Final goods and services. Produced in a country in a given period of time

Transcription

1 Chapter 4

2 1. Explain how economists define and measure an economy's output 2. Apply the expenditure method for measuring GDP to analyze economic activity 3. Define and compute nominal GDP and real GDP 4. Discuss the relationships between GDP and economic well-being 4-2

3 Gross Domestic Product (GDP) is The market value of Final goods and services Produced in a country in a given period of time 4-3

4 Aggregate measure of quantities produced More expensive items receive a higher weighting Orchardia Apples Bananas Shoes Price $0.25 $0.50 $20.00 Quantity GDP contribution $1.00 $3.00 $60.00 Orchardia's GDP is $

5 Government goods and services are not sold in the market How to deal with this problem? Government production is valued at cost 4-5

6 Final goods and services are consumed by the ultimate user Intermediate goods and services are used up in the production of final goods Example 4.2: Barber charges $10 per haircut A barber's assistant earns $2 per haircut for providing services such as shampooing and sweeping up What is haircut's contribution to GDP? Difficult to measure final goods. 4-6

7 Value added is the market value of the product minus the cost of inputs purchased from other firms Company Revenues Cost of Purchased Inputs Value Added ABC Grain $0.50 $0.00 $0.50 General Flour $1.20 $0.50 $0.70 Hot'n'Fresh $2.00 $1.20 $0.80 Total $

8 "Domestic" in GDP means the activity is measured within a country's borders Value must be produced in the year considered 4-8

9 Users of final goods All goods produced are purchased by one of these groups in a given year GDP can be measured two ways (1) Market Value (2) Total spending for final goods less value of import 4-9

10 Consumption $11,484.4 Durable Goods $1,249.3 Non-durable Goods 2,601.9 Services 7,633.2 Investment 2,648.0 Business Fixed Investment 2,054.0 Residential Inventory 74.1 Government Purchases 3,143.9 Net Exports Exports 2,262.9 Imports 2,770.2 GDP $16,

11 Consumption expenditure is spending by households for goods and services Consumer durables are long-lived consumer goods Consumer non-durable goods are shorter-lived goods Services are the largest component of consumer spending 4-11

12 Investment is spending by firms on final goods and services Business fixed investment is purchases of new capital goods Residential investment is construction of new homes and apartment buildings Inventory investment is the change in unsold goods to the company's inventory 4-12

13 Financial investment Economic investment: the increase in the capital goods used to produce other goods 4-13

14 Government purchases are final goods and services bought by federal, state, and local governments Excludes transfer payments Excludes interest paid on government debt 4-14

15 Net exports equal exports minus imports Exports are goods and services produced domestically and sold abroad Imports are purchases in the US of goods and services produced abroad 4-15

16 Terminology Y Gross Domestic Product or output C Consumption Expenditure I Investment G Government Purchases NX Net Exports Expenditure approach to measuring GDP Y = C + I + G + NX 4-16

17 Example 4.5 Sector # Cars Purchased GDP Contribution Consumers 700,000 $ billion Businesses 200, ,000 $3.000 $3.375 billion Government 50,000 $0.750 billion Net exports 25,000 $0.375 billion Total 1,000, ,000 $ $ billion 4-17

18 When a good is sold, its proceeds are distributed to workers or business owners GDP = labor income + capital income Labor income is wages, salaries, benefits, and incomes of the self-employed Capital income pays for physical capital and intangibles Measured before tax. 4-18

19 Production Expenditure Income Market Value of Final Goods and Services Consumption Investment Government purchases Net exports Labor Income Capital Income 4-19

20 Compare GDP for different years to see how much output has changed GDP changes over time because To see how much output has grown, use only the changes in quantities 4-20

21 What are the norminal GDP in 2009 and 2013? $175 and $420 Number of Pizzas Price of Pizza Number of Calzones Price of Calzones $10 15 $ $12 30 $6 4-21

22 Real GDP values output in the current year using the prices from the base year Nominal GDP values output in the current year using prices from the current year 4-22

