measures of how the overall price level is changing.
If an unwary analyst compared nominal GDP in 1960 to nominal GDP in 2010, it might appear that national output had risen by a factor of more than twenty-seven over this time. This conclusion would be highly misleading.
GDP deflator is one measure of the overall price level. Is a price index measuring the average prices of all goods and services included in the economy.

22. Nominal vs Real GDP: Calculating the GDP Deflator
Much like nominal GDP (left), the GDP deflator (right) has risen exponentially from 1960 through 2010 (source: BEA)

23. Nominal vs Real GDP: Calculating the GDP Deflator
𝑽𝒂𝒍𝒖𝒆=𝑷𝒓𝒊𝒄𝒆 𝒙 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷=𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙 𝒙 𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷= 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷= 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓/𝟏𝟎𝟎

24. Nominal vs Real GDP: Example: Computing GDP
From Table 6.5, in 1960, Nominal GDP was $543.3 B and the price index (GDP deflator) was 19.0
To calculate the real GDP in 1960, using the formula:
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷= 𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓/𝟏𝟎𝟎
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷= $𝟓𝟒𝟑.𝟑𝑩 𝟏𝟗/𝟏𝟎𝟎
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷= $𝟓𝟒𝟑.𝟑𝑩 𝟎.𝟏𝟗
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷=$𝟐,𝟖𝟓𝟗.𝟓 𝐁

25. GDP Deflator: Calculating GDP Deflator
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Production
Price per Unit
GDP in Year 1 in Year 1 Prices
GDP in Year 2 in Year 1 Prices
GDP in Year 1 in Year 2 Prices
GDP in Year 2 in Year 2 Prices Q1 Q2 P1 P2
P1 × Q1
P1 × Q2
P2 × Q1
P2 × Q2
Good A 7 4
$ 3.00
$ 5.00
Good B 5 12
$ 4.00
$ 6.00
Good C 6 10
Total

26. GDP Deflator: Calculating GDP Deflator
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Production
Price per Unit
GDP in Year 1 in Year 1 Prices
GDP in Year 2 in Year 1 Prices
GDP in Year 1 in Year 2 Prices
GDP in Year 2 in Year 2 Prices Q1 Q2 P1 P2
P1 × Q1
P1 × Q2
P2 × Q1
P2 × Q2
Good A 7 4
$ 3.00
$ 5.00
$ 21.00
Good B 5 12
$ 4.00
$ 6.00
$ 20.00
Good C 6 10
$ 36.00
Total
$ 77.00
Nominal GDP in year 1

27. GDP Deflator: Calculating GDP Deflator
(1)
(2)
(3)
(4)
(5)
(6)
Production
Price per Unit
GDP in Year 1 in Year 1 Prices
GDP in Year 2 in Year 1 Prices Q1 Q2 P1 P2
P1 × Q1
P1 × Q2
Good A 7 4
$ 3.00
$ 5.00
$ 21.00
$ 12.00
Good B 5 12
$ 4.00
$ 6.00
$ 20.00
$ 48.00
Good C 6 10
$ 36.00
$ 60.00
Total
$ 77.00 $
Nominal GDP in year 1

28. GDP Deflator: Calculating GDP Deflator
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Production
Price per Unit
GDP in Year 1 in Year 1 Prices
GDP in Year 2 in Year 1 Prices
GDP in Year 1 in Year 2 Prices
GDP in Year 2 in Year 2 Prices Q1 Q2 P1 P2
P1 × Q1
P1 × Q2
P2 × Q1
P2 × Q2
Good A 7 4
$ 3.00
$ 5.00
$ 21.00
$ 12.00
$ 35.00
$ 20.00
Good B 5 12
$ 4.00
$ 6.00
$ 48.00
$ 30.00
$ 72.00
Good C 6 10
$ 36.00
$ 60.00
$ 24.00
$ 40.00
Total
$ 77.00 $
$ 89.00 $
Nominal GDP in year 1
Nominal GDP in year 2
GDP in Year 1 with Year 1 Prices  $ (Nominal GDP Year 1)
GDP in Year 1 with Year 2 Prices  $ 89.00
GDP in Year 2 with Year 2 Prices  $ (Nominal GDP Year 2)
GDP in Year 2 with Year 1 Prices  $

29. GDP Deflator: Calculating GDP Deflator
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Production
Price per Unit
GDP in Year 1 in Year 1 Prices
GDP in Year 2 in Year 1 Prices
GDP in Year 1 in Year 2 Prices
GDP in Year 2 in Year 2 Prices Q1 Q2 P1 P2
P1 × Q1
P1 × Q2
P2 × Q1
P2 × Q2
Good A 7 4
$ 3.00
$ 5.00
$ 21.00
$ 12.00
$ 35.00
$ 20.00
Good B 5 12
$ 4.00
$ 6.00
$ 48.00
$ 30.00
$ 72.00
Good C 6 10
$ 36.00
$ 60.00
$ 24.00
$ 40.00
Total
$ 77.00 $
$ 89.00 $
1.1558
1.1000
𝐺𝑒𝑜𝑚𝑒𝑡𝑟𝑖𝑐 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟= 𝑥 =

30. Limitations of the GDP Concept: GDP and Social Welfare
If crime levels went down, society would be better off, but a decrease in crime is not an increase in output and is not reflected in GDP.
An increase in leisure is also an increase in social welfare, sometimes associated with a decrease in GDP.
Most nonmarket and domestic activities, such as housework and child care, are not counted in GDP.
GDP also has nothing to say about the distribution of output among individuals in a society.
GDP is also neutral about the kinds of goods an economy produces

31. Limitations of the GDP Concept: GDP and Social Welfare
“Standard of living” is a broader term than GDP. While GDP focuses on production that is bought and sold in markets, standard of living includes all elements that affect people’s well-being.

32. Limitations of the GDP Concept: The Informal Economy
Is the part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP.
These transactions may be missed because they are illegal activities or tax evasions.
This causes two problems:
The size of the GDP will be underreported.
Since countries differ in the relative sizes of their underground economies, inter-country comparisons based on GDP or any GDP-related measurement are suspect

33. Lecture 5 – The Macroeconomic Perspective II
School of Natural and Social Sciences
Department of Economics and Business, Lehman College
Lecture 5 – The Macroeconomic Perspective II
"Quarterly gross domestic product compared to Federal Funds Rate" by Wikideas1 is in the Public Domain, CC0
Alexander Núñez Torres, PhD
Assistant Professor,
Department of Economics and Business