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Slide 1
Chapter 7: Measuring Domestic Output and National Income
Slide 2
Assessing the Economys Performance Compares levels of
production (every 3 months) Track fluctuations in growth Used to
create policies to address issues
Slide 3
Gross Domestic Product Annual total value of output of goods
and services (aggregate output)
Slide 4
A Monetary Measure Compares relative values of goods and
services in different years GDP = C + I + G + (X-M)
Slide 5
Counting Goods Intermediate Goods In need of further processing
Final Goods Ready for consumption
Slide 6
Avoid Multiple Counting GDP ignores intermediate goods
Slide 7
Value Added Value of firms output less value of inputs the
firms have bought
Slide 8
GDP Exclusions Financial Transactions Soc. Sec., Welfare
Private Transfer Payments Funds transferred from one person to
another Stock Market Transactions Buying and selling stocks (just
paper; no production) Second Hand Sales Ebay
Slide 9
Aggregate Spending Spending on output comes from 4 sectors
Consumer Spending (C) Investment Spending (I) Government Spending
(G) Net Exports (X-M) GDP = C + I + G + (X-M)
Slide 10
Consumer Spending (C) Personal Consumption Expenditures Covers
all consumer goods and services Largest source of spending GDP = C
+ I + G + (X-M)
Slide 11
Investment Spending (I) Expenditures to increase output later
New capital machinery purchased New construction for firms or
consumers Market value of the change in unsold inventories GDP = C
+ I + G + (X-M)
Slide 12
Government Spending (G) Expenditures on goods, services,
infrastructure, etc. Does not include spending on benefits GDP = C
+ I + G + (X-M)
Slide 13
Net Exports (X-M) Foreign bought US goods (X) Subtract total
imports (M) GDP = C + I + G + (X-M)
Slide 14
GDP Practice The following list shows the total expenditures in
the private, public and foreign sectors in the United States in
2009 (in billions of dollars). Household Consumption (C) = 10,001
Private Investment (I) = 1,590 Government Expenditures (G) = 2,914
Net Exports (X-M) = -386. Calculate total US GDP for 2010. GDP = C
+ I + G + (X-M) Total GDP = 10,001 + 1,590 + 2,914 +(-386) =
$14,119 billion
Slide 15
The Income Approach to GDP The sum of all income sources is
approximately equal to the sum of all spending sources (GDP)
RESOURCE SUPPLIEDINCOME RECEIVED LaborWages LandRent
CapitalInterest Entrepreneurial TalentProfits GDP = C + I + G +
(X-M) = Aggregate Spending
Slide 16
Comparing GDP over time by accounting for different prices over
time
Slide 17
Nominal GDP (Current Dollar, Money GDP) Value of current
production at current prices
Slide 18
Real GDP (Constant Dollar GDP) Value of current production, but
using prices from a point of time to evaluate inflations impact
Example: Valuing 2003 production at 2002 prices creates 2003 Real
GDP
Slide 19
Nominal to Real GDP Example Suppose GDP is made up of just one
product, cups of latte. The table shows how many lattes have been
made in a four-year period, the prices, and a price index. We need
a price index in order to calculate real GDP. This index is a
measure of the price of a good in a given year, when compared to
the price of that good in a reference (or base) year. Using 2000 as
the base year, the index is used to adjust nominal GDP to real GDP
for this one good. First the latte price index, or LPI. YEAR# OF
LATTES PRICE PER CUP NOMINAL GDP PRICE INDEX REAL GDP
20001,000$2$2,000= 100 x $2/$2 = 100 = $2,000
20011,200$3$3,600150$2,400 20021,800$4$7,200200$3,600
20031,600$5$8,000250$3,200 LPI in year t = 100 x (Price of a latte
in year t) / (Price of a latte in base year)
Slide 20
The GDP Price Deflator Used to calculate the rate of price
inflation for all goods produced in a nation Used for signs of
growth and recession Nominal GDP Real GDP GDP Deflator =X 100
Slide 21
GDP Price Deflator Practice 1. If nominal GDP is $100 billion
and real GDP is $80 billion, what is the deflator? 2. If Real GDP
is $200 billion and deflator is 120 what is the nominal GDP? 3. If
nominal GDP is $300 billion and the deflator is 150 what is the
real GDP? Nominal GDP Real GDP GDP Deflator =X 100 1. Deflator is
1252. Nominal GDP is $240 billion 3. Real GDP is $200 billion
Slide 22
Is inflation bad?
Slide 23
Consumer Price Index (CPI) Measures average price level of
consumers goods actually bought EXAMPLE using Market basket of
goods Items in the Market Basket Quantity Purchased
PriceSpendingPriceSpending on 2000 Quantities Chocolate
Bars12$1.50$18$1.75$21 Concert Tickets4$45$180$60$240 Compact
Discs18$16$288$15$270 Total Spending=$486=$531 2000 (Base Period)
2001 (Current Period)
Slide 24
CPI So, 2001 price index = 100 x (531) / (486) = Price Index
current year = 100 x (Spending current year) / (Spending base year)
Items in the basket Quantity Purchased PriceSpendingPriceSpending
on 2000 Quantities Chocolate Bars12$1.50$18$1.75$21 Concert
Tickets4$45$180$60$240 Compact Discs18$16$288$15$270 Total
Spending=$486=$531 2000 (Base Period) 2001 (Current Period)
109.26
Slide 25
Slide 26
Inflation Annual rate of inflation is the percentage change in
CPI from one year to another Consumers can see a cost of living
adjustment to income to keep up with inflation
Slide 27
Nominal and Real Income Nominal = Income in actual currency
terms unadjusted for inflation Real = Inflation-adjusted income
Real income = (nominal income this year) / CPI (in hundredths)
Slide 28
Real Income Example Real income = (nominal income this year) /
CPI (in hundredths) Real income 2002 = $40,000 / 1.816 = $22,026
Real income 2003 = $41,000 / 1.850 = $22,162 Real income increased
by $136 What if the wages did not increase from 2002 to 2003? What
would happen to this persons purchasing power? Real income 2003 =
$40,000 / 1.85 = $21,622 (decrease of $404)
Slide 29
Real Income Activity
Slide 30
Slide 31
Expected Inflation Banks factor expected inflation through
nominal interest rates Nominal Interest Rate = Real interest rate +
Expected inflation
Slide 32
Unexpected Inflation and Examples Effects of unpredictable
inflation Employers and employees Due to rapid inflation workers
nominal income rise by 8%, but prices of goods rise by 10%, the
employer has the advantage Fixed income earners If inflation rises
but minimum/transfer payments do not their purchasing power greatly
diminishes Savers and borrowers Savers put money into accounts but
inflation rises higher than expected hurts the saver Borrowers take
out a loan then inflation rises unexpectedly it hurts the
lenders
Slide 33
Unemployment Frictional Fired employees, newly entered workers
Seasonal Periodic and predicted job loss Structural Changes to a
field that causes loss of job Cyclical Job loss pending the health
of the economy
Slide 34
Full Employment No cyclical unemployment = full employment
Natural Rate of Unemployment in US is 4-6%