Measuring the

1
Measuring the Macroeconomy
2
Review of the Spending Approach to Measuring GDP
Example 1998.3 (billions of dollars)note new
symbols
3
Y C I X G
Remember X Export - Imports
4
Could you compare the spending shares in 1998
with those of 1996 shown in Fig 20.3 of the
text?
5
The Production ApproachValue Added

• Perhaps the most straightforward way of measuring
  GDP
• But must avoid double counting
• value-added value of production less value of
  intermediate goods
• At each stage of production add value-added only
  to avoid double counting

6
A simple example showing how value-added avoids
double counting
7
The Income Approach

• If we add up what everyone earns we get yet
  another measure of GDP
• Use an example to show how this works

8
Example of the income approach (1998.3 estimates)
9
WGAD

• Now we see why the G is in GDP
• GDP includes production of goods used to replace
  depreciated goods
• that is, GDP is gross because it includes
  depreciation
• net domestic product is GDP - depreciation

10
National Saving

• Income and spending approaches provide a way to
  measure national saving (S)
• Definition for a nation S Y - C - G
• The spending identity shows that
• Y C I X G
• thus we get Y - C - G I X which implies S Y
  - C - G I X
• Or S - I X

11
An Important Implication of S - I X

• If S lt I, then
• Xlt0 and the country has a trade deficit
• Example
• United States now

• If S gt I, then
• Xgt0 and the country has a trade surplus
• Example
• Japan now

12
Circular flow diagram does it help you
understand?
13
Real GDP

• Look at any news report about GDP (example Wall
  Street Journal)
• Here are some of the major components of gross
  domestic product in billions of chained 1992
  dollars
• What are chained 1992 dollars?
• Are they locked up in jail?

14
Example Wall Street Journal report
15
Difference between real and nominal GDP over time
16
End of Lecture