chapter 08: gdp: measuring total production and...

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‹#›Macroeconomics6th edition

Chapter 8GDP: Measuring Total Productionand Income

Modified by Yulin HouFor Principle of MacroeconomicsFlorida International UniversitySummer 2017

Copyright © 2017 Pearson Education, Inc. All Rights Reserved


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Some Important Macroeconomic TermsBusiness cycle: Alternating periods of economic expansion andeconomic recession.

Expansion: The period of a business cycle during which the totalproduction and total employment are increasing.

Recession: The period of a business cycle during which totalproduction and total employment are decreasing.

Economic growth: The ability of an economy to produceincreasing quantities of goods and services.

Inflation rate: The percentage increase in the price level from oneyear to the next.


‹#›‹#›8.1 Gross Domestic Product MeasuresTotal Production

Gross domestic product (GDP): the market value of all finalgoods and services produced in a country during a period of time,typically one year.


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“Market Values”

We cannot add together the number of cars, melons, haircuts, andall other goods and services without agreeing on a common wayto measure them.


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“Final Goods and Services”A final good or service is a good or service purchased by a finaluser. These are what are used to calculate GDP.

• Why? If we counted intermediate goods and services aswell, ones that were inputs into another good or service, suchas a tire on a truck, then we would end up double counting.


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Follow the Spending to Measure GDP

To measure GDP, the Bureau of Economic Analysis (BEA) in theDepartment of Commerce measures four major categories ofexpenditures:• Personal consumption expenditures, or consumption (C)• Gross private domestic investment, or investment (I)• Government consumption and gross investment, or

government purchases (G)• Net exports of goods and services, or net exports (NX)

GDP can be expressed as the sum of these:

Y = C + I + G + NX


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Consumption

Y = C + I + G + NX

Consumption is spending by households on goods and services,not including spending on new houses (which are counted insteadin investment).


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Investment

Y = C + I + G + NX

Investment is spending by firms on new factories, office buildings,and additions to inventories, plus spending by households andfirms on new houses.


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Government Purchases

Y = C + I + G + NX

Government purchases are spending by federal, state, and localgovernments on goods and services, such as teachers’ salaries,highways, and aircraft carriers.

This does not include transfer payments, since those do notresult in immediate production of new goods and services.


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Net Exports

Y = C + I + G + NX

Net exports are the value of exports minus the value of imports.

This difference might be positive or negative


‹#›‹#›8.2 Does GDP Measure What We WantIt to Measure?

GDP can be a useful tool to measure total output in an economy.Many people go further than this, interpreting GDP as a measureof the well-being of citizens.

However, GDP has shortcomings as both a• Measure of total production and a• Measure of well-being.


‹#›Shortcomings of GDP as a Measure ofTotal Production

Two important types of production are omitted from the BEA’smeasurement of GDP:

Household production such as childcare, cleaning, and cooking isnot typically paid for with money.

Underground economy: Buying and selling of goods and servicesthat is concealed from the government to avoid taxes or regulations,or because the goods and services are illegal.


‹#›Shortcomings of GDP as a Measure ofWell-Being

GDP would not reflect:• The value of leisure• Pollution and other negative effects of production• Crime and other social problems• The distribution of income

• Note: A person’s well-being depends on many factors. Thus,GDP is not a perfect measure of well-being.


‹#›‹#›8.3 Real GDP versus Nominal GDP

• Nominal GDP—the value of final goods and servicesevaluated at current-year price.

• Real GDP—the value of final goods and services evaluated atbase-year prices.


Calculating Real GDP: An Example (base year: 2009)

100209015Shoes

10801190Pizzas

$50100$4080Eye examinations

PriceQuanitityPriceQuantityProductBlank2017Blank2009Blank

The table shows output and prices in 2009 and 2017.• Calculating the total value of output in 2009 gives:

$3,200 + $990 + $1,350 = $5,540.

To calculate real GDP in 2017, we use the prices from 2009.• This gives real 2017 GDP in 2009 dollars of $6,680.

chapter 08: gdp: measuring total production and...

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