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THE DATA OF MACROECONOMICS:Rules for computing GDP

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Macroeconomics ECO 403
VU
LESSON 04
THE DATA OF MACROECONOMICS
THE CIRCULAR FLOW
Income (S)
Labor
Households
Firms
Goods (bread)
Expenditure ($)
"Expenditure = Income" Why?
In every transaction,
the buyer's expenditure becomes the seller's income.
Thus, the sum of all expenditure equals
the sum of all income
Rules for computing GDP
1) To compute the total value of different goods and services, the national income
accounts use market prices.
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Macroeconomics ECO 403
VU
Thus, if
$0.50
$1.00
GDP = [P (A) × Q (A)] + [P (O) × Q (O)]
= ($0.50 × 4) + ($1.00 × 3)
GDP = $5.00
2) Used goods are not included in the calculation of GDP.
3) Treatment of inventories depends on if the goods are stored or if they spoil.
4) Intermediate goods are not counted in GDP­ only the value of final goods.
Value added of a firm equals the value of the firm's output less the value of the intermediate
goods the firm purchases.
Example
·  A farmer grows a bushel of wheat and sells it to a miller for $1.00
·  The miller turns the wheat into flour and sells it to a baker for $3.00
·  The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00
·  The engineer eats the bread
·  Compute
­  value added at each stage of production
­  GDP
·  The value of the final goods already includes the value of the intermediate goods, so
including intermediate goods in GDP would be double-counting.
·  Thus,
Expenditure = Income = Sum of value added
5) Some goods are not sold in the marketplace and therefore don't have market prices. We
must use their imputed value as an estimate of their value. For example, home ownership and
government services.
·  Apt Rent will be included in GDP.
­  Your expenditure and landlord's income
·  How about people who own houses?
­  They pay themselves their rent.
·  How about services of police officers, firefighters and senators?
­  All public goods and services
·  These are all included in GDP.
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Macroeconomics ECO 403
VU
Nominal vs Real GDP
·  The value of final goods and services measured at current prices is called nominal
GDP.
It can change over time either because there is a change in the amount (real value) of
·
goods and services or a change in the prices of those goods and services.
Hence, nominal GDP
·
Y=P×y
where P is the price level & y is real output
Real GDP or,
·
y = Y/P
is the value of goods and services measured using a constant set of prices?
This distinction between real and nominal can also be applied to other monetary
·
values, like wages. Nominal (or money) wages can be denoted by (W) and
decomposed into a real value (w) and a price variable (P). Hence,
W = nominal wage = P x w
w = real wage = W/P
This conversion from nominal to real units allows us to eliminate the problems created by
having a measuring stick (dollar value) that essentially changes length over time, as the price
level changes.
Apple & Orange Economy
Let's see how real GDP is computed in our apple and orange economy.
For example, if we wanted to compare output in 2002 and output in 2003, we would obtain
base-year prices, such as 2002 prices.
·  Real GDP in 2002 would be:
[2002 P (A) × 2002 Q (A)] + [2002 P(O) × 2002 Q(O)]
Real GDP in 2003 would be:
·
[(2002 P (A) × 2003 Q (A)] + [(2002 P (O) × 2003 Q (O)]
Real GDP in 2004 would be:
·
[(2002 P (A) × 2004 Q (A)] + [(2002 P (O) × 2004 Q (O)]
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Table of Contents:
  1. INTRODUCTION:COURSE DESCRIPTION, TEN PRINCIPLES OF ECONOMICS
  2. PRINCIPLE OF MACROECONOMICS:People Face Tradeoffs
  3. IMPORTANCE OF MACROECONOMICS:Interest rates and rental payments
  4. THE DATA OF MACROECONOMICS:Rules for computing GDP
  5. THE DATA OF MACROECONOMICS (Continued…):Components of Expenditures
  6. THE DATA OF MACROECONOMICS (Continued…):How to construct the CPI
  7. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES
  8. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  9. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  10. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  11. MONEY AND INFLATION:The Quantity Equation, Inflation and interest rates
  12. MONEY AND INFLATION (Continued…):Money demand and the nominal interest rate
  13. MONEY AND INFLATION (Continued…):Costs of expected inflation:
  14. MONEY AND INFLATION (Continued…):The Classical Dichotomy
  15. OPEN ECONOMY:Three experiments, The nominal exchange rate
  16. OPEN ECONOMY (Continued…):The Determinants of the Nominal Exchange Rate
  17. OPEN ECONOMY (Continued…):A first model of the natural rate
  18. ISSUES IN UNEMPLOYMENT:Public Policy and Job Search
  19. ECONOMIC GROWTH:THE SOLOW MODEL, Saving and investment
  20. ECONOMIC GROWTH (Continued…):The Steady State
  21. ECONOMIC GROWTH (Continued…):The Golden Rule Capital Stock
  22. ECONOMIC GROWTH (Continued…):The Golden Rule, Policies to promote growth
  23. ECONOMIC GROWTH (Continued…):Possible problems with industrial policy
  24. AGGREGATE DEMAND AND AGGREGATE SUPPLY:When prices are sticky
  25. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…):
  26. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…):
  27. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  28. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  29. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  30. AGGREGATE DEMAND IN THE OPEN ECONOMY:Lessons about fiscal policy
  31. AGGREGATE DEMAND IN THE OPEN ECONOMY(Continued…):Fixed exchange rates
  32. AGGREGATE DEMAND IN THE OPEN ECONOMY (Continued…):Why income might not rise
  33. AGGREGATE SUPPLY:The sticky-price model
  34. AGGREGATE SUPPLY (Continued…):Deriving the Phillips Curve from SRAS
  35. GOVERNMENT DEBT:Permanent Debt, Floating Debt, Unfunded Debts
  36. GOVERNMENT DEBT (Continued…):Starting with too little capital,
  37. CONSUMPTION:Secular Stagnation and Simon Kuznets
  38. CONSUMPTION (Continued…):Consumer Preferences, Constraints on Borrowings
  39. CONSUMPTION (Continued…):The Life-cycle Consumption Function
  40. INVESTMENT:The Rental Price of Capital, The Cost of Capital
  41. INVESTMENT (Continued…):The Determinants of Investment
  42. INVESTMENT (Continued…):Financing Constraints, Residential Investment
  43. INVESTMENT (Continued…):Inventories and the Real Interest Rate
  44. MONEY:Money Supply, Fractional Reserve Banking,
  45. MONEY (Continued…):Three Instruments of Money Supply, Money Demand