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Lecture 12:Measuring GDP. What is the circular flow of income and expenditure? How are GDP, real GDP, and the average price level measured? What are the shortcomings of each measure of economic performance? We will be adding some slides to todays talk. Direction for Next Week. - PowerPoint PPT Presentation
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Lecture 12:Measuring GDP
What is the circular flow of income and expenditure?
How are GDP, real GDP, and the average price level measured?
What are the shortcomings of each measure of economic performance?
We will be adding some slides to todays talk
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Direction for Next Week
Have seen that Unemployment and Inflation are the twin evils inflation: see pgs 127-128 for
discussion of index calculation
Today GDP as a barometer of the economys well-being
Next. How is GDP determined??
Your Weekend
Parkin Chapter 6 and 7 EIA 7, There is nothing else to do!!!!!!!
Economic Barometers The U.S. Department of Commerce
publishes GDP statistics every quarter (three months). These statistics are a barometer of the economy, telling us: how fast it has grown the rate of inflation
Companies use this data to forecast future demand for their products.
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Gross Domestic Product
Gross domestic product (GDP) is the dollar value of total production of goods and services in a country during a calendar year.
you can plot the time path of GDP in EIA
the easiest way to understand GDP is to use a circular flow diagram.
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The Circular Flow ofIncome and Expenditure
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Sectors of the Economy
The economy has four sectors: households firms governments the rest of the world
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Markets of the Economy
The economy has three aggregate markets: factor markets
goods and services markets (heart) financial markets
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Gross Domestic Product
Gross domestic product is the value of aggregate production in a country during a year.
GDP can be valued one of two ways: By what buyers pay for it By what it costs producers to make it
These two ways of adding up GDP always give the same answer.
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Aggregate Expenditure
The total amount that buyers pay for the goods produced is aggregate expenditure.
Aggregate expenditure includes: Consumption (C) Investment (I) Government purchases (G) Net exports (NX)
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Injections and Leakages
Leakages from the circular flow of spending and income are saving, net taxes, and imports.
Injections into the circular flow include investment, government purchases, and exports.
Injections always equal leakages. why is this important?
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The Expenditure Approach
The expenditure approach measures GDP by collecting data on: consumption expenditure (C) investment (I) government purchases (G) net exports (NX)
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Gross Domestic Product
Expenditure Equals Income
Y = C + I + G + NX
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Gross Domestic Product
Measuring U.S. GDP
1) Expenditure Approach
2) Income Approach
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Gross Domestic Product
Expenditure Approach Uses data on consumption expenditure,
investment, government purchases, and net exports
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Gross Domestic Product
Expenditure Approach Personal consumption expenditures are
the expenditures by households on goods and services produced in the United States and the rest of the world
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Gross Domestic Product
Expenditure Approach Gross domestic investment is
expenditure on capital equipment and buildings by firms and expenditure on new homes by households. Also, it includes the change in inventories.
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Gross Domestic Product
Expenditure Approach Government purchases of goods and
services are the purchases of goods and services by all levels of government.
• Does not include transfer payments
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Gross Domestic Product
Expenditure Approach Net exports of goods and services are
the value of exports minus the value of imports
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GDP in 1997
Item Amount(billion $)
% ofGDP
Consumption (C) 5,628 68.7
Investment (I) 1,133 15.3
Government (G) 1,275 17.4
Net exports (NX) -98 -1.4
GDP (Y) 7,938 100.0
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Expenditures Not in GDP
Aggregate expenditure equals GDP. However, not all the things that people and
businesses buy are included in this final expenditure.
Spending not part of GDP includes: Intermediate goods and services Used goods Financial securities
Why are these excluded?
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Value Added andFinal Expenditure
Value addedFarmer Farmer’s
value added
Final expenditure
Intermediate expenditure
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Value Added andFinal Expenditure
Value addedFarmer
Miller
Farmer’svalue added
Value of wheat
Miller’svalue added Final
expenditure
Intermediate expenditure
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Value Added andFinal Expenditure
Value addedFarmer
Miller
Baker
Farmer’svalue added
Value of wheat
Valueof flour
Miller’svalue added
Bakersvalue added
Final expenditure
Intermediate expenditure
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Value Added andFinal Expenditure
Value addedFarmer
Miller
Baker
Grocer
Farmer’svalue added
Value of wheat
Valueof flour
Wholesalevalue of bread
Miller’svalue added
Bakersvalue added
Grocer’s value added
Final expenditure
Intermediate expenditure
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Value Added andFinal Expenditure
Value addedFarmer
Miller
Baker
Grocer
Consumer
Farmer’svalue added
Value of wheat
Valueof flour
Wholesalevalue of bread
Retail value of bread;Final Expenditure on bread
Miller’svalue added
Bakersvalue added
Grocer’s value added
Final expenditure
Intermediate expenditure
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Intermediate Goodsand Services
Intermediate goods and services are the goods and services that firms buy from each other and use as inputs in the goods and services they eventually sell to final users.
The way a good is counted depends on its use. Ice cream sold to you is a final good, while ice cream sold to a restaurant is an intermediate good.
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Used Goods
Expenditure on used goods (previously owned goods) is not part of GDP because these goods were counted as GDP in the period in which they were originally produced.
However, the services of sales people and firms who sell used goods are included in GDP.
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Financial Securities
Firms often sell financial securities such as stocks and bonds to finance purchases of capital goods.
Since GDP already includes the amount spent on producing new capital goods, it would be double counting to include the amount raised financing the purchase.
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Aggregate Expenditure, Income, and GDP
Aggregate expenditure equals aggregate income.
The Department of Commerce uses both approaches to estimate GDP because their estimates are based on samples of information.
They can check one aggregate against the other.
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We will use the aggregate expenditureapproach in any calculation of GDP onan exam.
Distinguishing Real and Nominal GDP
Ck out EIA Real gdp = Nom gdp / price index economic well-being is increased with an
increase in real gdp so we have to subtract price inflation from nominal gdp growth.
the numbers you see reported in the WSJ are inflation adjusted numbers or real gdp
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The U.S. GDP Balloon
1996
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The U.S. GDP Balloon
GDPdeflator
1996
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The U.S. GDP Balloon
GDPdeflator
19961992
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Limitations of GDP as a measure of well-being
see pages 132-133 in your text GDP is used as a measure of
economic well-being. Think of GDP as output (or aggregate income). When GDP increases the total economic pie increases so presumably each individual has the opportunity to consume a bigger piece of the pie
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But is GDP a good measure of well-being?
? overadjustments for inflation. confusing quality changes with inflation
household production underground economic activity quality of life issues
health, liesure, pollution, political freedom.
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