Chapter 5: Measuring a Nation s Income

Transcription

1 Chapter 5: Measuring a Natin s Incme Grss Dmestic Prduct GDP Is the market value f all final gds and services prduced It is strictly a measure f PRODUCTION (And incme earned) within a cuntry In a given perid f time (such as a year) Valued at market prices Dmestic means within the brders f a cuntry Imprtant Facts abut GDP: GDP is basically a prductin cncept GDP is a flw variable (thrugh time) ie nt Stck variable Market Value see fllwing example Example: Item Price Quantity Price * Quantity CDs $ Tapes $ Calculate GDP by multiplying P * Q fr each gd and then adding yur results tgether GDP = (15 * 1,000) + ($5 * 2,000) = $25,000 Imprtant Facts abut GDP cntinued In the natinal accunts, firms and the gvernment are the units which prduce utput in the dmestic ecnmy GDP includes nly final gds nt intermediate gds (input int the prductin prcess) Items nt included in GDP: Used r secnd hand gds Nn-marketed gds and services Financial assets

2 Hw d we actually measure GDP? Three Methds: Value-added (prductin) Apprach Measures items included in GDP by measuring value added at each stage f prductin Expenditure Apprach Calculates GDP by adding tgether spending by all the sectrs (grups) in the ecnmy Incme Apprach Measures GDP by adding tgether the incmes f the factrs f prductin used t prduce dmestic prduct Value-Added Example Cl (i) Cl (ii) Cl (iii) Cl (iv) = Cl (ii iii) Stage f Ttal Value Prductin Cst f Intermediate Prducts Value Added = Ttal Value - Cst f Intermediate Prducts Sheep Ranch $60 $0 $60 Wl $100 $60 $40 Prcessr Suit $175 $100 $75 Manufacturer Retail Outlet $250 $175 $75 Ttal $585 $335 $250 Cntributin t GDP: $250 Ttal value f all transactins: $585

3 Incme Apprach Factrs Land Labur Capital Entrepreneurship Cmpensatin (Incme) Rent Wages Interest & Dividends Prfits Incme Apprach t Measuring GDP First determine: Net Dmestic Incme at Factr Cst Wages, salaries and supplementary labur incme Crprate prfits befre taxes Gvernment enterprise prfits befre taxes Interest and miscellaneus investment incme Accrued net incme f farm peratrs Net incme f nn-farm unincrprated business, including rent Inventry valuatin adjustment Add the fllwing t Net Dmestic Incme at Factr Cst t btain GDP: Indirect taxes less subsidies Capital Cnsumptin Allwance: Als knwn as depreciatin Statistical Discrepancy Expenditure Apprach C - Cnsumptin I Business Grss Investment Residential cnstructin Nn-residential cnstructin Machinery Inventry investment

4 G Gvernment Expenditure n Gds and Services Can be divided int tw categries: Current expenditures Investment expenditures Des nt include: Transfer payments Interest payments n natinal debt NX Net Exprts (X-M) = Exprts Imprts Exprts are included in GDP Gds prduced dmestically and sld t freigners Imprts are nt included in GDP Gds prduced by freigners and sld t dmestic residents Equatin fr GDP expenditure based: C + I + G + X - M GDP vs GNP Anything that happens within the brders f Canada is GDP, and anything that happens in the rest f the wrld is GNP Grss Natinal Prduct (GNP) Measures the incme earned by a cuntry s dmestic residents The incme culd have been earner dmestically r abrad First define: Investment Incme: Payment f interest and dividends fr the wnership f capital GNP = GDP Net investment incme paid t freigners Freign wned cmpanies amng Canada s current largest cmpanies: General Mtrs Canada Owned by Detrit-based, General Mtrs Wal-Mart Canada Whlly wned by Wal-Mart f the US Hnda Canada

