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Measurement of Economic Variables
Gross domestic product (GDP)
• GDP is the dollar value of all final goods and services produced by a domestic economy in a years time.
Gross National Product (GNP)
• GNP=Income earned by U.S. residents
• GNP=GDP-payments to foreigners who own assets located in the U.S. +
payments to U.S. residents who own foreign assets
GDP=Household income in this class
• NNP=GNP-IBT– GNP=Gross National Product– IBT = Indirect Business Taxes (sales tax)– NNP=Net National product\
Assume IBT = 0, so
NNP=GDP
• NI=NNP-CCA = GDP - CCA– NI = National Income– CCA = Capital Consumption Allowence
(depreciation)
Assume CCA = 0
NI=NNP=GDP
• Assume no foreign sector, no retained earnings, no corporate taxes
• GDP = NI = Household Income=Y
Source of Household Income
Uses of Household Income
• Y=C+S+T– C=Consumption– S=Household Saving– T=Taxes
YD=Y-T
YD = Disposable Income
Spending
• AE=C +Ir + G– AE = Aggregate Expenditures– C = Household spending– Ir = Realized Investment (Business spending)– G = Government spending
AE = GDP = Y
Value Added
• VA = Value Added
• = Revenue – Cost of Materials
Value Added.xls
• Sum of VA at each stage of production = price of a good
• Sum of VA for all firms = final price of all output.
• Sum of VA for all firms = GDP
• VA automatically eliminates double counting of output.
• Profits = Revenue – Costs
• Profits = Revenue –
• Wages – Rent – Interest –
• Cost of Materials
• Profits + Wages + Rent + Interest =
• Revenue – Cost of Materals
• Profits + Wages + Interest + Rent = VA
• Sum (Profits+Wages+Interest+Rent) =• Sum(VA)
• Sum (Profits+Wages+Interest+Rent)=GDP
• Sum(Household Income) = GDP
Planned Spending
• Firms may spend more than they plan to (inventories build up)
• Actual Expenditures=C + Ir + G
• Planned Expenditures = C + I + G
Real vs Nominal GDP
1 2 3
1
2
3
Real Output =
bushels of wheat
new cars
gallons orange juice
nQ Q Q Q
Q
Q
Q
Real vs Nominal GDP
•
1 2 3
1
2
3
Real output
bushels of wheat
new cars
gallons of orange juice
nQ Q Q Q
Q
Q
Q
Nominal GDP
• If Nominal GDP doubles is that due to P increases or Q increases ?
1 1 2 2 3 3Nominal GDP
Nominal GDP Real GDP
PQ PQ PQ
P
Two ways to estimate prices
• Directly by constructing price indexes
• Indirectly by computing the implicit price deflator
Price index for groceries
• Market basket (in base year of 1960)– 1 dozen eggs– 2 chickens– 3 pounds hamburger – Other things a typical family might buy
Price of basket =$100 in 1960
Price of basket = $200 in 1970
Price index
• The market basket does not change so any difference must be due to prices.
• Price indexes however miss– Substitution effect– New goods– Quality changes– Discount stores
Computing real GDP using price index
•
Nominal GDPReal GDP
P
Implicit price deflator
• Can get good estimate of Nominal GDP– Nominal GDP = Sum of Value Added
• Estimate real GDP by determining what people buy now using base year prices– If year 2000 is the base year compute real
GDP by determining what year 2003 GDP would have cost in 2000
Implicit price deflator
•
Nominal GDP
Real GDPP
Unemployment
• Overview of BLS Statistics on Employment and Unemployment