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C H A P T E R

MACROECONOMICS Roger A. Arnold • Thirteenth Edition

7 MACRO

ECONOMIC MEASUREMENTS, PART II: GDP AND

REAL GDP

7-1 Gross Domestic Product

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy

7-3 The Income Approach to Computing GDP for a Real-World Economy

7-4 Real GDP

7-1 Gross Domestic Product (1 of 5)

• Gross Domestic Product (GDP): The total market value of all final goods and services produced annually within a country’s borders

• 7-1a Calculating GDP • To show how GDP is computed, suppose the

following data represent the prices and quantities of three goods produced in a tiny economy this year:

7-1 Gross Domestic Product (2 of 5)

• 7-1a Calculating GDP (cont) • GDP is the sum (S) of the products of the prices

(P) of all goods and the quantities (Q) of those goods produced:

• In the case of our hypothetical economy:

7-1 Gross Domestic Product (3 of 5)

• 7-1b Final Goods and Intermediate Goods • Final Good: A good in the hands of its final

user • Intermediate Good: A good that is an input to

the production of a final good • Double Counting: Counting a good more than

once when computing GDP

7-1 Gross Domestic Product (4 of 5)

• 7-1c What GDP Omits • Certain Nonmarket Goods and Services • Underground Activities, Both Legal and Illegal • Sales of Used Goods • Financial Transactions • Government Transfer Payments – Transfer Payment: A payment to a person that

is not made in return for goods and services currently supplied

• Leisure

7-1 Gross Domestic Product (5 of 5)

• 7-1d GDP is Not Adjusted for Bads Generated in the Production of Goods • Economic growth often comes with certain bads

(anything from which individuals receive disutility or dissatisfaction)

• 7-1e Per-Capita GDP • If we divide a country’s GDP by the population

in the country, we get per-capita GDP • In 2015, the per-capita GDP in the U.S. was

$56,115 • Money and Happiness: The Easterlin paradox

has been questioned by Stevenson & Wolfers

Income and Subjective Well-Being (part 1)

EXHIBIT 1

Income and Subjective Well-Being (part 2)

EXHIBIT 1

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy (1 of 6)

• In a tiny economy, we can compute GDP simply by multiplying the price of each good produced by the quantity of the good produced

• The U.S. economy is too large to be measured this way, but can be measured in different ways

• A principal way is called the expenditure approach; economists sum the spending on final goods and services in four sectors of the economy:

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy (2 of 6)

• Consumption: The sum of spending on durable goods, nondurable goods, and services

• Investment: The sum of all purchases of newly produced capital goods, changes in business inventories, and purchases of new residential housing

• Inventory Investment: Changes in the stock of unsold goods

• Fixed Investment: Business purchases of capital goods, such as machinery and factories, and purchases of new residential housing

• Government Purchases: Federal, state, and local government purchases of goods and services, and gross investment in highways, bridges, and so on

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy (3 of 6)

• Government Transfer Payments: Payments to persons that are not made in return for currently supplied goods and services

• Imports: Total domestic (U.S.) spending on foreign goods

• Exports: Total foreign spending on domestic (U.S.) goods

• Net Exports: Exports minus imports

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy (4 of 6)

• 7-2a Using the Expenditure Approach to Compute GDP • The expenditure approach to measuring GDP

calls for totaling the purchases of final goods and services in the four sectors of the economy (Exhibit 2) • But you will recall that we defined GDP as the

total market value of all final goods and services produced annually • Economists who compute GDP assume that

anything produced but not sold to consumers is “bought” by the firm that produced it

The Expenditure Approach to Computing GDP

EXHIBIT 2

Components of GDP (Expenditure Approach)

EXHIBIT 3

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy (5 of 6)

• 7-2b Common Misconceptions about Increases in GDP • Investment may rise for one of three reasons: • 1. Firms may purchase more newly produdced

capital goods • 2. Individuals may purchase new residential

housing • 3. Firms’ inventory investment rises; these can be: – Planned inventory investment (firms deliberately

produce more units, and add them to inventory) – Unplanned inventory investment (consumers don’t

buy as many units as firms have produced, so unsold units are added to inventory)

7-2 The Expenditure Approach to Computing GDP for a Real-World Economy (6 of 6)

• 7-2b Common Misconceptions about Increases in GDP (cont) • Now, compare the two settings: – Setting 1. Firms purchase more newly produce4d capital

goods (more factories and machinery); as a result, investment rises and so does GDP, all other things remaining constant

– Setting 2. Buyers don’t buy as many units of output as firms have produced; unsold units go to (unplanned) inventory investment; as a result, investment rises and so does GDP, all other things remaining constant

• Are the higher GPD dollars in settings 1 and 2 equivalent? • As far as the health and strength of the economy are

concerned, the increase in GDP in setting 1 is superior to the increase in GDP in setting 2

7-3 The Income Approach to Computing GDP for a Real-World Economy (1 of 5)

• A second way to compute GDP, the income approach, should give us the same dollar amount of GDP as the expenditure approach

• However, money spent by one person is money earned by another; the person who sells 10 units of good A at $1 per unit receives an income of $10; the $10 spent by the buyer is $10 earned by the seller