5 Owned by Hnda f Japan Cstc Based in Seattle Labatt Brewing Cmpany Purchased by Belgian brewer Interbrew in 1995 Other Key Natinal Accunts Cncepts Persnal Dispsable Incme Cnsumptin (C) + Savings (S) Persnal (Private) Saving The difference between Persnal Dispsable Incme and Cnsumptin Questin: What is anther wrd fr persnal dispsable incme? Take hme pay. Nminal GDP vs. Real GDP Nminal GDP aka Current Dllar GDP Current prductin expressed in current dllars r current prices Real GDP Cnsider the fllwing: Five years ag: cmputer prices were high and cmputer prductin was lw Tday: Cmputer prices are lw (decreased by 25%) and cmputer prductin is high If we express tday s prductin in terms f the prices f five years ag GDP will be (underestimated/verestimated) If we express the prductin f five years ag in terms f the prices f tday GDP will be (verestimated/underestimated) Example: Price and Quantity Data fr a Hypthetical Ecnmy Year 1 Year 2

6 Price Quantity Price Quantity Apples $ $ Bread $ $ Find Nminal GDP fr Year 1 and Year 2 Apples (Price * Quantity) + Bread (Price * Quantity) fr year year Year 1 NGDP = ($1.20*60) + ($1.00*90) = $72 + $90 = $162 Year 2 NGDP = ($1.25*80) + ($1.30*100) = $100 + $130 = $230 T calculate real GDP, first calculate the Fisher Vlume Index using three steps: Step 1: Calculate the Laspeyres Vlume Index fr Year 2: = Year 2 GDP at Year 1 prices = (1.2* *100) = $196 = $ Year 1 GDP at Year 1 prices $162 $162 Year 2 GDP is the utput prduced in Year 2 Year 1 GDP is the utput prduced in Year 1 Laspeyres Vlume Index Step 2: Calculate the Paasche Vlume Index fr Year 2 : = Year 2 GDP at Year 2 prices = $230 = $230 = $ Year 1 GDP at Year 2 prices (60*1.25)+(90*1.3) $192

7 Step 3: Calculate the Fisher Vlume Index fr Year 2 : = (Laspeyres Index) (Paasche Index) = (1.2099)(1.1979) = The Fisher Vlume Index can nw be used t calculate real GDP: Calculatin f Real GDP Using Year 1 as the Base Year: Year Index f Real GDP (Fisher Vlume Index) Real GDP 1 1 $ $162* = $ Nte: the index f real GDP = 1 in the base year Nte: real GDP = Nminal GDP in the base year Calculatin f Real GDP using Year 2 as the Base Year: Year Index f Real GDP Real GDP 1 1/ / = $230 GDP Deflatr A price index that indicates hw much prices rise frm ne year t the next Includes prices f all the gds and services in GDP GDP Deflatr in Year t : = Nminal GDP in Year t * 100% Real GDP in Year t Frm the previus example, using Year 1 as the base year, calculate the GDP deflatr fr Year 1 : GDP deflatr in Year1: = $162 * 100% = 100% $162 Frm the previus example, using Year1 as the base year

8 calculate the GDP deflatr fr Year2: GDP deflatr in Year2: = $230 * 100% = % $ Inflatin Rate Percent change in the GDP deflatr frm ne year t the next Frmula fr Percent Change: [Final value Initial value]/ [Initial value] * 100% [ ]/ [100] * 100% = 17.93% Frmula fr Percent Change can als be used fr real GDP in current and real GDP in base year grwth rates [ ]/ [162] * 100% = 20.39% [ ]/ [191.05] * 100% = 20.39% GDP and Ecnmic Well Being GDP ignres: The Size f The Ppulatin Cnsumptin Of Leisure Nn-Marketed Ecnmic Activities Envirnmental Quality GDP Per Capita Output per persn Is a better measure f ecnmic well-being than real GDP Example: Suppse the ecnmy f Denmark had a real GDP f $40B and China had a real GDP f $220B. But suppse the ppulatin f China was much larger than the ppulatin f Denmark. The ecnmy f Denmark wuld be much better ff GNP When cnsidering the prductin (incme) included in GNP, remember GNP is the prductin (incme earned) by a cuntry s residents r natinals. It des nt matter if that prductin (incme earned) tk place in the residents wn cuntry r in anther cuntry Prblem:

