Measurement. Chapter 2. Topics in Macroeconomics 2. Economics Division University of Southampton. February 2009

Transcription

1 Measurement Chapter 2 Topics in Macroeconomics 2 Economics Division University of Southampton February 2009 Chapter 2 1/45 Topics in Macroeconomics

2 Gross Domestic Product Introduction Gross Domestic Product (GDP) Dollar value of final output produced during a given period of time within the borders of a country (Log) Real GDP Per Capita (year 2003 pounds) Log RGDP per capita Year Chapter 2 3/45 Topics in Macroeconomics

3 Approaches to Measure GDP Introduction Product approach Sum of value added to goods and services in production across all productive units in the economy Expenditure approach Adds all spending on goods and services in the economy Income approach Adds up all incomes received by economic agents contributing to production NOTE: All three measures must add up to the same value (up to measurement error of course) Chapter 2 4/45 Topics in Macroeconomics

4 A Simple Economy Measuring GDP Introduction Consider an economy composed of the following agents: A corn producer Uses labour to produce corn A pig producer Uses corn and labour to grow pigs Consumers Supply labour, consume corn and pigs, provide loans A government Taxes firms and workers, uses labour to produce government supplied goods or services Chapter 2 6/45 Topics in Macroeconomics

5 Producer 1 Measuring GDP Introduction Corn Producer Total revenue Wages interest on loans Taxes 20 million 5 million 0.5 million 1.5 million Produces 10 million bushels of corn which are sold for 2 per bushel From these 6 million bushels are sold to the pig producer and 4 million to consumers Pays wages of 5 million to workers (who are the consumers) Pays 0.5 million in interest on a loan (to some consumers) Pays 1.5 million in taxes to the government Chapter 2 7/45 Topics in Macroeconomics

6 Producer 2 Measuring GDP Introduction Pig Producer Total revenue Cost of feed corn Wages Taxes 30 million 12 million 4 million 3 million Buys 6 million bushels of corn from the corn producer at 2 per bushel These are intermediate goods Pays wages of 4 million to workers Pays 3 million in taxes to the government Sells all its production to consumers (20 million kg at 1.50 per kilo) Chapter 2 8/45 Topics in Macroeconomics

7 Producers: After-Tax Profits Introduction After-Tax Profits Corn producer Pig producer Total 13 million 11 million 24 million After-Tax Profits = Total revenue - Wages - Interest - Cost of intermediate inputs - Taxes Before-Tax Profits = = 28.5 million Chapter 2 9/45 Topics in Macroeconomics

8 The Government Measuring GDP Introduction Government Tax revenue From producers From consumers Wages 4.5 million 1 million 5.5 million The Government collects taxes from consumers and producers Uses the tax revenue to pay government workers (some consumers) to build a bridge Chapter 2 10/45 Topics in Macroeconomics

9 Consumers / Workers Introduction Consumers Wage income Interest income Taxes Profits distributed by producers 14.5 million 0.5 million 1 million 24 million Consumers work for the producers and government, earning a total of 14.5 million in wages Receive 0.5 million in interest from the corn producer Pay 1 million in taxes to the government Receive after-tax profits of 24 million from producers (consumers own the production units) Chapter 2 11/45 Topics in Macroeconomics

10 Introduction GDP Using the Product or Value Added Approach GDP Using the Product Approach Value added corn Value added pigs Value added government GDP 20 million 18 million 5.5 million 43.5 million GDP is the sum of value added to goods and services in production across all productive units in the economy We need to subtract intermediate goods to avoid double counting Value added for the government is problematic: usually set to the cost of the inputs since we don t have market prices for most goods produced by the government Chapter 2 12/45 Topics in Macroeconomics

11 Introduction GDP Using the Expenditure Approach GDP Using the Expenditure Approach Consumption (C) 38 million Investment (I) 0 Government expenditures (G) 5.5 million Net exports (NX) 0 GDP 43.5 million GDP = Total Expenditures = C + I + G + NX Consumers spend all their income ( 8 million on corn and 30 million on pigs) The government spends all its income There is no investment nor international trade in this example Chapter 2 13/45 Topics in Macroeconomics

