Chapter 2 Measurement Measuring GDP The National Income

  • Slides: 38
Download presentation
Chapter 2 Measurement

Chapter 2 Measurement

Measuring GDP: The National Income and Product Accounts • What is GDP and How

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 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -2

A Simple Fictional Island Economy Sectors: a coconut producer, a restaurant, consumers, and a

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. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -3

Table 2. 1 Coconut Producer Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2

Table 2. 1 Coconut Producer Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -4

Table 2. 2 Restaurant Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -5

Table 2. 2 Restaurant Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -5

Table 2. 3 After-Tax Profits Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2

Table 2. 3 After-Tax Profits Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -6

Table 2. 4 Government Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -7

Table 2. 4 Government Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -7

Table 2. 5 Consumers Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -8

Table 2. 5 Consumers Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -8

The Product Approach • Value Added: VA = total revenue – the value of

The Product Approach • Value Added: VA = total revenue – the value of intermediate goods Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -9

Table 2. 6 GDP Using the Product Approach Copyright © 2005 Pearson Addison-Wesley. All

Table 2. 6 GDP Using the Product Approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -10

The Expenditure approach • GDP = Consumption (C) + Investment (I) + Government Expenditure

The Expenditure approach • GDP = Consumption (C) + Investment (I) + Government Expenditure (G) + Net Exports (NX=X-IM) Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -11

Table 2. 7 GDP Using the Expenditure Approach Copyright © 2005 Pearson Addison-Wesley. All

Table 2. 7 GDP Using the Expenditure Approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -12

The Income approach • GDP = Wage Income + After-Tax Profits + Interest Income

The Income approach • GDP = Wage Income + After-Tax Profits + Interest Income + Taxes Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -13

Table 2. 8 GDP Using the Income Approach Copyright © 2005 Pearson Addison-Wesley. All

Table 2. 8 GDP Using the Income Approach Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -14

Add in Inventory Investment Suppose now the coconut producer produces 13 million instead 10

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. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -15

Add in International Trade Suppose now the restaurant imports additional 2 million coconuts from

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. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -16

What is GNP? • GNP = GDP + NFP: Net Factor Payments = Factor

What is GNP? • GNP = GDP + NFP: Net Factor Payments = Factor payments to US citizens - Factor payments to foreigners Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -17

What does GDP Leave Out? • Nonmarket activity: home production, leisure, …… • Underground

What does GDP Leave Out? • Nonmarket activity: home production, leisure, …… • Underground economy: illegal drug trade, baby-sitting, …… • Valuing Government Production • GDP is not green Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -18

Table 2. 9 Gross Domestic Product for 2002 Copyright © 2005 Pearson Addison-Wesley. All

Table 2. 9 Gross Domestic Product for 2002 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -19

Nominal and Real GDP and Price Indices • Nominal GDP: GDP at current price

Nominal and Real GDP and Price Indices • Nominal GDP: GDP at current price • Real GDP: GDP corrected for inflation Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -20

Table 2. 10 Real GDP: Example Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Table 2. 10 Real GDP: Example Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -21

Nominal GDP 1 = $130, GDP 2 = $292 Change = (GDP 2 -GDP

Nominal GDP 1 = $130, GDP 2 = $292 Change = (GDP 2 -GDP 1)/GDP 1 = 225% Real GDP Base year 1: RGDP 1 = $130, RGDP 2 = $176 Change (g 1) = 35. 4% Base year 2: RGDP 1 = $222. 50, RGDP 2 = $292 Change (g 2) = 31. 2% Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -22

Chain-Weighting Scheme Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -23

Chain-Weighting Scheme Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -23

Figure 2. 1 Nominal GDP (black line) and Chain -Weighted Real GDP(colored line) for

Figure 2. 1 Nominal GDP (black line) and Chain -Weighted Real GDP(colored line) for the Period 1947– 2003 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -24

Measures of the Price Level • Implicit GDP Price Deflator = (Nominal GDP /

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 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -25

Table 2. 11 Implicit GDP Price Deflators: Example Cont’d Copyright © 2005 Pearson Addison-Wesley.

Table 2. 11 Implicit GDP Price Deflators: Example Cont’d Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -26

Figure 2. 2 Inflation Rate Calculated from the CPI (blue line), and Calculated from

Figure 2. 2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line). Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -27

Problems Measuring Real GDP and Prices • Substitution Biases: make CPI upward biased. •

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 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -28

Homework • Find data of GDP deflator and CPI in China (at least from

Homework • Find data of GDP deflator and CPI in China (at least from 1978)? • Which one is higher? Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -29

Measures of Savings, Wealth, and Capital • Flow: a rate (change) per unit of

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, … Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -30

Private Disposable Income and Private Sector Saving Copyright © 2005 Pearson Addison-Wesley. All rights

Private Disposable Income and Private Sector Saving Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -31

Government Surpluses, Deficits, and Government Saving Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Government Surpluses, Deficits, and Government Saving Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -32

Saving, Investment, and the Current Account Copyright © 2005 Pearson Addison-Wesley. All rights reserved.

Saving, Investment, and the Current Account Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -33

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -34

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -34

Homework • Find data of S/Y, I/Y and CA/Y in China • Does S/Y=I/Y+CA/Y

Homework • Find data of S/Y, I/Y and CA/Y in China • Does S/Y=I/Y+CA/Y hold in China? Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -35

Labor Market Measurement • BLS Categories – Employed – Unemployed: unemployed during the past

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 Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -36

• The Unemployment Rate = Number unemployed / Labor force • Participation Rate

• The Unemployment Rate = Number unemployed / Labor force • Participation Rate = Labor force / Total working age population Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -37

Discussion • How to measure unemployment rate in China? – Migrated workers (�民 )

Discussion • How to measure unemployment rate in China? – Migrated workers (�民 ) – Hidden unemployment in agricultural sector – Lay-off (下� ) in SOEs Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 2 -38