measuring economic activity_week02

8/3/2019 Measuring Economic Activity_week02

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Week02


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GDP is the market value of all finalgoods and services produced within acountry in a given period of time.


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GDP is the Market Value . . . Output is valued at market prices.

. . . Of All Final . . .

It records only the value of final goods, notintermediate goods (the value is countedonly once).

. . . Goods and Services . . . It includes both tangible goods (food,

clothing, cars) and intangible services(haircuts, housecleaning, doctor visits).


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. . . Produced . . .

It includes goods and services currentlyproduced, not transactions involving goods

produced in the past. . . . Within a Country . . .

It measures the value of production withinthe geographic confines of a country.


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. . . In a Given Period of Time.

It measures the value of production thattakes place within a specific interval of time,

usually a year or a quarter (three months)


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GDP includes all items produced in theeconomy and sold legallyin markets.

GDP excludes most items that are:

produced and consumed at home andthat never enter the marketplace,

produced and sold illicitly, such as illegal

drugs.


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GDP can be measured as .

1. a sum of spending (or expenditure) on finalproducts, or

2. a sum of income or earningsBoth approach yield exactly the samemeasure of GDP, because

every transaction has a buyer and a seller.

every dollar of spending by some buyer is adollar of income for some seller


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Spending

Goods and

services

bought

Revenue

Goods

and services

sold

Labor, land,

and capital

Income

= Flow of inputs

and outputs

= Flow of dollars

Factors of

production

Wages, rent,

and profit

FIRMS

Produce and sell

goods and services

Hire and use factors

of production

Buy and consume

goods and services

Own and sell factors

of production

HOUSEHOLDS

Households sell

Firms buy

MARKETS

FOR

FACTORS OF PRODUCTION

Firms sell

Households buy

MARKETS

FOR

GOODS AND SERVICES


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How to avoid double counting?

We have to include only final goods that areproduced and sold for consumption or investment,

and exclude the intermediate goods that are usedup in making the final goods.

We have to calculate value added at each stage ofproduction.

The value added can be defined as the differencebetween a firms sales and its purchases of materials

and services from other firms.


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GDP Sums up Value Added at EachProduction Stage

Stage ofProduction

Salesreceipts

Less: Cost ofintermediateproducts

Value added(wages,profits, etc.)

(1) (2) (3) = (1) (2)

Wheat 23 0 23

Flour 53 23 30

Baked dough 110 53 57

Final product:bread

190 110 80

Total 376 186 190

Note: final sales of bread = total earnings = total value added = 190


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Expenditure Approach

1 Personal consumption expenditures

Durable goods

Nondurable goods

Services

2 Gross private domestic investment

Fixed investment (both residential and nonresidential)

Change in private inventories

3 Government consumption expenditure and gross investment

(both state and local government)4 Net export of goods and services

Export

Import

Gross Domestic Product (GDP) = 1 + 2 + 3 + 4


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Income Approach

1 Wages, salaries, and other labor incomes

2 Interest

3 Rental income of person

4 Indirect business taxes

5 Depreciation

6 Income of unincorporated enterprises

7 Corporate profits before taxes

Corporate profit taxes

DividendUndistributed profit

Gross Domestic Product (GDP) = sum of 1 - 7


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GDP (Y) is the sum of the following:

Consumption (C)

Investment (I)

Government Purchases (G)

Net Exports (NX)

Y = C + I + G + NX


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Consumption(C)

The spending by households on goods andservices, with the exception of purchases of

new housing. Investment(I)

The spending on capital equipment,inventories, and structures, including newhousing.


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Government Purchases(G)

The spending on goods and services bylocal, state, and federal governments.

Does notinclude transfer payments becausethey are not made in exchange for currentlyproduced goods or services.

Net Exports(NX)

Exports minus imports.


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Nominal GDPvalues the production ofgoods and services at current prices.

Real GDPvalues the production of

goods and services at constant prices. An accurate view of the economy requires

adjusting nominal to real GDP by using theGDP deflator.


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The GDP deflatoris a measure of theprice level calculated as:

It tells us the rise in nominal GDP that isattributable to a rise in prices rather than

a rise in the quantities produced.


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Copyright2004 South-Western

Year Calculating the GDP Deflator

2001 ($200/$200) x 100 = 100

2002 ($600/$350) x 100 = 1712003 ($1,200/$500) x 100 = 240


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Expenditure of Gross DomesticProduct 2009 (Billion Rupiahs)

TYPE OF EXPENDITURE

at current

market

prices

at constant

2000 market

price

1 Private consumption expenditure 3,290,843.3 1,249,011.2

2 General government consumption expenditure 537,588.8 195,907.73 Gross domestic fixed capital formation 1,744,381.2 510,118.1

4 a. Change in inventory -7,264.2 -474.3

b. Statistical discrepancy* -118,994.7 -1,124.2

5 Export of goods and services 1,354,409.4 932,123.6

6 Less import of goods and services 1,197,092.7 708,586.6

7 GROSS DOMESTIC PRODUCT (GDP) 5,603,871.2 2,176,975.58 Net Factor income from abroad -196,219.5 -109,819.3

9 GROSS NATIONAL PRODUK (GNP) 5,407,651.6 2,067,156.2

10 Less net indirect taxes (indirect taxes minus subsidy) 214,833.2 64,782.0

11 Less depreciation 280,193.6 108,848.8

12 NATIONAL INCOME (NI) 4,912,624.9 1,893,525.5* Defferent between GDP by industrial origin and expenditure of GDP


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Gross Domestic Product by IndustrialOrigin 2009 (Billion Rupiahs)