23 How to calculate real GDP for 2013? $350 How to calculate real GDP for 2009? $175 Number of Pizzas Price of Pizza Number of Calzones Price of Calzones $10 15 $ $12 30 $6 4-23

24 Usually, nominal and real GDP increase each year Nominal GDP can go up and real GDP go down Nominal GDP will be smaller than real GDP if the prices in the current year are less than in the base year Real GDP could rise and nominal GDP fall, but this is rare 4-24

25 Real GDP is a flawed measure of wellbeing Maximizing GDP will not necessarily maximize national well-being 4-25

26 Amount of leisure time has increased in the past 100 years Leisure produces no goods for market 4-26

27 GDP omits services that are not traded in markets Valuing these services would be difficult Nonmarket activities are important in poor countries 4-27

28 Suppose a factory is built in your town Suppose further that the factory creates pollution 4-28

29 No adjustment is made for the decline in resource availability when mining or other harvesting is done Environmental quality and resource depletion are difficult to value 4-29

30 GDP does not account for intangibles people value Very important, education

31 GDP does not capture the effects of income inequality U.S. uses an absolute standard of poverty Inequality matters and it is increasing in the US 4-31

32 GDP omits and undervalues some goods and services GDP per capita is positively associated with several measures of well-being 4-32

33 Gross Domestic Product Production Method Expenditure Method Income Method Real and Nominal Values GDP and Well- Being 4-33

34 (1) Definition of GDP (2) GDP can be calculated three ways. (3) Real GDP and nominal GDP. (4) Why real GDP is an imperfect measure of economic well-being. McGraw-Hill Education. All rights reserved. 4-34

35 George and John, stranded on an island, use clamshells for money. Last year George caught 400 fish and 5 wild boars. John grew 200 bunches of bananas. In the twoperson economy that George and John set up, fish sell for 1 clamshell each, boars sell for 10 clamshells each, and bananas go for 6 clamshells per bunch. George paid John a total of 30 clamshells for helping him to dig bait for fishing, and he also purchased five of John s mature banana trees for 30 clamshells each. What is the GDP of George s and John s island in terms of clamshells? McGraw-Hill Education. All rights reserved. 4-35

36 GDP is the market value of production and is equal to: = (400 fish 1 clamshell per fish) + (5 boars 10 clamshells per boar) + (200 bunches of bananas 6 clamshells per bunch) = ,200 = 1,650. McGraw-Hill Education. All rights reserved. 4-36

37 MNLogs harvested logs (with no inputs from other companies) from their property in northern Minnesota. They sold these logs to MNLumber for $1,500 and MNLumber cut and planed the logs into lumber. MNLumber then sold the lumber for $3,000 to MNFurniture. MNFurniture used the lumber to produce 100 tables that they sold to customers for $80 each. McGraw-Hill Education. All rights reserved. 4-37

38 Company Revenues Cost of purchased inputs Value added MNLogs $ $ $ MNLumber $ $ $ MNFurniture $ $ $ b. Suppose that all of these transactions took place in By how much did GDP increase because of these transactions? McGraw-Hill Education. All rights reserved. 4-38

39 GDP Consumption expenditures $550 Exports $75 Government purchases of goods and services $200 Construction of new homes and apartments $100 Sales of existing homes and apartments $200 Imports $50 Beginning-of-year inventory stocks $100 End-of-year inventory stocks $125 Business fixed investment $100 Government payments to retirees $100 Household purchases McGraw-Hill of durable Education. goods All rights reserved. $

40 1. Consumption expenditures are $550. These already include household purchases of durable goods, so those would not be counted again. 2. Investment expenditures are $225. This is the sum of residential construction ($100) plus business fixed investment ($100) plus inventory investment (change in stocks over the year, or $25). Sales of existing homes and apartments are not counted in investment or GDP. 3. Government purchases are $200. Government payments to retirees are transfers and are not counted. 4. Net exports are $25. Net exports equal exports ($75) minus imports ($50). GDP is the sum of the four components: $550 + $225 + $200 + $25 = $1,000. McGraw-Hill Education. All rights reserved. 4-40