Introduction to Macroeconomics
Chapter 20. Measuring the Macroeconomy
Measuring the Macroeconomy
1.
2.
3.
4.
5.
Measuring Total Output
How to Measure Total Output
GDP Accounting Complications
Measuring Price Changes
Empirical Applications
1. Measuring Total Output
• Monetary Measure of Value
• GDP versus GNP
• Omissions from GDP - does not measure
social welfare
2. How to Measure GDP
• Expenditure Approach
• Income Approach
Circular Flow of Income and Expenditures
Expenditure Approach
• GDP =
Consumption Spending (C)
+ Private Domestic Investment (I)
+ Government Spending (G)
+ Exports - Imports (NX)
• GDP = C + I + G + NX
Expenditure Shares
1998 U.S. Nominal Gross Domestic Product
Government Spending
17.5 %
Investment
17.5 %
Net Exports = - 1.7 % (not shown in slide)
Consumption
66.8 %
Consumption Trends
75%
Percent of GDP
70%
U.S.
65%
Japan
60%
55%
1998
U.S. 66.8 %
Japan 59.7 %
50%
45%
40%
1959
1969
1979
1989
1999
Government Spending Trends
35%
Percent of GDP
30%
25%
U.S.
20%
Japan
15%
1998
U.S. 17.5 %
Japan 18.2 %
10%
5%
0%
1959
1969
1979
1989
1999
Investment Trends
35%
Percent of GDP
30%
Japan
25%
20%
15%
U.S.
1998
U.S. 17.5 %
Japan 20.0 %
10%
5%
0%
1959
1969
1979
1989
1999
Net Export Trends
Percent of GDP
6%
4%
Japan
2%
1998
U.S. - 1.7 %
Japan 2.1 %
0%
U.S.
-2%
-4%
1959
1969
1979
1989
1999
National Income
• National Income with corrections
= GDP
• National Income with corrections
= Personal Income
• Personal Income
- Personal income taxes
- Social Security withholding
= Disposable Personal Income
3. GDP Accounting Complications
• Double Counting
– Intended for “final” use
• excludes intermediate products
– Value added
• excludes used goods
• Depreciation
Depreciation
Gross Domestic Product (GDP)
- Depreciation
= Net Domestic Product (NDP)
Depreciation of Private Capital Stock
80%
70%
60%
Percent of Gross
Private Investment
50%
40%
30%
20%
10%
Percent of GDP
0%
1947 1953 1959 1965 1971 1977 1983 1989 1995 2001
4. Measuring Price Changes
• Price Index - a measure of the change in the
average level of prices
• GDP Deflator
• Consumer Price Index
GDP Deflator
• Nominal GDP
– Value of output measured at actual prices
(current dollar output)
– Does not correct for inflation
• Real GDP
– Value of output based on prices of some base
period (“constant” dollar output)
– eliminates effect of inflation
• GDP Deflator
= Nominal GDP ÷ Real GDP
Simple Economy
Average Prices
Quantity Sold
1992
1994 % Change 1992
$ 12
$ 14
17 %
4
5
Housing
9
10
11 %
3
3
Fun
4
5
25 %
3
4
Machines
20
20
0%
2
2
Food
1994
Nominal GDP
Current year Quantities
x Current year Prices
1992 Nominal GDP
= 1992 Quantities x 1992 Prices
= 1992 Spending on
Food
Housing
Fun
Machines
= 4 • $12 + 3 • $9 + 3 • $4 + 2 • $20
= $48 + $27 + $12 + $40
= $127
1994 Nominal GDP
= 1994 Quantities x 1994 Prices
= 1994 Spending on
Food
Housing
Fun
Machines
= 5 • $14 + 3 • $10 + 4 • $5 + 2 • $20
= $70 + $30 + $20 + $40
= $160
Real GDP
Current year Quantities
x Base year Prices
1992 Real GDP
= 1992 Quantities x 1992 Prices
Food
Housing
Fun
Machines
= 4 • $12 + 3 • $9 + 3 • $4 + 2 • $20
= $48 + $27 + $12 + $40
= $127
1994 Real GDP
= 1994 Quantities x 1992 Prices
Food
Housing
Fun
Machines
= 5 • $12 + 3 • $9 + 4 • $4 + 2 • $20
= $60 + $27 + $16 + $40
= $143
GDP Growth
• Growth in Nominal GDP
= (160 - 127) • 100 = 26%
127
• Growth in Real GDP
= (143 - 127) • 100 = 13%
127
GDP Deflator
GDP Deflator = Nominal GDP • 100
Real GDP
1992 GDP Deflator = 127• 100 = 100.0
127
1994 GDP Deflator = 160 • 100 = 111.9
143
Inflation
Change in Average Level of Prices
= Percent Change in GDP Deflator
Inflation from 1992 to 1994
= (1994 Deflator - 1992 Deflator) • 100
1992 Deflator
= (111.9 - 100.0) • 100 = 11.9%
100.0
Price Indexes
• GDP Deflator
– Base-year prices
– Quantities variable
– Imports excluded
• Consumer Price Index
– Base year quantities
– Prices variable
– Imports included
Problems With Price Indexes
• Substitution bias - changes in relative prices
– between goods (butter vs margarine)
– between stores (small vs large discounters)
• Quality changes and new products
• Chain-weighted indexes
5. Empirical Applications
• Use Real rather than Nominal values
• Compare Per Capita rather than
Aggregates
• Compare Growth Rates rather than
Levels