12 Introduction GDP Using the Income Approach GDP Using the Income Approach Wage income Before-tax profits Interest income GDP 14.5 million 28.5 million 0.5 million 43.5 million GDP = Total Income = Y = C + I + G + NX GDP is also the sum of all incomes received by economic agents contributing to production Chapter 2 14/45 Topics in Macroeconomics

13 Gross National Product (GNP) Introduction Gross National Product (GNP) Pound value of final output produced by domestic factors of production, regardless of where production takes place Net Factor Payments Income paid to domestic factors of production by the rest of the world - Income paid to foreign factors of production by the domestic economy GNP = GDP + Net Factor Payments Chapter 2 15/45 Topics in Macroeconomics

14 Introduction Problems with Measures of GDP Problems and things that are left out of GDP measures Inequality Non-market activity (home production) Underground economy Problems with value-added of the government and service sector Chapter 2 16/45 Topics in Macroeconomics

15 Nominal vs Real GDP Nominal GDP Measures GDP in the current year in terms of current prices Real GDP at constant prices (base-year prices) Measures GDP in the current year in terms of prices of a base year One problem with this measure is that the base year used matters Chain-weighted Real GDP Essentially uses a rolling base year (eg. average price of two consecutive years) Chapter 2 18/45 Topics in Macroeconomics

16 Data for the Example Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Price Nominal GDP in 2002: 50* * 0.80 = 130 Nominal GDP in 2003: 80* * 1.60 = 292 Nominal GDP in 2004: 100* * 2.00 = 520 Chapter 2 20/45 Topics in Macroeconomics

17 Nominal GDP and GDP Growth Nominal GDP and GDP Growth Nominal GDP ( ) GDP growth (%) GDP Growth from 2002 to 2003 = 292/130-1 GDP Growth from 2003 to 2004 = 520/292-1 Chapter 2 21/45 Topics in Macroeconomics

18 Real GDP at Constant Prices: Base-Year = 2002 Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Price Real GDP in 2002 (this is nominal GDP from before): 130 Real GDP in 2003: 80* * 0.80 = 176 (these are 2002 ) Real GDP in 2004: 100* * 0.80 = 228 Chapter 2 22/45 Topics in Macroeconomics

19 Real GDP at Constant Prices: Base-Year = 2003 Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Price Real GDP in 2002: 50* * 1.60 = (these are 2003 ) Real GDP in 2003 (this is nominal GDP from before): 292 Real GDP in 2004: 100* * 1.60 = 381 Chapter 2 23/45 Topics in Macroeconomics

20 Real GDP at Constant Prices: Base-Year = 2004 Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Price Real GDP in 2002: 50* * 2.00 = 300 (these are 2004 ) Real GDP in 2003: 80* * 2.00 = 400 Real GDP in 2004 (this is nominal GDP from before): 520 Chapter 2 24/45 Topics in Macroeconomics

21 Real GDP at Base-Year Prices Real GDP at Base-Year Prices Base Year = 2002 Real GDP ( ) Real GDP growth (%) Base Year = 2003 Real GDP ( ) Real GDP growth (%) Base Year = 2004 Real GDP ( ) Real GDP growth (%) Chapter 2 25/45 Topics in Macroeconomics

22 Chain-Weighted Real GDP: Average Prices Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Price Average prices from 2002 to 2003: Apples: Oranges: 1.20 Average prices from 2003 to 2004: Apples: Oranges: 1.80 Chapter 2 26/45 Topics in Macroeconomics

23 Chain-Weighted Real GDP Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Avg Price Real GDP using rolling prices: 2002: 50* * 1.20 = : 80* * 1.20 = Real GDP growth from 2002 to 2003: 32.8% Real GDP growth from 2003 to 2004: 30.2% Chapter 2 27/45 Topics in Macroeconomics

24 Chain-Weighted Real GDP at 2002 Constant Prices Chain-Weighted Real GDP Real GDP ( ) GDP growth (%) : (this is Real GDP using rolling prices) 2003: *( %) = : *( %) = Chapter 2 28/45 Topics in Macroeconomics

