ECON1102 Lecture Notes - Lecture 2: Gross Domestic Product, Net Domestic Product, Gdp Deflator
TOPIC 2: MEASUREING THE MACROECONOMY
y = ax + b
y is endogenous x is the exogenous a is parameter
MOTIVATING QUESTION(S)
- Ho a e opare a outry’s total produtio to aother outry’s?
- Ho a e opare a outry’s total produtio at poit i time to production at another point in
time?
- More geerally, ho a e opare outries’ perforae agaist eah other ad oer tie?
- Answer: MEASUREMENT
MEASUREMENT IS (NEARLY) EVERYTHING
- Consider the wisdoms of R. W. Hamming:
o You Caot Hae A “iee Without Measureet.
o It is through the use of logi ad or preise, areful easureet that e eoe aare of
our progress.
OUTLINE OF TOPIC
1. Measuring State of the Economy (GDP)
– Production vs Expenditure vs Income Approach
2. What’s Iluded i GDP and What Not?
3. Limitations of Aggregate Accounting
4. Measurement Over Time
5. Measuring Unemployment
6. Measuring Inflation
– GDP Deflator vs CPI
MEASURING THE STATE OF THE ECONOMY
- National income accounting provides a systematic method of aggregating the production of diverse
goods into a single measure of overall economic activity.
- National accounting allows us to analyze the state of an economy at a given time, the changes over
time, and differences across countries.
- Gross domestic product (GDP) is the market value of the final goods and services produced in an
economy over a certain period.
- United States GDP was US$ 18.5 trillion in 2016 (or US$ 57,300 per capita)
- Australian GDP was AUS$ 1.6 trillion in 2015 (or AUS$ 51,000 per capita)
- PRODUCTION = EXPENDITURE = INCOME
o The production measure of GDP counts the number of goods produced in the economy.
o The expenditure measure of GDP counts the total purchases in the economy.
o The income measure of GDP counts all the income earned in the economy.
o All three approaches give identical measures of GDP.
o Economic profits are the above-normal returns associated with prices that exceed those
that prevail under perfect competition.
find more resources at oneclass.com
find more resources at oneclass.com
- Q3
Can
have two endogenous variables at the same. Very often both endogenous on x and y axis respectively,
allows us to see the value of both variables. E.g. both quantity and price are endogenous variables. If
two endogenous variables on the x, any variable that is exogenous on the y axis is going to constitute
→ along the curves. If I choose to move one of the endogenous variables then I am looking at one of
the other variables, showing my much x or why is changing.
- If I change an exogenous variable then I am shifting the entire schedule.
EXPENDITURE APPROACH TO GDP
- The national income accounting identity states that Y = C + I + G + NX where Y is GDP in dollars, C is
consumption, I is investment, G is government purchases, and NX is net exports:
o Y = C + I + G + NX
1. Consumption (C) is spending by households on goods an services
2. Investment (I) is spending for the purpose of additional production
3. Government spending (G) is goods and services that the government buys
4. Net exports (NX) is spending on exports (X) minus spending on imports (M)
NB: transfers are govt. payment to individuals (social security, medicare, u/e insurance) are not included in
GDP b/c no goods are produced.
- Net exports (trade balance) are exports minus imports and were equal to negative 3.6 percent of GDP.
- The recent trade deficit indicates that the United States is borrowing goods from the rest of the world.
This deficit must be repaid in the form of trade surpluses in the future.
- How does the trade balance vary with the other components of GDP? What might be the reasons?
• CAPITAL ACCOUNT DEFICIT
• EVERY TRADE BALANCE THERE IS AN OFFSET IN LIABILTIES.
INCOME APPROACH TO GDP
- The income approach measures the sum of all income earned in the economy.
- Capital is the inputs into production other than labor that are not used up in the production process.
- Firms increase capital through investment.
find more resources at oneclass.com
find more resources at oneclass.com
- Depreciation is the deterioration of the capital stock due to wear and tear.
- If we subtract depreciation from gross domestic product,we get net domestic product:
o NDP = C + I + G + (X-M) – depreciation
- The total share of GDP to labor is approximately twothirds while the total share of GDP to capital is
approximately one-third.
- Laor’s share of GDP has remained approximately constant over time.
PRODUCTION APPROACH TO GDP
- There is o doule outig i GDP; oly the fial sale of goods and services count.
- The amount each producer contributes to GDP is called the value added.
- Value added is the revenue generated by each producer minus the value of intermediate products.
- Only new production of goods and services counts toward GDP.
Two ways of Eliminating Double Counting
- Calculate only final output (goods and services purchased for final use)
o A firm would report how much it sold to consumers and how much it sold to producers
(intermediate goods)
- Follow the value added approach
o Value added is the increase in value that a firm contributes to a product or service
o It is calculated by subtracting intermediate goods (the cost of materials that a firm uses to produce a
good or service)from the value of its sales
WHAT IS INCLUDED IN GDP AND WHAT’“ NOT?
- Only goods and services that are transacted through official (and legal) markets are included in GDP.
- GDP does not include a measure of the health of a atio’s people.
- GDP does not include changes in environmental resources.
- Intermediate goods count towards period when they were made. E.g. if they were made in the
previous period then they do not count towards GDP. *if there is ambiguity show that there is
aiguity e.g. either say orret aser … here produtio has take plae i the sae year $2 or if
in previous period $1 million
- If the production of intermediate and final good fall into same peiod, count both in gdp
- If the production of intermediate and final good are in different period, current gdp will only rise by the
difference of the final good and intermediate good i.e. value added
NATIONAL AND DOMESTIC CONCEPTS
- GDP is the total value of all final goods and services produced in an economy in a one-year period
o GDP is output produed ithi a outry’s orders
- Gross National Product (GNP) is the aggregate final output of citizens and businesses of an economy in
one year
o GNP is output produed y a outry’s itizes
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Topic 2: measureing the macroeconomy y = ax + b y is endogenous x is the exogenous a is parameter. Consider the wisdoms of r. w. hamming: (cid:862)you ca(cid:374)(cid:374)ot ha(cid:448)e a (cid:272)ie(cid:374)(cid:272)e without measure(cid:373)e(cid:374)t. (cid:863, (cid:862)it is through the use of logi(cid:272) a(cid:374)d or pre(cid:272)ise, (cid:272)areful (cid:373)easure(cid:373)e(cid:374)t that (cid:449)e (cid:271)e(cid:272)o(cid:373)e a(cid:449)are of our progress. (cid:863) Outline of topic: measuring state of the economy (gdp) Production vs expenditure vs income approach: what"s i(cid:374)(cid:272)luded i(cid:374) gdp and what not, limitations of aggregate accounting, measurement over time, measuring unemployment, measuring inflation. National income accounting provides a systematic method of aggregating the production of diverse goods into a single measure of overall economic activity. National accounting allows us to analyze the state of an economy at a given time, the changes over time, and differences across countries. Gross domestic product (gdp) is the market value of the final goods and services produced in an economy over a certain period.
