GDP amazonaws com
Chapter 6 Measuring National Output and National Income Chapter Outline Gross Domestic Product Final Goods and Services What’s Excluded Calculating GDP The Expenditure Approach The Income Approach Nominal versus Real GDP Calculating Real GDP Calculating the GDP Deflator The Problems of Fixed Weights Limitations of the GDP Concept GDP and Social Welfare The Underground Economy Gross National Income Per Capita
MEASURING NATIONAL OUTPUT AND NATIONAL INCOME 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.
GROSS DOMESTIC PRODUCT (GDP)
The total market value of all final goods and services produced within a given period by factors of production located within a country.
GDP is the total market value of a country’s output. It is the market value of all final goods and services produced within a given period of time by factors of production located within a country.
1
GROSS DOMESTIC PRODUCT (GDP) FINAL GOODS AND SERVICES final goods and services Goods and services produced for final use. intermediate goods Goods that are produced by one firm for use in further processing by another firm.
GROSS DOMESTIC PRODUCT (GDP)
Tires taken from that pile and mounted on the wheels of the new car before it is sold are considered intermediate goods to the auto producer. Tires from that pile to replace tires on your old car are considered final goods. If, in calculating GDP, we included the value of the tires (an intermediate good) on new cars and the value of new cars (including the tires), we would be double counting.
Gross Domestic Product (GDP) Two definitions: Total expenditure on domestically-produced final goods and services. Total income earned by domestically-located factors of production.
2
Why does expenditure = income InInevery everytransaction, transaction, the buyer’s the buyer’sexpenditure expenditurebecomes becomesthe the seller’s seller’sincome. income. Thus, Thus,the thesum sumofofall allexpenditure expenditureequals equals the thesum sumofofall allincome. income.
Simple Circular Flow Income ($ ) Labor
Households
The circular flow diagram shows the income received and payments made by each sector of the economy.
Firms
Goods (bread ) Expenditure ($ )
Value Added
Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
3
Gross Domestic Product Final Goods and Services In calculating GDP, we can sum up the value added at each stage of production or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.
TABLE 6.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) Stage of Production
Value of Sales
Value Added
$3.00
$3.00
(2) Refining
3.30
0.30
(3) Shipping
3.60
0.30
(4) Retail sale
4.00
(1) Oil drilling
Total value added
0.40 $4.00
Exercise A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and sells it to a baker for $3.00. The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. The engineer eats the bread. Compute: • value added at each stage of production • GDP
Exercise Value added - farmer = Value added - miller = Value added - baker = Total Value added =
? ? ? ? = GDP
4
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 ignores all transactions in which money or goods change hands but in which no new goods and services are produced. - Take a few minutes to think of such transactions
GROSS DOMESTIC PRODUCT EXCLUSION OF OUTPUT PRODUCED ABROAD BY DOMESTICALLY OWNED FACTORS OF PRODUCTION
gross national product (GNP) The total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced.
GNP versus GDP Gross National Product (GNP): total income earned by the nation’s factors of production, regardless of where located Gross Domestic Product (GDP): total income earned by domestically-located factors of production, regardless of nationality.
5
GNP versus GDP GNP = GDP + (payments received by U.S owned factors of production from abroad) less (payments made to foreign owned factors of production) (GNP - GDP) = (factor payments from abroad) less (factor payments to abroad)
GNP versus GDP Payments received by U.S. factors of production from abroad include: - wages earned by U.S. citizens working abroad - profits earned by U.S.-owned businesses located abroad - income (interest, dividends, rent) generated from the foreign assets owned by U.S. citizens Payments to foreign factors of production include: - wages earned by foreign workers in the U.S. - profits earned by foreign-owned businesses located in the U.S. - income (interest, dividends, rent) that foreigners earn on U.S. assets
(GNP – GDP) as a percentage of GDP for selected countries U .S .A . B a n g la d es h B ra zil C an ad a C h ile Irelan d K u w ait M e xico S a u d i A rab ia S in g ap o re
0 .1 % 3.3 - 2.0 - 3.2 - 8.8 - 16 . 2 20 . 8 - 3.2 3.3 4.2
6
CALCULATING GDP
expenditure approach A method of computing GDP that measures the amount spent on all final goods 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 goods.