25 Nominal and Real (Chain-Weighted) GDP [Canada] Chapter 2 29/45 Topics in Macroeconomics

26 Chain-Weighted Real GDP: Average Growth Rates Real GDP Growth at Base-Year Prices Base Year = 2002 Real GDP growth (%) Base Year = 2003 Real GDP growth (%) Base Year = 2004 Real GDP growth (%) Average growth rate from 2002 to 2003: g c = = Average growth rates from 2003 to 2004: g c = = Chapter 2 30/45 Topics in Macroeconomics

27 Chain-Weighted Real GDP at 2002 Constant Prices Chain-Weighted Real GDP Real GDP ( ) GDP growth (%) : (this is Real GDP using 2002 prices) 2003: *( %) = : *( %) = Chapter 2 31/45 Topics in Macroeconomics

28 Nominal and Real (Chain-Weighted) GDP [U.K.] Log RGDP per capita Year Chapter 2 32/45 Topics in Macroeconomics

29 Implicit GDP Price Deflator Implicit GDP Price Deflator = Nominal GDP Real GDP 100 By convention, the price deflator is 100 in the base year (if there is a base year) Of course, the implicit GDP price deflator depends on the measure of real GDP Chapter 2 34/45 Topics in Macroeconomics

30 Implicit GDP Price Deflator Implicit GDP Price Deflator Base Year = % increase Base Year = % increase Base Year = % increase Chain-weighted % increase Chapter 2 35/45 Topics in Macroeconomics

31 Consumer Price Index (CPI): Base-Year = 2002 Quantities and Prices Apples Oranges Apples Oranges Apples Oranges Quantity Price CPI in 2002: 100 CPI in 2003: 100*(50* * 1.60)/130 = (71.2% increase from 2002) CPI in 2004: 100*(50* * 2.00)/130 = (34.8% increase from 2003) Chapter 2 36/45 Topics in Macroeconomics

32 Inflation from CPI and Implicit GDP Price Deflator Inflation Base Year = Base Year = Base Year = Chain-weighted CPI Chapter 2 37/45 Topics in Macroeconomics

33 Figure 2.3: Inflation from CPI and Implicit GDP Deflator Chapter 2 38/45 Topics in Macroeconomics

34 Problems measuring Real GDP and the Price Level Relative prices change over time The quality of goods changes over time New goods appear all the time Chapter 2 39/45 Topics in Macroeconomics

35 Some Definitions Measuring GDP Savings, Wealth, and Capital Labour Market Measurement Private disposable income Y d Y d = Y + NFP + TR + INT T TR: Transfers from the government to the private sector INT : Interest on government debt T : Taxes Private sector saving S p S p = Y d C = Y + NFP + TR + INT T C Government saving S g S g = T TR INT G National saving S S = S p + S g = Y + NFP C G S = C +I+G+NX +NFP C G = I +NX +NFP = I +CA Chapter 2 41/45 Topics in Macroeconomics

36 Nation s Wealth Measuring GDP Savings, Wealth, and Capital Labour Market Measurement The set of assets held by the country as a whole Plants, equipment, and structures Housing (and durables?) Wealth can be accumulated in 2 ways (S = I + CA) Through investment, as addition to the nation s capital stock Through current account surpluses, as Brits accumulate claims on foreigners Wealth and capital are stocks Investment and current account are flows Chapter 2 42/45 Topics in Macroeconomics

37 Labour Market Measurement Savings, Wealth, and Capital Labour Market Measurement Individuals can be in one of three labour market pools Employed Worked full-time or part-time during the last week Unemployed Not employed during the last week but actively searched for work during the last 4 weeks Out of the labour force Neither employed nor unemployed Unemployment rate = Participation rate = Number unemployed Labour force Labour force Total working age population Chapter 2 44/45 Topics in Macroeconomics

38 Labour Market Tightness Savings, Wealth, and Capital Labour Market Measurement Unemployment rate is potentially useful as a measure of market tightness - degree of difficulty firms face in hiring workers But there are two potential problems: Discouraged workers Search intensity Chapter 2 45/45 Topics in Macroeconomics