Measuring Output and The Price Level

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Measuring Output and The Price Level

• Close look at the measures of the big two goal
  variables -- real GDP and the price level (to
  compute the inflation rate).
• Data complied at the National Income and Product
  Accounts (NIPA)

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Measuring Output -- Gross Domestic Product (GDP)

• Gross Domestic Product -- The total market value
  of all currently produced final goods and
  services over a period of time.
• Nominal GDP -- GDP in current dollars
• Real GDP -- GDP in constant dollars (of a base
  year).

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Aspects of GDP Definition

• Over a Period of Time ? GDP is a flow
  measure.
• Currently Produced ? GDP excludes
  the following
• -- sales of used items
• -- transfer payments
• -- purchases of stocks, bonds,
• or land

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• Market Value -- the transaction must be
  recorded and have a specific dollar figure
  attached ? GDP excludes
• -- illegal purchases
• -- household production
• (example fixing your own car)

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Final Goods and Services and Measuring GDP

• Example -- Production of a pair of shoes.

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GDP and Making Shoes

• Step Value Value Added
• Farmer 3 3
• Packing Plant 7 4
• Tannery 13 6
• Shoe
• Manufacturer 25 12
• Wholesaler 40 15
• Retailer 75 35
• Total 163 75

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What Real GDP (Y) Signifies

• Total Production or Output of final goods and
  services
• Total Sales on Final Goods and Services
  (Approximately)
• Total Income (Approximately)
• Correlated With Total Employment

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Computing GDP (Y) -- The Expenditure Approach

• Operative Equation
• Y C I G X - M

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Consumption (C)

• Defined as consumer purchases of final goods and
  services
• components of consumption
• -- nondurable goods
• -- durable goods
• -- services
• largest component of GDP

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Investment (I)

• Business Purchases of New Plant and Equipment
• New Residential Housing
• Changes In Inventories

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Output Versus Sales -- The Approximation

• Example -- 18,000 car, produced in 2000, sold in
  2001
• Year ?C ?I ?G ?(X-M) ?Y
• 2000 0 18 0 0 18
• 2001 18 -18 0 0 0
• Bottom Line The car is counted in the year it
  was produced (as a change in inventory), not the
  year it was sold.

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Investment Goods Versus Intermediate Goods

• The Similarity -- Transactions between
  businesses.
• The Conceptual Difference -- Producing Final
  Goods (Investment) Versus Being Part of a Final
  Good (Intermediate Good).
• The Operational Difference Investment goods
  (e.g. shoe machines) are used repeated times
  intermediate goods (e.g. leather) are used just
  once.

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Government Purchases of Goods and Services (G)

• Not the same as government expenditure (does not
  include transfer payments)
• In the US, the government is a purchaser, not a
  producer.

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Net Exports (X-M)

• Net Exports
• Exports (X) - Imports (M)
• Exports are, by definition, all final goods and
  services (last sale in US).
• Gross National Product (GNP) versus Gross
  Domestic Product (GDP) different accounting of
  multinational firms (firms operating in a country
  other than their origin e.g. a Honda plant in
  Ohio).

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Real GDP and the Quality of Life

• Real GDP does not account for the following
  changes
• -- leisure time
• -- quality differences
• -- crime
• -- environmental impacts

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More Quality of Life Variables Not in Real GDP

• -- nonmarket production activities
• (I) household production
• (II) underground economy
• -- income distribution

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Disposable Income and (Personal) Saving

• Disposable Income (YD) -- total consumer income
  after taxes.
• (Personal) Saving (S)
• S YD - C
• The Saving Rate -- (S)/(YD)

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Measuring The Price Level

• Measures of the Price Level (P)
• -- Consumer Price Index (CPI)
• -- GDP Deflator

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Common Features Price Level Measures

• They are indexes -- compare current prices with
  those of a given base year.
• They consist of a ratio of weighted expenditure
  of prices of selected goods and services (market
  basket) in current year to a weighted average of
  prices in the base year.

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• Weights are based upon quantities of goods and
  services in the market basket.
• Inflation Rate Percentage Change in the Index.
• Example Inflation Rate for 2000
• Inflation Rate2000 P2000 - P1999
• 
  P1999

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Distinctions in Price Level
Measures

• Whats in the market basket?
• Method of computation -- fixed weight index
  versus chain weight index.

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Measure 1 -- The Consumer Price
Index (CPI)

• Market Basket Set of goods and services
  purchases by consumers.
• Fixed Weight Index

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Computing a CPI

• Example -- Compute the CPI for 2000 with 1992 as
  the base year.
• CPI2000
• (Cost of 1992 Market Basket
• Purchased in 2000)
• (Cost of Actual Consumer
• Purchases in 1992)

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Biases in CPI (as a Fixed
Weight Index)

• Entry Bias -- goods leaving and entering the
  market basket.
• Quality Bias -- different quality of the same
  goods.
• Outlet Bias -- retail vs outlet prices?
• Substitution Bias -- changing quantities over
  time due to demand response to goods that have
  become relatively expensive.

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Implications -- CPI Bias

• CPI inflation overstates the true inflation rate.
• Implication -- reforming Social Security.

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Measure 2 -- The GDP Deflator

• Market Basket -- set of final goods and services
  that are used to compute GDP (macro measure of
  price level).
• Chain Weight Index -- reduces biases associated
  with fixed weight index.

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Converting Nominal GDP to Real
GDP

• Example -- find Real GDP 2000
• Real GDP2000 Nominal GDP2000
• GDP
  Deflator2000
• Real GDP for other years is computed the same
  way.
• Real GDP Growth Percentage Change in Real GDP.

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Sources to Obtain Macroeconomic Data

• The Economic Report of the President (Historical
  Data)
• Economic Indicators (Recent)

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Some Websites for Macro Data and Information

• www.federalreserve.gov (Federal Reserve)
• www.stls.frb.org/fred (Federal Reserve
  Economic Data)
• www.bea.doc.gov (Bureau of
  Economic Analysis)
• www.dismal.com (neat macro
  stuff)