CALCULATING GDP THE EXPENDITURE APPROACH 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 consumption and gross investment (G) Net exports (EX - IM): net spending by the rest of the world, or exports (EX) minus imports (IM)
GDP = C + I + G + (EX - IM)
Calculating GDP The Expenditure Approach TABLE 6.2 Components of U.S. GDP, 2009: The Expenditure Approach Billions of Dollars Personal consumption expenditures (C) Durable goods Nondurable goods Services Gross private domestic investment (l) Nonresidential Residential Change in business inventories Government consumption and gross investment (G) Federal State and local Net exports (EX – IM) Exports (EX) Imports (IM) Gross domestic product
10,089.1
Percentage of GDP 70.8
1,035.0 2,220.2 6,833.9 1,628.8
7.3 15.6 47.9 11.4
1,388.8 361.0 120.9 2,930.7
9.7 2.5 0.8 20.5
1,144.8 1,786.9
8.0 12.5 2.8
392.4 1,564.2 1,956.6 14,256.3
11.0 13.7 100.0
Note: Numbers may not add exactly because of rounding.
GDP = C + I + G + (EX - IM) 14,256.3 = 10,089.1 + 1,628.8 + 2,930.7 + (1,564.2 – 1,956.6)
7
GDP – The Expenditure Approach GDP
=
C
+
I
+
G
+ (EX
-
IM)
2008: 14.369.1 = 10,104.5 + 2,096.7+ 2,878.3 + (1,843 – 2554) 2009: 14,119.0 = 10,001.3 +1,589.2 + 2,914.9 + (1,578 – 1,965) 2010: 2011:
CALCULATING GDP The Expenditure Approach Personal Consumption Expenditures (C) personal consumption expenditures (C) A major component of GDP: 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 The things we buy that do not involve the production of physical things, such as legal and medical services and education.
ECONOMICS IN PR AC TICE Where Does eBay Get Counted? eBay’s business is to provide a marketplace for exchange. In doing so, it uses labor and capital and creates value. In return for creating this value, eBay charges fees to the sellers that use its site. The value of these fees enter into GDP. So while the old knickknacks that people sell on eBay do not contribute to current GDP, the cost of finding an interested buyer for those old goods does indeed get counted.
8
CALCULATING GDP The Expenditure Approach Gross Private Domestic Investment (I) gross private domestic investment (I) Total investment in capital—that is,the purchase of new housing, plant, equipment, and inventory by the private (or non-government) 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 The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.
CALCULATING GDP Gross Private Domestic Investment (I)
change in business inventories The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.
GDP = Final sales + Change in business inventories
CALCULATING GDP Gross Investment versus Net Investment
depreciation The amount by which an asset’s value falls in a given period. gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. net investment Gross investment minus depreciation. capitalend of period = capitalbeginning of period + net investment
9
CALCULATING GDP Government Consumption and Gross Investment (G)
government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services. Net Exports (EX - IM)
net exports (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). The figure can be positive or negative.
Calculating GDP The Income Approach
TABLE 6.3 National Income, 2009
National income Compensation of employees Proprietors’ income Rental income Corporate profits Net interest Indirect taxes minus subsidies Net business transfer payments Surplus of government enterprises
Billions of Dollars 12,280.0 7,783.5 1,041.0 268.1 1,308.9 788.2 964.3 134.1 8.1
Percentage of National Income 100.0 63.4 8.5 2.2 10.7 6.4 7.9 1.1 0.1
Calculating GDP The Income Approach
TABLE 6.4 GDP, GNP, NNP, and National Income, 2009
GDP Plus: Receipts of factor income from the rest of the world
Dollars (Billions) 14,256.3 +589.4
Less: Equals: Less: Equals: Less: Equals:
484.5 14,361.2 1,864.0 12,497.2 217.3 12,280.0
Payments of factor income to the rest of the world GNP Depreciation Net national product (NNP) Statistical discrepancy National income
10
Calculating GDP The Income Approach disposable personal income or after-tax income Personal income minus personal income taxes. The amount that households have to spend or save. personal saving The amount of disposable income that is left after total personal spending in a given period. personal saving rate The percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.
