Chapter 2

Measurement

Measuring GDP: The National Income and Product Accounts

What is GDP and How Do We Measure It?
GDP: Value of Domestically Produced Output Commerce Departments National Income and Product Accounts (NIPA) Business, Consumer, and Government Accounting

The Equivalence of Three Methods

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A Simple Fictional Island Economy

Sectors: a coconut producer, a restaurant, consumers, and a government Coconut producer: produces 10 million coconut, each sold at $2. 6 million go to the restaurant, remaining 4 go to the consumers.

Restaurant: sells $30 million meals

Government: provides protection from attacks from other islands. It collects taxes ($4.5 million from firms, 1 million from consumers). Consumers: work for the business and government, receive interest, pay taxes.
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Table 2.1 Coconut Producer

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Table 2.2 Restaurant

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Table 2.3 After-Tax Profits

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Table 2.4 Government

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Table 2.5 Consumers

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The Product Approach

Value Added: VA = total revenue the value of intermediate goods

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Table 2.6 GDP Using the Product Approach

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The Expenditure approach

GDP = Consumption (C)
+ Investment (I) + Government Expenditure (G) + Net Exports (NX=X-IM)

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Table 2.7 GDP Using the Expenditure Approach

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The Income approach

GDP = Wage Income
+ After-Tax Profits + Interest Income + Taxes

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Table 2.8 GDP Using the Income Approach

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Add in Inventory Investment

Suppose now the coconut producer produces 13 million instead 10 million, but only sell out 10 million. What is GDP now? Answer: $49.5 million.

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Add in International Trade

Suppose now the restaurant imports additional 2 million coconuts from other islands at $2 each. What is GDP now? Answer: $39.5 million.

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What is GNP?
GNP = GDP + NFP
NFP: Net Factor Payments = Factor payments to US citizens - Factor payments to foreigners

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What does GDP Leave Out?

Nonmarket activity: home production, leisure,
Underground economy: illegal drug trade, baby-sitting, Valuing Government Production

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Table 2.9 Gross Domestic Product for 2002

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Nominal and Real GDP and Price Indices

Nominal GDP: GDP at current price
Real GDP: GDP corrected for inflation

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Table 2.10 Real GDP: Example

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Nominal GDP GDP1 = $130, GDP2 = $292 Change = (GDP2-GDP1)/GDP1 = 225% Real GDP Base year 1: RGDP1 = $130, RGDP2 = $176

Change (g1) = 35.4%

Base year 2: RGDP1 = $222.50, RGDP2 = $292 Change (g2) = 31.2%

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Chain-Weighting Scheme

gc g1 g2
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Figure 2.1 Nominal GDP (black line) and Chain-Weighted Real GDP(colored line) for the Period 19472003

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Measures of the Price Level

Implicit GDP Price Deflator = (Nominal GDP / Real GDP) * 100 CPI(t) = (Cost of base year quantities at prices of year t / Cost of base year quantities at base year prices) * 100

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Table 2.11 Implicit GDP Price Deflators: Example Contd

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Figure 2.2 Inflation Rate Calculated from the CPI (blue line), and Calculated from the Implicit GDP Price Deflator (black line).

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Problems Measuring Real GDP and Prices

Substitution Biases: make CPI upward biased. Accounting for Quality Changes: increase in prices maybe reflect the improvement in quality. Inflation is biased upward. Treatment of Newly-Introduced Goods: bias downward GDP growth, upward the inflation
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Measures of Savings, Wealth, and Capital

Flow: a rate (change) per unit of time
Saving, Investment, Consumption,

Stock: the quantity in existence of some object at a point in time

Capital, Wealth,

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Private Disposable Income and Private Sector Saving

Y Y NFP TR INT T
d

S Y C
p d
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Government Surpluses, Deficits, and Government Saving

S T TR INT G
g

S S S Y NFP C G
p g

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Saving, Investment, and the Current Account

S I NX NFP
CA NX NFP S I CA

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S Wealth

I K
CA Claims on Foreigners
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Labor Market Measurement

BLS Categories
Employed Unemployed: unemployed during the past week but actively searched for work during the last four weeks Not in the Labor Force

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 The Unemployment Rate =

Number unemployed / Labor force Participation Rate = Labor force / Total working age population

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