Measuring Economic Activity

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• Chapter 19
• Measuring Economic Activity

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GDP

• Gross domestic product is the value, at current
  market prices, of all final goods and services
  produced annually in a given country.
• Final goods and services are those sold to
  parties who will use them for consumption,
  investment, government purchases, or exports.
• Not included in GDP
• Intermediate goods used in production of other
  goods
• Sales of used goods
• Most financial transactions

Medical care is a service included as part of
gross domestic product.
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GDP and Value Added

• GDP must include only the value of final goods
  and services if it is to measure total production
  without double counting.
• The value of sales at each stage of production
  can be divided into the value added at that stage
  and the value of purchased inputs.
• The selling price of the final product (a 100
  table, in this case) equals the sum of the values
  added at all stages of production.

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Expenditure Approach to GDP

• Gross domestic product is estimated using the
  expenditure approach.
• This involves adding together the values of
  expenditures on newly produced final goods and
  services made by all economic units
  CIG(Ex-IM).
• Net domestic product is derived from gross
  domestic product by excluding the value of
  expenditures made to replace worn-out or obsolete
  capital equipment.

US, 2012
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National and Domestic Income

• National and domestic income are measured using
  the income approach.
• National income is obtain by adding together the
  values of all forms of income earned by a
  countrys residents.
• Domestic income is derived from national income
  by subtracting receipts of factor income from the
  rest of the world and adding factor income paid
  to the rest of the world.

US, 2012
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Balance of Payments Accounts (1)

• Current account transactions consist of imports
  and exports of goods and services, together with
  international flows of factor income and transfer
  payments.
• The US had a current account deficit of 674
  billion in 2012.

2012, Billions of Dollars
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Balance of Payments Accounts (2)

• Capital and financial account transactions
  consist of international borrowing and lending,
  securities transactions, direct investment, and
  official reserve transactions.
• If all amounts were measured completely and
  accurately, the current account and financial
  account balances would be equal and opposite in
  sign.
• In practice, there is a statistical discrepancy
  indicating errors and omissions in measurement.

2012, Billions of Dollars
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Consumer Price Index for a Simple Economy

• To calculate the consumer price index, divide the
  value of base-year prices valued at current-year
  prices by the value of base-year goods valued at
  base-year prices.
• In this case, the CPI is 170.

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How Good Are the GDP Accounts?

• U.S. national accounts are among the best in the
  world, but they still suffer from major
  limitations
• Accuracy vs. timeliness
• Biases in price indexes and changes in quality of
  goods
• Omission of the underground economy
• Omission of nonmaterial sources of welfare

The quality of computers has increased rapidly
even as their price has fallen.