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Chapter 6
Measuring Total Output and Income
Hossain: MSMC
Gross Domestic Product Formal definition: Nominal GDP
Total value of all final goods and services produced in an economy in given year valued at the current price
Real GDP
Hossain: MSMC 2
Total value of all final goods and services produced in an economy in given year valued at the current price
Total value of all final goods and services produced in an economy in given year adjusted to eliminate the effect of price change
final
current price
adjusted to eliminate the effect of price change
GDP Accounting Bureau of Economic Analysis (BEA)
measures nation’s GDP How do economists at BEA measure
the total value of goods and services produced in an economy
We can go to each and every producers in the economy and ask the value of their output
Well, even if you do that, how do you define value?
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GDP Accounting To a producer, value of his product
might be different from those who buy that product
BEA looks at the market value or the value at which the product is bought and sold
So, if Apple produces 1m ipod in 2010 and each is sold at $150
Total value created in the economy is 1m x $150 = $150m
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GDP Accounting It is not hard to visit companies like
Apple, GM, General Mills and IBM, but for smaller companies, manufacturers, self employed individual it is almost impossible
To simplify their job, BEA does not ask output and price information and multiply them to get the value, but ask the company’s income information
Note, the income will already have the price and quantity information in it
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GDP Accounting So what BEA would get the following
from Apple
Note, by doing so they will directly get the market value
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Income from Amount
ipod 150m
iphone 500m
Mac Book 1b
ipad 300m
Approaches to GDP Accounting
Also note, someone’s income is always someone else’s expenditure
Apple’s income is Bob’s expenditure who just bought his first iphone
There are two approaches to GDP accounting: Income Approach
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Expenditure Approach
Expenditure Approach to GDP
In this approach, BEA counts the expenditures of all major spenders in the economy
There are four of them:
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Consumption
Investment
Government Purchases
Net Export
Component of GDP
Consumption measures the value of goods and services purchased by households during a time period
Investment is the value of all goods produced during a period that will be used in the production of other goods and services. This is often the capital investment Inventory investment is also counted
as investment
Component of GDP
Government purchases Goods and services produced in an
economy, but purchased by government agencies during a time period, and
Total value of output produced by government agencies themselves during a time period.
Component of GDP
Transfer payments are payments that do not require the recipient to produce a good or service in order to receive them
This means, Transfer Payments are government expenditure but not a GDP contributing expenditure
Therefore, it will not be included in the GDP
BEA needs to be careful here
Component of GDP
The final component of expenditure approach is Net Exports that counts the part of the US GDP that goes to the rest of the world
But, note US also imports a lot of goods and services from the rest of the world
Since we are trying to measure GDP using expenditures, we want to include only the part of expenditure that foreigners do on US made products
However, we only have Export and Import expenditures
Component of GDP
Exports (X)Total value of a country’s goods and services to buyers in the rest of the world
Imports (M)Total value foreign-produces goods and services purchased by a country’s residents
Net Exports are exports minus imports. Exports (X) – Imports (M) = Net
exports (Xn)
Components of GDP
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How to compute Final Output
Goods Produced by
Purchased by
Price
Logs Logger Sawmill 12,000
Lumber
Sawmill Builders 25,000
House
Builders Household
125,000
Total Value with double counting
162, 000
Final market value 125,000
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Total Value Added
12,000
13,000
100,000
125, 000