Calculating GDP The Income Approach
TABLE 6.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2009 Dollars (Billions) National income Less: Amount of national income not going to households Equals: Personal income Less: Personal income taxes Equals: Disposable personal income Less: Personal consumption expenditures Personal interest payments Transfer payments made by households Equals: Personal saving Personal saving as a percentage of disposable personal income:
12,280.0 261.0 12,019.0 1,101.7 10,917.3 10,089.1 213.9 155.7 458.6 4.2%
11
Nominal Versus Real GDP
current dollars The current prices that we pay for goods and services.
nominal GDP Gross domestic product measured in current dollars.
Real vs. Nominal GDP GDP is the value of all final goods and services produced. Nominal GDP measures these values using current prices. Real GDP measure these values using the prices of a base year.
Real GDP controls for inflation Changes in nominal GDP can be due to: changes in prices changes in quantities of output produced Changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices.
12
Example - Calculation of Real GDP
2009
2010
2011
P
Q
P
Q
P
Q
good A
$30
900
$31
1,000
$36
1,050
good B
$100
192
$102
200
$100
205
Compute nominal GDP in each year Compute real GDP in each year using 2009 as the base year.
Example - Calculation of Real GDP
Nominal GDP multiply Ps & Qs from same year 2009: $46,200 = $30 900 + $100 192 2010: $51,400 = $31 x 1000 + $102 x 200 2011: $58,300 = $36 x 1050 + $100 x 205
Real GDP
multiply each year’s Qs by 2005 Ps 2009: $46,200 = $30 x 900 + $100 x 192
2010: $50,000 = $30 x 1000 + $100 x 200 2011: $52,000 = $30 1050 + $100 205
GDP Deflator The inflation rate is the percentage increase in the overall level of prices. One measure of the price level is the GDP Deflator, defined as
GDP deflator = 100
Nominal GDP Real GDP
13
Exercise Nominal GDP
Real GDP
2005
$46,200
$46,200
2006
51,400
50,000
2007
58,300
52,000
GDP deflator
inflation rate n.a.
Use your previous answers to compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate from 2005 to 2006, and from 2006 to 2007.
Answers
Nom. GDP
Real GDP
GDP deflator
inflation rate
2005
$46,200
$46,200
100.0
n.a.
2006
51,400
50,000
102.8
2.8%
2007
58,300
52,000
112.1
9.1%
NOMINAL VERSUS REAL GDP THE PROBLEMS OF FIXED WEIGHTS The use of fixed-price weights to estimate real GDP leads to problems because it ignores: • Structural changes in the economy. • Supply shifts, which cause large decreases in price and large increases in quantity supplied. • The substitution effect of price increases.
14
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 even though they amount to real production. GDP also has nothing to say about the distribution of output among individuals in a society.
LIMITATIONS OF THE GDP CONCEPT THE UNDERGROUND ECONOMY underground economy 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.
Comparison of Per Capita Income
gross national income (GNI) GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.
15
Limitations of the GDP Concept Gross National Income per Capita
FIGURE 6.1 Per Capita Gross National Income for Selected Countries, 2008
Looking Ahead
This chapter has introduced many key variables in which macroeconomists are interested, including GDP and its components. There is much more to be learned about the data that macroeconomists use. In the next chapter, we will discuss the data on employment, unemployment, and the labor force. In later chapters, we will discuss the data on money and interest rates. Finally, we will discuss in more detail the data on the relationship between the United States and the rest of the world.
REVIEW TERMS AND CONCEPTS base year
gross domestic product (GDP)
change in business inventories
gross investment
compensation of employees
gross national income (GNI)
corporate profits
gross national product (GNP)
current dollars
gross private domestic investment (I)
depreciation
income approach
disposable personal income, or after-tax income
indirect taxes minus subsidies
durable goods
national income
expenditure approach
national income and product accounts
final goods and services
net business transfer payments
intermediate goods
fixed-weight procedure government consumption and gross investment (G)
16
REVIEW TERMS AND CONCEPTS net exports (EX - IM)
rental income
net interest
residential investment
net investment
services
net national product (NNP)
statistical discrepancy
nominal GDP
surplus of government enterprises
nondurable goods
underground economy
nonresidential investment
value added
personal consumption expenditures (C)
weight
personal income
Expenditure approach to GDP: GDP = C + I + G + (EX IM)
personal saving personal saving rate proprietors’ income
GDP = Final sales + Change in business inventories Net investment = Capital end of period Capital beginning of period
17
MEASURING NATIONAL OUTPUT AND NATIONAL INCOME 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.
