Lecture Macroeconomics - Chapter 6: Measuring domestic output and the price level

Chapter 6 - Measuring domestic output and the price level. After studying this chapter you will be able to understand: What gross domestic product (GDP) is and what it measures, the expenditure approach to measuring gross domestic product (GDP), the income approach to measuring gross domestic product (GDP), the distinction between nominal GDP and real GDP, what the Consumer Price Index (CPI) is and how it is constructed, the shortcomings of GDP as a measure of a country’s well-being.

Measuring Domestic Output

and the Price Level

Chapter 6

In this chapter you will learn

What gross domestic product (GDP) is

and what it measures

The expenditure approach to measuring

gross domestic product (GDP)

The income approach to measuring

gross domestic product (GDP)

In this chapter you will learn

The distinction between nominal GDP

and real GDP

What the Consumer Price Index (CPI) is

and how it is constructed

The shortcomings of GDP as a

measure of a country’s well-being

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

Assessing the Economy’s

Performance

National income accounting is useful

to assess the health of the

economy

Assessing the Economy’s

Performance

National income accounting is useful

to assess the health of the

economy

to track the long-run course over

time

Assessing the Economy’s

Performance

National income accounting is useful

to assess the health of the

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

• A Monetary Measure

the total market value of all final goods and services produced in the economy in one year

Gross Domestic Product

Gross Domestic Product

• A Monetary Measure

• Avoiding Multiple Counting

the total market value of all final goods and services produced in the economy in one year

Gross Domestic Product

Gross Domestic Product

illustrated

Production Stage Sales Value

GDP & Value Added:

The Story of a Suit

GDP & Value Added:

The Story of a Suit

Production Stage Sales Value

GDP & Value Added:

The Story of a Suit

GDP & Value Added:

The Story of a Suit

good

Production Stage Sales Value

GDP & Value Added:

The Story of a Suit

GDP & Value Added:

The Story of a Suit

• A Monetary Measure

• Avoiding Multiple Counting

• Excludes Nonproduction Transactions

Financial Transactions

- Public Transfer Payments

- Private Transfer Payments

- Stock-Market Transactions

the total market value of all final goods and services produced in the economy in one year

Gross Domestic Product

Gross Domestic Product

• A Monetary Measure

• Avoiding Multiple Counting

• Excludes Nonproduction Transactions

Financial Transactions

Second-hand Sales

the total market value of all final goods and services produced in the economy in one year

Gross Domestic Product

Gross Domestic Product

The money income derived from production of this year’s output

Amount spent to purchase this year’s total output

Expenditures Approach

Income Approach

GDP

GDP

Consumption expenditures by households

+ Investment expenditures

by businesses

+ Government purchases

of goods & services

+ Expenditures by

Consumption expenditures by households

+ Investment expenditures

by businesses

+ Government purchases

of goods & services

+ Expenditures by foreigners

Wages + Rents + Interest + Profits + Statistical discrepancy

Wages + Rents + Interest + Profits + Statistical discrepancy

=GDP=

Expenditures approach Income approach

Figure 6-1

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

Expenditures Approach

Everything that is produced either

is purchased, or

ends up in inventory

Gross Domestic Product

Gross Domestic Product

Amount spent to purchase

this year’s total output

GDP = C + Ig + G + Xn

Expenditures Approach

Gross Domestic Product

Gross Domestic Product

Gross Private Domestic Investment ( I g )

GDP: Expenditures Approach

GDP: Expenditures Approach

Personal Consumption Expenditure ( C )

• Machinery, Equipment, & Tools

• All Construction

• Changes in Inventories

Gross vs Net Investment

Gross Private Domestic Investment ( I g )

GDP: Expenditures Approach

GDP: Expenditures Approach

Personal Consumption Expenditure ( C )

• Machinery, Equipment, & Tools

Government Purchases

( G )

GDP: Expenditures Approach

GDP: Expenditures Approach

Gross Private Domestic Investment ( I g )

Personal Consumption Expenditure ( C )

G Excludes Transfer Payments

NOTES:

GDP: Expenditures Approach

GDP: Expenditures Approach

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

A dollar’s worth of output

generates

a dollar’s worth of income

GDP: Income Approach

GDP: Income Approach

• Wages, Salaries, Labour Income +

• Corporate Profits before Taxes +

• Wages, Salaries, Labour Income +

• Corporate Profits before Taxes +

GDP: Income Approach

GDP: Income Approach

• Interest & Investment Income +

• Farmers’ Income +

• Net Income of Non-Farm Unincorp.

Business, Including Rent

equals

NET DOMESTIC INCOME (NDI)

NET DOMESTIC INCOME 2000

$ billions

Net Income of Non-Farm Unincorp.

NET DOMESTIC INCOME (NDI)

y

statistical discrepanc

y

NET DOMESTIC INCOME 2000

$ billions

Gross Domestic Product $1038.8

GDP: Income Approach

GDP: Income Approach

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

GNP Gross National Product

vs output in Canada

Other National Accounts

Other National Accounts

GNP Gross National Product

PI Personal Income

Other National Accounts

Other National Accounts

GNP Gross National Product

PI Personal Income

DI Disposable Income

• personal income less taxes &

transfers to government

• personal saving is the amount

remaining after consumption has been deducted from DI

Other National Accounts

Other National Accounts

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

GDP

= real quantities X prices

what is really changing?

• price?

• quantity?

• both?

Nominal GDP vs Real GDP

NOMINAL GDP measures the

value of current production in

current prices

REAL GDP measures the value

of current production in base

Nominal GDP vs Real GDP

Price Index = Nominal GDP Real GDP

The GDP Price Index:

Nominal GDP vs Real GDP

price index is a % (do not write % sign)

use decimal form for calculations e.g., 103% = 1.03

NOTES:

Price Index = Nominal GDP Real GDP

The GDP Deflator:

Real GDP = Nominal GDP Price Index

Nominal GDP vs Real GDP

Year Nominal

GDP

Real GDP

GDP Price Index

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

compares the cost of a FIXED

basket of CONSUMER goods in

the base year & the year of

interest

note the GDP deflator is

calculated with a CHANGING

basket of ALL goods

Consumer Price Index (CPI)

CPI = basket @ current prices

basket @ base year prices

Consumer Price Index (CPI)

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

Shortcomings of GDP

Non-Market Transactions

Leisure

Improved Product Quality

The Underground Economy

The underground economy as a % of GDP

Switzerland United States

Japan Britain Holland Germany France Canada Sweden Belgium Portugal Spain Italy Greece

GLOBAL PERSPECTIVE 6-2

Shortcomings of GDP

GDP & the Environment

Composition & Distribution of Output

Per Capita Output

Non-Market Transactions

Leisure

Improved Product Quality

The Underground Economy

Chapter 6 Topics

Assessing the Economy’s Performance

Gross Domestic Product

The Expenditures Approach

INTRODUCTION TO ECONOMIC

GROWTH & FLUCTUATIONS

Chapter 7