• Exhibit 4 shows a circular flow diagram of the economy • Two steps are involved in computing GDP with the

income approach: • First, compute national income • Second, adjust national income for certain things • The end result is GDP

Breakdown of the U.S. Population and the Labor Force

EXHIBIT 4

7-3 The Income Approach to Computing GDP for a Real-World Economy (2 of 5)

• 7-3a Computing National Income • National Income: Total income earned by U.S.

citizens and businesses, no matter where they reside or are located. National income is the sum of the payments to resources (land, labor, capital, and entrepreneurship)_. National income = Compensation of employees + Proprietors’ income + Corporate profits + Rental income of persons + Net Interest

Per-Capita GDP in Various Countries

EXHIBIT 5

7-3 The Income Approach to Computing GDP for a Real-World Economy (3 of 5)

• 7-3b From National Income to GDP; Making Some Adjustments • Not every dollar spent is someone else’s

income, so we must add certain things to national income and subtract things from it:

The Income Approach to Computing GDP

EXHIBIT 6

7-3 The Income Approach to Computing GDP for a Real-World Economy (4 of 5)

• 7-3c Other National Income Accounting Measurements • Three other national income measurements are

important: – Net domestic product – Personal income – Disposable income

• All five measurements are often used interchangeably to measure the output produced and income earned in an economy

• 7-3d Net Domestic Product • Net Domestic Product (NDP): GDP minus the

capital consumption allowance 24

7-3 The Income Approach to Computing GDP for a Real-World Economy (5 of 5)

• 7-3e Personal Income • Personal Income: The amount of income that

individuals actually receive. It is equal to national income minus undistributed corporate profits, social insurance taxes, and corporate profits taxes, plus transfer payments

• 7-3f Disposable Income • Disposable Income: The portion of personal

income that can be used for consumption or saving. It is equal to personal income minus personal taxes (especially income taxes)

7-4 Real GDP (1 of 5)

• 7-4a Why We Need Real GDP • GDP may rise because the price of one good

increased, or because the quantity of output produced increased, or because the price of the good increased and the quantity increased

• To gauge the health of the economy, economists want to know why GDP increased – If it increased simply because price increased, then the

economy is not growing – For an economy to grow, more output must be

produced • Real GDP: The value of the entire output produced

annually within a country’s borders, adjusted for price changes

7-4 Real GDP (2 of 5)

• 7-4b Computing Real GDP • One way to compute Real GDP is the find the

value of the output for the different years in terms of the same prices -0 that is, the base- year prices; consider the following data for our 1-good economy:

7-4 Real GDP (3 of 5)

• 7-4b Computing Real GDP (cont) • The data show why GDP is higher in years 2 &

3; both price and quantity have increased; but we want to separate the part that is higher because of an increase in quantity from the part that is higher because of an increase in price; we want the Real GDP

7-4 Real GDP (4 of 5)

• 7-4c The General Equation for Real GDP

• 7-4d What Does It Mean if Real GDP is Higher in One Year Than in Another? • Real GDP rises only if output rises • Real GDP rises only if more goods and services are

produced

7-4 Real GDP (4 of 5)

• 7-4e Real GDP, Economic Growth, and Business Cycles • Economic Growth: Increases in Real GDP • Business Cycle: Recurrent swings (up and down) in

Real GDP • 1. Peak – a temporary high • 2. Contraction – a decline in Real GDP • 3. Trough – the low point in Real GDP, just before it

begins to turn up • 4. Recovery – the period when Real GDP is rising • 5. Expansion – refers to increases in Real GPD

beyond the recovery; in Exhibit 7, it refers to increases in Real GDP above Q1

The Phases of the Business Cycle

EXHIBIT 7

7-4 Real GDP (5 of 5)

• 7-4e Real GDP, Economic Growth, and Business Cycles (cont) • The standard definition of a recession is two

consecutive quarterly declines in Real GDP, but this is not the only definition of a recession • National Bureau of Economic Research (NBER)

and Recessions: – A recession is a period between a peak and a

trough… During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year

Slide 1
Slide 2
7-1 Gross Domestic Product (1 of 5)
7-1 Gross Domestic Product (2 of 5)
7-1 Gross Domestic Product (3 of 5)
7-1 Gross Domestic Product (4 of 5)
7-1 Gross Domestic Product (5 of 5)
Income and Subjective Well-Being (part 1)
Income and Subjective Well-Being (part 2)
Slide 10
Slide 11
Slide 12
Slide 13
The Expenditure Approach to Computing GDP
Components of GDP (Expenditure Approach)
Slide 16
Slide 17
Slide 18
Breakdown of the U.S. Population and the Labor Force
Slide 20
Per-Capita GDP in Various Countries
Slide 22
The Income Approach to Computing GDP
Slide 24
Slide 25
7-4 Real GDP (1 of 5)
7-4 Real GDP (2 of 5)
7-4 Real GDP (3 of 5)
7-4 Real GDP (4 of 5)
7-4 Real GDP (4 of 5)
The Phases of the Business Cycle
7-4 Real GDP (5 of 5)