Macroeconomics

1
Macroeconomics

• Gross Domestic Product
• Baumol Blinder ch 25
• Appendix, pp 552 - 557

2
GDP Background

• GDP comes from the work of John Maynard Keynes
  The General theory of Employment,k Interest, and
  Money in 1936.
• The system of measurement devised for collecting
  and expressing macroeconomic data is called
  national income accounting.
• Even though the system is not perfect, it is
  eminently serviceable.

3
GDP Defined

• GDP the sum of the money values of all final
  goods and services produced during a specified
  period of time, usually one year.
• Sometimes this is expressed as the dollar value
  of all goods and services produced in a nation in
  a year.

4
GDP Nominal Real

• Nominal GDP means the GDP expressed in money
  value for that year.
• All prices used are current prices, regardless of
  changes in moneys value.

• Real GDP means GDP corrected for inflation.
• To arrive at this figure the GDP deflator is
  used.
• The GDP deflator is a price index used to track
  inflation across the entire economy.

5
Exceptions to GDP

• Government output is not priced using market
  prices. Instead they are valued with the costs
  of inputs, especially employee time.
• Inventories of unsold goods are also included in
  GDP, even though the goods havent passed through
  markets.
• Investment goods are included in GDP, even though
  they could be considered intermediary goods
  (meaning they are used to create final goods).

6
Measuring GDP

• Three Different Methods are used
• GDP as Sum of Final Goods Svcs
• GDP as Sum of all Factor Payments
• GDP as Sum of Values Added
• Each of these methods yields the same result, the
  only difference between the figures is due to
  bookkeeping or statistical errors.

7
GDP as Sum of Final Goods Services

• The most natural and useful way to measure GDP is
  to add up the final demands of consumers,
  governments, firms and foreigners.
• This yields a simple formula
• GDP C G I (X - M)
• This formula often includes Y for GDP.

8
Example of GDP as Sum of Final Goods Services

• The example to the right shows how simple this
  calculation can be.
• It also shows how important personal consumption
  is.
• Finally we have nominal and real figures

9
GDP as Sum of all Factor Payments

• Factor Payments Incomes
• If we add all incomes in the economy, this too
  can be a measurement of GDP (aka National
  Income).
• This means we can use a second formula for GDP
• GDP Wages Interest Rents Profits NI
• The final part of this formula involves indirect
  business taxes and depreciation.
• GDP NI Indirect business taxes depreciation

10
Example of GDP as Sum of All Factor Payments

• The table to the right shows how GDP can be
  calculated as National Income plus accounting and
  other factors.
• Remember that depreciation is hard to measure.
• Note also that incomes paid to foreign workers
  and incomes earned from foreign firms are
  included here.

11
GDP as Sum of All Values Added

• Value Added A firms revenue from selling
  product minus the amount paid for goods
  services purchased from other firms.
• This method requires that we adjust the final
  amount by including indirect business taxes and
  depreciation, just as we did with factor payments.

12
Value Added Example

• The data on the right show that each step of
  production adds value to a final product.
• From the GDP perspective, the important sum is
  10, not 25.
• 10 is the sum of what each intermediate
  producer has added.

13
GDP Conclusion

• GDP tells us more than how much an economy
  produces
• By tracking GDP over time we discover how fast an
  economy is growing.
• By looking at GDP per capita we get an idea of
  living standards.
• By analyzing the data which are used to determine
  GDP we can infer strengths and weaknesses of a
  nations economy as a whole.