9 Suppse a persn is a Canadian citizen and an American citizen. This persn prduces wine in Mntreal, Quebec. Des the utput f this persn cntribute t: a) Canadian GNP b) Canadian GDP c) American GNP d) American GDP Which f the fllwing gets cunted in GDP? a) The tires n a brand new car (NO) b) The new tires n a used car (YES) c) The sale f an ld pair f shes (NO) d) A transactin invlving financial assets (NO) Next questin Which adds mre t GDP? A pund f grund beef r a pund f caviar? Questin One An art cllectr recently sld a piece f pttery fr $300. He had purchased it fr $200 tw years earlier. Definitins: Subsidy: Payment by the gvernment t a prducer Nt included in GDP Incme based Capital Cnsumptin Allwance Als called depreciatin Is wear and tear and bslescence f capital equipment It is als a fall in the market value f a capital asset Ex. Jan 1, 2010 $20,000 Dec 31, 2010 $15,000 Depreciatin = $5,000 Grss Investment = Net Investment + Depreciatin Net Investment = Grss Investment Depreciatin

10 GNP vs GDP Sme Key Pints Definitin f GNP The ttal market value f all final gds and services prduced by the citizens f a cuntry, regardless f the lcatin f prductin Key Pint # 1 - GNP versus GDP GNP wuld include sme f the incme/utput frm an Apple Cmputer factry in Singapre but wuld exclude sme f the incme prduced by a Hnda factry in Ontari Key Pint # 2 - Size f GNP and GDP The relative size f GDP and GNP depends n the balance between incme frm Canadian investments abrad and incme frm freign investments in Canada Fr mst f Canada s histry Canada has been a net debtr cuntry Therefre, the value f freign-based assets wned by Canadian residents has been less than the value f Canadian based assets wned by freigners This makes Canadian GNP less than Canadian GDP But the difference is small Alternatively, because there are many freign wned firms in Canada (cmpared t Canadian-wned firms abrad) GNP is less than GDP Canadian GNP fr 2005 ttaled $ billin whereas GDP was $ billin Key Pint # 3 GNP, Interest n Bnds and Earnings f Cmpanies Estimates f Canadian GNP differ slightly frm estimates f GDP because GNP adds items such as the earnings f Canadian cmpanies abrad and subtracts items such as interest payments n bnds wned by the residents f say, China and Japan Questin One In 1995 GDP was $780B $16B in incme (interest and dividends) was paid t Canadians by freigners $49B f incme (interest and dividends) was paid t freigners by Canadians a) What is the value f net investment incme paid t freigners? $33B

11 T calculate this, we subtract the amunt paid t Canadians frm the amunt paid by Canadians b) What is the value f GNP? $747B T btain this value, we subtract the net investment incme paid t freigners frm the GDP Questin Tw Suppse a wrker is a Canadian and an American citizen. If that wrker wrks fr Stelc in Sudbury, which f the fllwing des his prductin get cunted in: Canadian GDP YES Canadian GNP YES American GDP NO American GNP YES Questin 3 Suppse Tyta built a new autmbile plant in Mexic using Japanese management practices, Canadian capital, and Mexican labur. Which f the fllwing statements wuld be true at least cnceptually? a) The prtin f the utput cntributed by Canadian capital wuld be included in Canadian GDP b)the prtin f utput cntributed by Japanese management wuld be included in bth Japanese GNP and GDP c) The prtin f utput cntributed by Japanese management wuld nt be included in Japanese GNP and GDP d)the prtin f utput cntributed by Mexican labur wuld be included in bth Mexican GDP and GNP