INDUSTRIAL ORIGIN

at current

market

prices

at constant

2000 market

price

1 Agriculture, Livestock, Forestry and Fishery 858,252.0 296,369.3

2 Mining and Quarrying 591,531.7 179,974.9

3 Manufacturing industry 1,480,905.4 569,550.8

4 Electricity, Gas and Water Supply 46,823.1 17,059.8

5 Construction 554,982.2 140,184.2

6 Trade, Hotel and Restaurant 750,605.0 367,958.8

7 Transport and Communication 352,407.2 191,674.08 Financial, Ownership and Business Services 404,116.4 208,832.2

9 Services 573,818.7 205,371.5

GROSS DOMESTIC PRODUCT 5,613,441.7 2,176,975.5


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GDP is the total market value of all final goodsand services produced within a country in agiven period of time.

GNP is the total market value of final goodsand services produced during a given periodby the factors owned by a nation.

GNP = GDP + (IR IP)

IR = factor income received from abroadIP = factor income paid to abroad

IR IP = net factor income received from abroad


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GDP = C + I + G + NX

Less Depreciation

Less Indirect Taxes Equal to National Income (NI)

Minus Direct Taxes

Minus Net Business Saving Plus Transfer payment

Equal to Disposable Income (DI)


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GDP is the best single measure of theeconomic well-being of a society.

GDP per persontells us the income and

expenditure of the average person in theeconomy.


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Higher GDP per person indicates ahigher standard of living.

However, GDP is not a perfect measure

of the happiness or quality of life.


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Some things that contribute to well-being are not included in GDP.

The value of leisure.

The value of a clean environment. The value of almost all activity that takes

place outside of markets, such as the valueof the time parents spend with their children

and the value of volunteer work.


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GDP, Life Expectancy, and Literacy


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Price index (P) is a measure of the

average level of price.

Inflation refers to a situation in which the

economys overall price level is rising.

The inflation rate () is the percentagechange in the price level from the

previous period.


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THE CONSUMER PRICE INDEX The consumer price index (CPI) is a

measure of the overall cost of the goods andservices bought by urban consumer.

The fixed weight is used to calculate CPI. CPI is used to monitor changes in the cost

of living over time.

When the CPI rises, the typical family has tospend more dollars to maintain the samestandard of living.


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Calculating the CPI and the Inflation Rate


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GDP PRICE INDEX

The GDP price index (or GDP deflator)is the price of all goods and servicesproduced domestically.

It is a chain-weighted index that takeinto account the changing shares ofdifferent goods.


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THE PRODUCER PRICE INDEX

The produces price index (PPI)measures the cost of a basket of goodsand services bought by firms rather than

consumers. It measure the level of prices commodity

at the wholesale or producer stage.

The fixed weight used to calculate PPIare the net sales of each commodity.


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The CPI is an accurate measure of theselected goods that make up the typicalbundle, but it is not a perfect measure of

the cost of living.


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1. Substitution bias

The basket does not change to reflectconsumer reaction to changes in relative

prices. Consumers substitute toward goods that have

become relatively less expensive.

The index overstates the increase in cost of

living by not considering consumersubstitution.


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2. Introduction of new goods

The basket does not reflect the change inpurchasing power brought on by the

introduction of new products. New products result in greater variety, which

in turn makes each dollar more valuable.

Consumers need fewer dollars to maintain

any given standard of living.


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3. Unmeasured quality changes

If the quality of a good rises from one year tothe next, the value of a dollar rises, even if

the price of the good stays the same. If the quality of a good falls from one year to

the next, the value of a dollar falls, even ifthe price of the good stays the same.

The BPS tries to adjust the price forconstant quality, but such differences arehard to measure.


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The substitution bias, introduction ofnew goods, and unmeasured qualitychanges cause the CPI to overstate the

true cost of living. The issue is important because many

government programs use the CPI to adjustfor changes in the overall level of prices.

The CPI overstates inflation by about 1percentage point per year.


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Price indexes are used to correct for theeffects of inflation when comparing

dollar figures from different times. Forexample:

Salary SalaryPrice level in 2001

Price level in 19312001 1931

$80,.

$931,

000177

152

579


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Indexation When some dollar amount is

automatically corrected for inflation bylaw or contract, the amount is said to be

indexedfor inflation.


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Real and Nominal Interest Rates Interest represents a payment in the

future for a transfer of money in thepast.

The nominal interestrate is the interestrate usually reported and not correctedfor inflation. It is the interest rate that a bank pays.

The real interest rateis the nominalinterest rate that is corrected for theeffects of inflation.


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Real and Nominal Interest Rates You borrowed $1,000 for one year.

Nominal interest rate was 15%.

During the year inflation was 10%.Real interest rate = Nominal interest rate Inflation

=15% - 10% = 5%


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Assignment-2

Questions for discussion, problems andapplication at the end of the chapter.

measuring economic activity_week02

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