GROSS DOMESTIC PRODUCT (GDP)
The total market value of all final goods and services produced within a given period by factors of production located within a country.
GDP is the total market value of a country’s output. It is the market value of all final goods and services produced within a given period of time by factors of production located within a country.
1
GROSS DOMESTIC PRODUCT (GDP) FINAL GOODS AND SERVICES final goods and services Goods and services produced for final use. intermediate goods Goods that are produced by one firm for use in further processing by another firm.
GROSS DOMESTIC PRODUCT (GDP)
Tires taken from that pile and mounted on the wheels of the new car before it is sold are considered intermediate goods to the auto producer. Tires from that pile to replace tires on your old car are considered final goods. If, in calculating GDP, we included the value of the tires (an intermediate good) on new cars and the value of new cars (including the tires), we would be double counting.
Gross Domestic Product (GDP) Two definitions: Total expenditure on domestically-produced final goods and services. Total income earned by domestically-located factors of production.
2
Why does expenditure = income InInevery everytransaction, transaction, the buyer’s the buyer’sexpenditure expenditurebecomes becomesthe the seller’s seller’sincome. income. Thus, Thus,the thesum sumofofall allexpenditure expenditureequals equals the thesum sumofofall allincome. income.
Simple Circular Flow Income ($ ) Labor
Households
The circular flow diagram shows the income received and payments made by each sector of the economy.
Firms
Goods (bread ) Expenditure ($ )
Value Added
Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
3
Gross Domestic Product Final Goods and Services In calculating GDP, we can sum up the value added at each stage of production or we can take the value of final sales. We do not use the value of total sales in an economy to measure how much output has been produced.
TABLE 6.1 Value Added in the Production of a Gallon of Gasoline (Hypothetical Numbers) Stage of Production
Value of Sales
Value Added
$3.00
$3.00
(2) Refining
3.30
0.30
(3) Shipping
3.60
0.30
(4) Retail sale
4.00
(1) Oil drilling
Total value added
0.40 $4.00
Exercise A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and sells it to a baker for $3.00. The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. The engineer eats the bread. Compute: • value added at each stage of production • GDP
Exercise Value added - farmer = Value added - miller = Value added - baker = Total Value added =
? ? ? ? = GDP
4
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 ignores all transactions in which money or goods change hands but in which no new goods and services are produced. - Take a few minutes to think of such transactions
GROSS DOMESTIC PRODUCT EXCLUSION OF OUTPUT PRODUCED ABROAD BY DOMESTICALLY OWNED FACTORS OF PRODUCTION
gross national product (GNP) The total market value of all final goods and services produced within a given period by factors of production owned by a country’s citizens, regardless of where the output is produced.
GNP versus GDP Gross National Product (GNP): total income earned by the nation’s factors of production, regardless of where located Gross Domestic Product (GDP): total income earned by domestically-located factors of production, regardless of nationality.
5
GNP versus GDP GNP = GDP + (payments received by U.S owned factors of production from abroad) less (payments made to foreign owned factors of production) (GNP - GDP) = (factor payments from abroad) less (factor payments to abroad)
GNP versus GDP Payments received by U.S. factors of production from abroad include: - wages earned by U.S. citizens working abroad - profits earned by U.S.-owned businesses located abroad - income (interest, dividends, rent) generated from the foreign assets owned by U.S. citizens Payments to foreign factors of production include: - wages earned by foreign workers in the U.S. - profits earned by foreign-owned businesses located in the U.S. - income (interest, dividends, rent) that foreigners earn on U.S. assets
(GNP – GDP) as a percentage of GDP for selected countries U .S .A . B a n g la d es h B ra zil C an ad a C h ile Irelan d K u w ait M e xico S a u d i A rab ia S in g ap o re
0 .1 % 3.3 - 2.0 - 3.2 - 8.8 - 16 . 2 20 . 8 - 3.2 3.3 4.2
6
CALCULATING GDP
expenditure approach A method of computing GDP that measures the amount spent on all final goods 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 goods.
