Macroeconomic Macroeconomic AggregatesAggregates

The Importance of The Importance of Economic Data Economic Data

For the practicing economists and those who must make economic decisions, measuring the economy accurately is essential.

Faulty economic statistics can lead to bad decisions by government decision-makers and by those running private business firms.

Economic statistics are also important for economists who are developing theories to explain economic growth and fluctuations.

Gross Domestic ProductGross Domestic Product

GDP is the total final output produced within the country over a given period (12-month).

Production of domestic firms in abroad is not calculated in GDP.

It is an alternative measure of national output.

Real and Nominal GReal and Nominal GDDPP

Real GDP is calculated in constant or invariant prices.

Nominal GDP is measured at current market prices.

GDP deflator= Nominal GDP /Real GDP

IPDGDP = ∑Q1 P1 / ∑Q1 P0

Implicit price deflator

Total GTotal GDP and GDP per-capitaDP and GDP per-capita

Total GDP is a measure of a country's overall economic output (economic power).

GDP per head equals to the country's GDP divided by the total number of people in the country. In order to compare living standards of different countries GDP has to be expressed per capita (per head).

TheThe Three Ways of Measuring GThree Ways of Measuring GDDPP

• The Expenditure Method: this measures the total amount that people spend on the final goods and services. (aggregate spending)

The Income Method: this measures the total income that is earned by all the workers and businesses that produced goods and services. (aggregate income)

The Product Method: this measures the total of all the goods and services as they are produced. (aggregate production)

The Circular-Flow Diagram

Market for Factors

of Production

Market for Goods

and Services

Wages, rent, and interest

Income

Goods & Services sold

Goods & Services bought

Labour, land, and capital

Inputs for production

Firms Households

The Expenditure MethodThe Expenditure Method

Total spending in the economy is divided into four categories.

GDP = C + I + G + X

GGDDP = P = CC + I + G + X + I + G + X

C = Personal consumption expenditure

Purchases of final goods and services by households and by non-profit institutions serving households.

The market prices are used as weights in valuing different commodities, because in a well-functioning market economy prices reflect the relative satisfactions that consumers receive from each good.

GDP = C + GDP = C + II + G + X + G + X

Investment includes: ◦Investment in capital (new machines,

factories and other tools that businesses use to produce goods and services).

◦Inventory investment is defined as the change in inventories (+ increase, - decrease in inventories).

GGDDP = C + P = C + II + G + X + G + X

Gross investment represents additions to the stock of durable capital goods (buildings, equipment, inventories) during a year that increase production possibilities in the future.

Gross investment is not adjusted for depreciation.

Depreciation measures the amount of capital that has been used up in a year.

Net investment = gross investment - depreciation

GDP = C + I + GDP = C + I + GG + X + X

Government expenditures include purchases of good and services and all the government payroll expenditures on its employees.

GDP excludes spending on transfer payments.

Transfer payments are government payments to individuals that are not made in exchange for goods or services supplied.

GDP = C + I + G + GDP = C + I + G + XX

Net exports is the difference between exports and imports of goods and services. (trade deficit/trade surplus)

Exports: the total value of the goods and services that people in one country sell to people in other countries.

Imports: the total value of the goods and services that people in one country buy from people in other countries.

Income MethodIncome Method

Income method includes the incomes earned by those involved in the production process (wages, interest, rents and profits) that are the costs of producing society's final products.

GDP = W (wages) + R (rents)+ i (interest)+ P (profit)+ Indirect business taxes+ Depreciation

GDP = GDP = WW ++ R + i + PR + i + P+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Wages, salaries and other employee supplements include all take-home pay, fringe benefits.

Economists classify wages, salaries, and fringe benefits paid to workers as labour income.

GDP = GDP = WW ++ RR + i + P + i + P+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Rental payments are income to persons who own buildings and rent them out. The rents they receive from their tenants are rental payments.

Land rent is paid to landlords by tenants.

GDP = GDP = WW ++ RR + + ii + P+ P+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Interest payments are incomes received from lending.

Because many economic agents pay interest as well as they receive interest, interest payments are defined as the difference between receipts and payments (net interest).

GDP = GDP = WW ++ RR + + i i + + PP+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Gross profits include the profits of large corporations and also of small businesses and farms.

There are two kinds of profits: Profit of corporations Profit of unincorporated enterprises

GDP = GDP = WW ++ R + i + PR + i + P+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Economists classify rental payments, interest payments, and gross profits as capital income

GDP = GDP = WW ++ RR + + i i + + PP+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Indirect business taxes must be included as a separate item in the income method (value added tax levied on goods and services, consumer taxes).

Capital and labour income do not include indirect business taxes paid by the businesses to government. But those taxes are part of the income generated in producing GDP.Therefore we have to add those taxes to capital and labour income.

GDP = GDP = WW ++ RR + + i i + + PP+ Indirect business taxes+ Indirect business taxes+ Depreciation+ Depreciation

Depreciation on capital goods that were used up must appear as an expense in GDP, like other costs.

The difference between investment, the purchases of final goods by firms, and depreciation is called net investment.

The Product MethodThe Product Method

The third measure of GDP adds up the production of each firm or industry in the economy.

Using this method we must to avoid “double counting”. Thus when we measure GDP by production, it is necessary to count only value added by each manufacturer.

Intermediate goodsIntermediate goods

Intermediate goods are part of final goods.

Final goods are goods that undergo no farther processing.

Intermediate goods are not included in the GDP in order to avoid distortions resulting from double counting.

Gross National ProductGross National Product

The gross national product (GNP) is the most comprehensive measure of a nation's total output of goods and services.

GNP is a measure of the value of all the final goods and services newly produced by the nation during some period of time.

NNP and NDPNNP and NDP

Net national product = GNP – depreciation

Net domestic product = GDP – depreciation

National IncomeNational Income

NI represents the total factor income received by labour, capital and land.

NI equals total wages, profits,

rents and interest.

NI = GNP – depreciation – indirect taxes

Disposable IncomeDisposable IncomePersonal income = NI - corporate

undistributed profits

- taxes paid by firms

- social insurance payments

+ benefits (transfer

payments)

Disposable income represents incomes received by households. It measures the income that people have available for spending or saving.

DI = PI – personal taxes

Net Economic WelfareNet Economic Welfare

GNP is an imperfect measure of genuine economic welfare. An alternative measure is net economic welfare.

NEW is an adjusted measure of total national output . It is calculated as additions to gross national product (GNP), including the value of leisure and the underground economy, and deductions such as environmental damage.

Human Development Human Development IndexIndexHDI was found in the United Nations

Development Programme’s (UNDP) and launched by Pakistani Economist Mahbub ul Haq in 1990 with the explicit purpose: ‘‘to shift the focus of development economics from national income accounting to people centred policies’’.

HDI is a composite statistic used to rank countries by level of "human development" and separate developed (high development), developing (middle development), and underdeveloped (low development) countries.

Human Development Human Development IndexIndex

HDI combines three dimensions:◦A long and healthy life: Life expectancy

at birth ◦Access to knowledge: Mean years of

schooling and Expected years of schooling

◦A decent standard of living: GNI per capita (PPP US$)