1. Measurement of Economic Variables

2. Gross domestic product (GDP) GDP is the dollar value of all final goods and services produced by a domestic economy in a years time.

3. Fair model FAIRMODEL site

4. Gross National Product (GNP) GNP=Income earned by U.S. residents GNP=GDP-payments to foreigners who own assets located in the U.S. + payments to U.S. residents who own foreign assets

5. GDP=Household income in this class NNP=GNP-IBT –GNP=Gross National Product –IBT = Indirect Business Taxes (sales tax) –NNP=Net National product\ Assume IBT = 0, so NNP=GDP

6. NI=NNP-CCA = GDP - CCA –NI = National Income –CCA = Capital Consumption Allowence (depreciation) Assume CCA = 0 NI=NNP=GDP

7. Assume no foreign sector, no retained earnings, no corporate taxes GDP = NI = Household Income=Y Source of Household Income

8. Uses of Household Income Y=C+S+T –C=Consumption –S=Household Saving –T=Taxes YD=Y-T YD = Disposable Income

9. Spending AE=C +Ir + G –AE = Aggregate Expenditures –C = Household spending –Ir = Realized Investment (Business spending) –G = Government spending AE = GDP = Y

10. Value Added VA = Value Added = Revenue – Cost of Materials Value Added.xls

11. Sum of VA at each stage of production = price of a good Sum of VA for all firms = final price of all output. Sum of VA for all firms = GDP

12. VA automatically eliminates double counting of output.

13. Profits = Revenue – Costs Profits = Revenue – Wages – Rent – Interest – Cost of Materials Profits + Wages + Rent + Interest = Revenue – Cost of Materals

14. Profits + Wages + Interest + Rent = VA Sum (Profits+Wages+Interest+Rent) = Sum(VA) Sum (Profits+Wages+Interest+Rent)=GDP Sum(Household Income) = GDP

15. Planned Spending Firms may spend more than they plan to (inventories build up) Actual Expenditures=C + Ir + G Planned Expenditures = C + I + G

16. Real vs Nominal GDP

18. Nominal GDP If Nominal GDP doubles is that due to P increases or Q increases ?

19. Two ways to estimate prices Directly by constructing price indexes Indirectly by computing the implicit price deflator

20. Price index for groceries Market basket (in base year of 1960) –1 dozen eggs –2 chickens –3 pounds hamburger –Other things a typical family might buy Price of basket =$100 in 1960 Price of basket = $200 in 1970

21. Price index The market basket does not change so any difference must be due to prices. Price indexes however miss –Substitution effect –New goods –Quality changes –Discount stores

22. Computing real GDP using price index

23. Implicit price deflator Can get good estimate of Nominal GDP –Nominal GDP = Sum of Value Added Estimate real GDP by determining what people buy now using base year prices –If year 2000 is the base year compute real GDP by determining what year 2003 GDP would have cost in 2000

24. Implicit price deflator

25. Unemployment Overview of BLS Statistics on Employment and UnemploymentOverview of BLS Statistics on Employment and Unemployment