CALCULATING GDP THE EXPENDITURE APPROACH 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 consumption and gross investment (G) Net exports (EX - IM): net spending by the rest of the world, or exports (EX) minus imports (IM)
GDP = C + I + G + (EX - IM)
Calculating GDP The Expenditure Approach TABLE 6.2 Components of U.S. GDP, 2009: The Expenditure Approach Billions of Dollars Personal consumption expenditures (C) Durable goods Nondurable goods Services Gross private domestic investment (l) Nonresidential Residential Change in business inventories Government consumption and gross investment (G) Federal State and local Net exports (EX – IM) Exports (EX) Imports (IM) Gross domestic product
10,089.1
Percentage of GDP 70.8
1,035.0 2,220.2 6,833.9 1,628.8
7.3 15.6 47.9 11.4
1,388.8 361.0 120.9 2,930.7
9.7 2.5 0.8 20.5
1,144.8 1,786.9
8.0 12.5 2.8
392.4 1,564.2 1,956.6 14,256.3
11.0 13.7 100.0
Note: Numbers may not add exactly because of rounding.
GDP = C + I + G + (EX - IM) 14,256.3 = 10,089.1 + 1,628.8 + 2,930.7 + (1,564.2 – 1,956.6)
7
GDP – The Expenditure Approach GDP
=
C
+
I
+
G
+ (EX
-
IM)
2008: 14.369.1 = 10,104.5 + 2,096.7+ 2,878.3 + (1,843 – 2554) 2009: 14,119.0 = 10,001.3 +1,589.2 + 2,914.9 + (1,578 – 1,965) 2010: 2011:
CALCULATING GDP The Expenditure Approach Personal Consumption Expenditures (C) personal consumption expenditures (C) A major component of GDP: 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 The things we buy that do not involve the production of physical things, such as legal and medical services and education.
ECONOMICS IN PR AC TICE Where Does eBay Get Counted? eBay’s business is to provide a marketplace for exchange. In doing so, it uses labor and capital and creates value. In return for creating this value, eBay charges fees to the sellers that use its site. The value of these fees enter into GDP. So while the old knickknacks that people sell on eBay do not contribute to current GDP, the cost of finding an interested buyer for those old goods does indeed get counted.
8
CALCULATING GDP The Expenditure Approach Gross Private Domestic Investment (I) gross private domestic investment (I) Total investment in capital—that is,the purchase of new housing, plant, equipment, and inventory by the private (or non-government) 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 The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.
CALCULATING GDP Gross Private Domestic Investment (I)
change in business inventories The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.
GDP = Final sales + Change in business inventories
CALCULATING GDP Gross Investment versus Net Investment
depreciation The amount by which an asset’s value falls in a given period. gross investment The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period. net investment Gross investment minus depreciation. capitalend of period = capitalbeginning of period + net investment
9
CALCULATING GDP Government Consumption and Gross Investment (G)
government consumption and gross investment (G) Expenditures by federal, state, and local governments for final goods and services. Net Exports (EX - IM)
net exports (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). The figure can be positive or negative.
Calculating GDP The Income Approach
TABLE 6.3 National Income, 2009
National income Compensation of employees Proprietors’ income Rental income Corporate profits Net interest Indirect taxes minus subsidies Net business transfer payments Surplus of government enterprises
Billions of Dollars 12,280.0 7,783.5 1,041.0 268.1 1,308.9 788.2 964.3 134.1 8.1
Percentage of National Income 100.0 63.4 8.5 2.2 10.7 6.4 7.9 1.1 0.1
Calculating GDP The Income Approach
TABLE 6.4 GDP, GNP, NNP, and National Income, 2009
GDP Plus: Receipts of factor income from the rest of the world
Dollars (Billions) 14,256.3 +589.4
Less: Equals: Less: Equals: Less: Equals:
484.5 14,361.2 1,864.0 12,497.2 217.3 12,280.0
Payments of factor income to the rest of the world GNP Depreciation Net national product (NNP) Statistical discrepancy National income
10
Calculating GDP The Income Approach disposable personal income or after-tax income Personal income minus personal income taxes. The amount that households have to spend or save. personal saving The amount of disposable income that is left after total personal spending in a given period. personal saving rate The percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.
