Macroeconomic Measurement

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Lecture 2 Macroeconomic Measurement
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Gross Domestic Product Gross Domestic Product is
the value of all goods and services produced
within a country over a given time period for
final use and not for further processing. Gross
National Product is the final value of all goods
and services produced by residents of a country
over a given time period GNP GDP Net
Foreign Payments
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Building GDP the single firm Sales (Money
In) Expenses (Money Out) Business
Sales 1050 Purchases from other
firms 820 Consumer Sales 825 Wages/Salaries 858 G
ovt Sales 125 Soc. Sec. Contributions 27 ?Invent
ory 100 Interest 8 Depreciation 60 S
ales Tax 30 Profit (before
tax) 297 2100 2100
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Point 1 If you want to measure what this firm
produced (ie its value added), net out
interfirm purchases. Sales Value
Added Farmer sells wheat to miller 6 6 Miller
sells flour to bakery 13 7 Bakery sells bread
to grocer 25 12 Grocer sells you
bread 30 5 74 30 So to get GDP
either add up final sales (bread 30) or value
added at each production stage (30)
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Point 2 Extend to Whole Economy Production/Income
Production/Expense Durables for households
(C) Compensation to Employees Nondurables for
households (C) (Wages/salaries/bonuses/ Services
to households (C) employer S.S.
contribution) New housing construction
(I) Proprietors (doctors, farmers)income PE for
businesses (I) Rental Income Change in
inventory (I) Net Interest (businesses
only) Equip, buildings, services for Corp
profits Government (G) Business
transfers/gifts Exports (minus imports)
(X-M) Sales taxes Depreciation Must add
up
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Another Way to Look at This Left Side Right
Side What we produce for What we pay to factors
of consumption, investment, production (Labor,
Capital) government and export plus indirectly
to govt (sales tax) We either spend this
income, save it, or pay taxes So Left
Side So Right Side ? C I G (X
M) C S T
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• A Well Known National Income Identity
• Or
• The Evil Twin Deficits!
• C I G (X M) ? C S T
• Where X M includes goods, services, transfers
  and net foreign factor payments
• I G (X M) ? S T
• S - I ? (G T) (X M)
• (S I) (M X) ? (G T)
• If these are positive, this says that
• Excess savings trade deficit ? Govt deficit
• Excess savings ? Difference between govt deficit
  and trade deficit
• If S I, trade deficit equals govt deficit

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Note You dont have to have twin deficits! (S
I) ? (G T) - (M X) USA (-) ? () - ()
Japan () ? () - (-)
So it is not true that is you have one deficit,
you will have the other. It depends on domestic
savings. Read The Twin Deficits
Identity internationalecon.com/V1.0/Finance/ch5/
5c090.html
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2004 Gross Domestic Product 11,734 Plus
Foreign Net Factor Payments 53 Gross National
Product 11,788 Less Capital Consumption
Allowance 1,434 Net National Product 10,353 L
ess Statistical Discrepancy 77 National
Income 10,276 Less Corp Profits 1,162 Less
Indirect Bus. Taxes 809 Less Bus. Contribution
for Soc. Sec. 822 Less Bus. Net
Interest 506 Less Bus. Transfers to Charity,
etc. 91 Plus Personal Interest Received 1,397 Plu
s Personal Transfers 1,428 Personal
Income 9,713 Less Personal
Taxes 1,049 Disposable Personal Income 8,662
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• Price Indexes
• At least 3 reasons we need to measure inflation
• To calculate real sales or real economic
  activity.
• To index entitlement payments (social security,
  COLA adjustments)
• To forecast nominal interest rates.

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TWO WAYS TO MEASURE INFLATION Laspeyres Index
compare the price of a fixed (old) basket of
goods over time. If the price goes up, assume the
increase is just inflation since quantities
fixed.
This is how the CPI is calculated.
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PAASCHE INDEX Compare the price of a new basket
of goods today to what it would have cost in the
past. If the price goes up, assume the increase
is just inflation.
This was how the GDP deflator was calculated
until 2003.
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HOW TO CALCULATE REAL VALUES Real output (todays
output holding prices constant) ie. P2001
Q2005 To get this just divide current nominal
numbers by the index
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How do you get inflation rates between any two
years if you have the price index in those years.
i.e. suppose you have and you want
P2004/P1990 Then to get annual average
inflation
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Problems With These Methods Laspeyres index tends
to overstate inflation because it assumes you
continue to buy expensive items (ie. Assumes you
do not substitute other cheaper goods) Paasche
index tends to understate inflation because it
assumes you continue to pay old (sometimes
higher) prices for larger quantities today (ie.
We buy more TVs, computers, etc. today yet
denominator assumes we pay old higher
price) So, Laspeyres indices tend to understate
Real growth because they overstate inflation,
Paasche indices do the opposite!!
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So solve the problem average (geometrically)
the two different inflation estimates. This is
called a CHAINED INDEX Used now for GDP
deflator, real GDP calculation and the Chained
CPI.
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TERMINOLOGY Inflation is a persistent trend of
higher prices, ie. prices rising 10 a
year. Disinflation is a trend to lower rates of
inflation, ie. the inflation rate dropped from 5
to 3. Deflation is a trend toward persistently
lower prices, ie. prices are falling 2 a
year. Recession is a period of real economic
decline, traditionally a decline in real GDP for
two or more consecutive quarters but NBER
(National Bureau of Economic Research) makes the
call.
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GRAPHING ECONOMIC DATE Suppose Real GDP growing
10 a year (100, 110, 121, 133.10,) Real GDP
133.1 121 110 100 time Log GDP
4.9 4.8 slope .10 10 4.7 4.6
time