Measuring a Nation's Income: Understanding Gross Domestic Product (GDP), Lecture notes of Economics

Download Measuring a Nation's Income: Understanding Gross Domestic Product (GDP) and more Lecture notes Economics in PDF only on Docsity! Lecture 1: Gross Domestic Product MEASURING A NATION’S INCOME 0 August 28, 2014 Prof. Wyatt Brooks MEASURING A NATION’S INCOME 1 Structure of the Course  First Part of the Class:  The macroeconomy in the long run  Why are countries rich and poor?  What can government policy do about it?  Second Part of the Class:  The macroeconomy in the short run  What are “business cycles”?  How should governments react to them? MEASURING A NATION’S INCOME 4 …the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… Goods are valued at their market prices, so:  All goods measured in the same units (e.g., dollars in the U.S.)  Things that don’t have a market value are excluded. MEASURING A NATION’S INCOME 5 …the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… Final goods: intended for the end user Intermediate goods: used as components or ingredients in the production of other goods GDP only includes final goods – they already embody the value of the intermediate goods used in their production. MEASURING A NATION’S INCOME 6 …the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… GDP includes tangible goods (beer, wine, brats, ketchup…) and intangible services (dry cleaning, concerts, cell phone service). MEASURING A NATION’S INCOME 9 …the market value of all final goods & services produced within a country in a given period of time. Gross Domestic Product (GDP) Is… Usually a year or a quarter (3 months) MEASURING A NATION’S INCOME 10 The Components of GDP  Recall: GDP is total spending.  Total spending is classified into four components:  Consumption (C)  Investment (I)  Government Purchases (G)  Net Exports (NX)  These components add up to GDP (denoted Y): Y = C + I + G + NX MEASURING A NATION’S INCOME 11 Consumption (C)  is total spending by households on goods & services.  Note on housing costs:  For renters, consumption includes rent payments.  For homeowners, consumption includes the imputed rental value of the house, but not the purchase price or mortgage payments. MEASURING A NATION’S INCOME 14 Net Exports (NX)  NX = exports – imports  Exports represent foreign spending on the economy’s goods & services.  Imports are the portions of C, I, and G that are spent on goods & services produced abroad.  Adding up all the components of GDP gives: Y = C + I + G + NX MEASURING A NATION’S INCOME 15 U.S. GDP and Its Components, 2011 –1,819 8,283 7,134 34,283 $47,881 per capita –3.8 17.3 14.9 71.6 100.0 % of GDP –568 2,594 2,236 10,729 $14,991 billions NX G I C Y MEASURING A NATION’S INCOME 16 France GDP and Its Components, 2011 –1,023 8,952 7,527 21,082 $36,538 per capita –2.8 24.5 20.6 57.7 100.0 % of GDP –65 565 476 1,330 $2,306 billions NX G I C Y MEASURING A NATION’S INCOME 19 Real versus Nominal GDP  Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not.  Nominal GDP values output using current prices. It is not corrected for inflation.  Real GDP values output using the prices of a base year. Real GDP is corrected for inflation. MEASURING A NATION’S INCOME 20 The GDP Deflator  The GDP deflator is a measure of the overall level of prices.  Definition:  One way to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator from one year to the next. GDP deflator = 100 x nominal GDP real GDP A C T I V E L E A R N I N G 1 Computing GDP 21 Use the above data to solve these problems: A. Compute nominal GDP in 2007. B. Compute real GDP in 2008. C. Compute the GDP deflator in 2009. 2007 (base yr) 2008 2009 P Q P Q P Q Good A $30 900 $31 1,000 $36 1050 Good B $100 192 $102 200 $100 205 MEASURING A NATION’S INCOME 24 GDP and Economic Well-Being  Real GDP per capita is the main indicator of the average person’s standard of living.  But GDP is not a great measure of well-being. MEASURING A NATION’S INCOME 25 GDP Does Not Value:  the quality of the environment  leisure time  non-market activity, such as the child care a parent provides his or her child at home  an equitable distribution of income MEASURING A NATION’S INCOME 26 GDP Maximization Strategies:  Require everyone to work 100 hours per week  Allow for (or encourage) child labor  Minimize consumption to maximize investment  Run perpetual trade surpluses (produce lots of stuff, and send it abroad for nothing in exchange) Clearly these outcomes are not good! MEASURING A NATION’S INCOME 29 GDP and Welfare: Digression on Correlations MEASURING A NATION’S INCOME 30 GDP and Welfare Jones & Klenow (2010), Figure 3, p. 17: Welfare and Income across Countries, 2000 Correlation coefficient: .97 MEASURING A NATION’S INCOME 31 GDP and Welfare Country Welfare Per capita income "Difference" Life expectancy C/Y Leisure Inequality USA 1.000 1.000 0.000 0.000 0.000 0.000 77.0 0.762 France 0.941 0.701 0.295 0.084 -0.055 0.140 0.125 78.9 0.721 Singapore 0.426 0.829 -0.667 0.036 -0.581 -0.106 -0.016 78.1 0.426 Botswana 0.074 0.179 -0.887 -0.577 -0.171 0.028 -0.167 48.9 0.642 GDP and Urbanization e ® e ee % e ® e Ge °. oe %@ °° e ee e e oe? e e f e e e@ °@ e ee ont’ © es e e, e ° 4 GDP per capita (2007) " (O661) UOle;ndod ueqin Jo a1eUus x10 8 6 2 34 GDP and Cell Phones S 180% & = 160+ e 2 ec 2 ° & 140; 5 eo °° ge Sete Me ow . = 10% oe 0 &° ° Sowa TS ° 7 solsgee™ ° ° ~ Poe e n @ 60 Sr « e 2 4, Oo o 2 40 ? e ; DS 200080 e n = e e OD e L jl 5 5 2 4 6 8 10 GDP per capita (2007) x 10° 35 Next Class MEASURING A NATION’S INCOME 36  Reading before class: Chapter 11  Topics: Inflation, the Consumer Price Index, and the Producer Price Index  From today’s lecture, you can do Section 1 of the homework