Calculating GDP The Income Approach
TABLE 6.5 National Income, Personal Income, Disposable Personal Income, and Personal Saving, 2009 Dollars (Billions) National income Less: Amount of national income not going to households Equals: Personal income Less: Personal income taxes Equals: Disposable personal income Less: Personal consumption expenditures Personal interest payments Transfer payments made by households Equals: Personal saving Personal saving as a percentage of disposable personal income:
12,280.0 261.0 12,019.0 1,101.7 10,917.3 10,089.1 213.9 155.7 458.6 4.2%
11
Nominal Versus Real GDP
current dollars The current prices that we pay for goods and services.
nominal GDP Gross domestic product measured in current dollars.
Real vs. Nominal GDP GDP is the value of all final goods and services produced. Nominal GDP measures these values using current prices. Real GDP measure these values using the prices of a base year.
Real GDP controls for inflation Changes in nominal GDP can be due to: changes in prices changes in quantities of output produced Changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices.
12
Example - Calculation of Real GDP
2009
2010
2011
P
Q
P
Q
P
Q
good A
$30
900
$31
1,000
$36
1,050
good B
$100
192
$102
200
$100
205
Compute nominal GDP in each year Compute real GDP in each year using 2009 as the base year.
Example - Calculation of Real GDP
Nominal GDP multiply Ps & Qs from same year 2009: $46,200 = $30 900 + $100 192 2010: $51,400 = $31 x 1000 + $102 x 200 2011: $58,300 = $36 x 1050 + $100 x 205
Real GDP
multiply each year’s Qs by 2005 Ps 2009: $46,200 = $30 x 900 + $100 x 192
2010: $50,000 = $30 x 1000 + $100 x 200 2011: $52,000 = $30 1050 + $100 205
GDP Deflator The inflation rate is the percentage increase in the overall level of prices. One measure of the price level is the GDP Deflator, defined as
GDP deflator = 100
Nominal GDP Real GDP
13
Exercise Nominal GDP
Real GDP
2005
$46,200
$46,200
2006
51,400
50,000
2007
58,300
52,000
GDP deflator
inflation rate n.a.
Use your previous answers to compute the GDP deflator in each year. Use GDP deflator to compute the inflation rate from 2005 to 2006, and from 2006 to 2007.
Answers
Nom. GDP
Real GDP
GDP deflator
inflation rate
2005
$46,200
$46,200
100.0
n.a.
2006
51,400
50,000
102.8
2.8%
2007
58,300
52,000
112.1
9.1%
NOMINAL VERSUS REAL GDP THE PROBLEMS OF FIXED WEIGHTS The use of fixed-price weights to estimate real GDP leads to problems because it ignores: • Structural changes in the economy. • Supply shifts, which cause large decreases in price and large increases in quantity supplied. • The substitution effect of price increases.
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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 even though they amount to real production. GDP also has nothing to say about the distribution of output among individuals in a society.
LIMITATIONS OF THE GDP CONCEPT THE UNDERGROUND ECONOMY underground economy 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.
Comparison of Per Capita Income
gross national income (GNI) GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation.
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Limitations of the GDP Concept Gross National Income per Capita
FIGURE 6.1 Per Capita Gross National Income for Selected Countries, 2008
Looking Ahead
This chapter has introduced many key variables in which macroeconomists are interested, including GDP and its components. There is much more to be learned about the data that macroeconomists use. In the next chapter, we will discuss the data on employment, unemployment, and the labor force. In later chapters, we will discuss the data on money and interest rates. Finally, we will discuss in more detail the data on the relationship between the United States and the rest of the world.
REVIEW TERMS AND CONCEPTS base year
gross domestic product (GDP)
change in business inventories
gross investment
compensation of employees
gross national income (GNI)
corporate profits
gross national product (GNP)
current dollars
gross private domestic investment (I)
depreciation
income approach
disposable personal income, or after-tax income
indirect taxes minus subsidies
durable goods
national income
expenditure approach
national income and product accounts
final goods and services
net business transfer payments
intermediate goods
fixed-weight procedure government consumption and gross investment (G)
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REVIEW TERMS AND CONCEPTS net exports (EX - IM)
rental income
net interest
residential investment
net investment
services
net national product (NNP)
statistical discrepancy
nominal GDP
surplus of government enterprises
nondurable goods
underground economy
nonresidential investment
value added
personal consumption expenditures (C)
weight
personal income
Expenditure approach to GDP: GDP = C + I + G + (EX IM)
personal saving personal saving rate proprietors’ income
GDP = Final sales + Change in business inventories Net investment = Capital end of period Capital beginning of period
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