Topic3-Measurement_AAP

Topic3-Measurement_AAP - Macroeconomic Measurement and...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Macroeconomic Measurement and Accounting The product, expenditure, and income approaches to measuring GDP, GDP Savings measures, Price indices, The real interest rate Topic 3 (Text: Chapter 2) 1 Time Series Plot of GDP and Real GDP GDP and Real GDP-2000 14,000 GDP Avg Growth = 6.74% RGDP Avg Growth = 3.31% 12,000 10,000 8,000 6,000 4,000 2,000 -0 2 -9 7 -9 2 -8 7 -8 2 -0 7 Ja n Ja n Ja n Ja n Ja n Ja n -7 2 -6 7 -6 2 -7 7 Ja n Ja n Ja n Ja n -5 2 -5 7 Ja n Ja n Ja n -4 7 0 2 Three Approaches to Measuring GDP GDP • The Gross Domestic Product (GDP) is a measure of the total economic activity in a country in one year (generally) • It can be measured in three ways: Production (Value Added) Approach: The total Production amount of output produced, excluding output used excluding up in intermediate stages of production Expenditure Approach: The total amount paid by Expenditure the ultimate purchasers of output ultimate Income Approach: The total income received by the Income producers of output 5 1 1 Example Calculate GDP using the 3 alternative methods GDP 6 GDP Accounting: Production Approach • GDP is defined as the market value of final goods and final services newly produced by domestically located newly domestically capital and labor during the year • Highlights of the production approach: Only goods and services produced in the current period are Only included (i.e. used good are excluded). Why? Uses market value to allow addition of different goods and Uses services. Drawback is non-market activities are left out. non(What are examples of such activities?) 7 Production Approach (cnt.) cnt.) • Highlights (cnt.) (cnt.) Uses Value Added approach to avoid the problem of double Uses Value counting intermediate goods Value Added Value = Final Revenue - Cost of Intermediate Goods Intermediate goods and services are used up in the same Intermediate period that they themselves were produced. Else, they are final goods A capital good is one that is itself produced and used to capital produce other goods, but is not used up in the process. It is a is final good and is therefore included in the GDP when GDP produced 8 2 2 Production Approach (cnt.) cnt.) • Highlights (cnt.) (cnt.) Inventories (stock of unsold finished goods and Inventories goods/raw materials in process) are also considered final goods for GDP accounting GDP GDP is value created by factors of production GDP located within the country, no matter who owns them (country’s product) (country’ GNP is value created by factors of production owned GNP by the country’s citizens, no matter where the factors country’ are located (country’s income) (country’ 9 Production Approach (cnt.) cnt.) • Highlights (cnt.): (cnt.): GNP (income) GNP =GDP(product) + Income from Abroad - Income Sent Abroad GNP = GDP + NFP GDP NFP Income from abroad is payment for domestic factors located Income there, and income sent abroad is payment for foreign factors located here Difference between GNP and GDP is small for the US (2002 Difference GNP GDP GDP was 10.446 T $ and 2002 GNP was 10.437 T $.) GDP GNP In what countries do you expect GDP and GNP to be very In GDP GNP different? Why? NFP NFP Net Foreign Payment Net 10 From the OJ Example The GDP components are: GDP • OI: VA = Revenue • JI: VA = Revenue – Raw Mat’l Mat’ 11 3 3 Production Breakdown of US GDP GDP • Percentage of GDP by sector: GDP 1947 Agriculture 8.3 Mining 2.7 Construction 3.7 Manufacturing 28.5 Transp. & Util. 8.5 Retail trade 11.4 FIRE 9.5 Services 15.2 Government 12.2 2002 1.4 1.2 4.7 13.9 8.0 9.3 20.9 27.8 12.9 FIRE = Finance, Insurance, Real Estate FIRE 13 GDP Accounting: Expenditure Approach • Measures GDP as the total spending on final GDP goods and services produced in the country during a specific time period • The income-expenditure identity: incomeY = GDP = C + I + G + NX GDP NX • NX = Net Exports = Exports (X) - Imports (M) • All production has to be consumed or invested by private agents or by the government or by foreigners (exported) 14 Expenditure Approach (cnt.) cnt.) • Expenditure breakdown for the US: 1963 Consumption 62.0% Consumption Durables 9 Durables Nondurables 27 Nondurables Services 27 Services Investment 15.0% Investment Business 10 Business Residential 4 Residential Inventory 1 Inventory Gov. Purchases 23.0% Gov. Net Exports 1.0% Net • Link to BEA table here 2002 69.9% 8.3 20.2 41.3 15.3% 10.7 4.5 0.1 18.9% -4.1% 16 4 4 From the OJ Example The GDP components are: GDP • Oranges bought: • OJ bought: 17 Real GDP and Its Components 6000 5000 4000 3000 GDP Consumption 2000 1000 Government Investment 50 55 60 65 70 75 80 85 90 Billions of 1987 dollars 19 GDP Accounting: Income Approach • Computes GDP by examining how the factors of GDP production (labor and capital) are compensated • National Income = Compensation + Proprietor’s Income + Proprietor’ Rental Income + Corporate Profits + Net Interest • Employee Compensation (71.6% in 2002) Wages and benefits paid to employees Wages Largest component Largest All before taxes All 20 5 5 Income Approach (cnt.) cnt.) • • • Proprietor’s Income (9.1% in 2002) Proprietor’ Income of the self-employed (labor + capital Income selfincome) Individual Rental Income (1.7% in 2002) Income earned by renting out land or structures Income Corporate Profits (9.4% in 2002 –-very volatile) = Corporate Revenue - (wages + interest + rents + other costs) Retained Earnings = Retained Corporate profits - (taxes + dividends) 21 Income Approach (cnt.) cnt.) • Net Interest (about 8.2% in 2002) Interest earned - Interest paid by individuals Interest • Net National Product (NNP) = National Income + Indirect Business Taxes Indirect business taxes (sales, excise taxes, etc.) are paid by Indirect businesses to the government • GNP = NNP + Depreciation NNP Depreciation Depreciation is the value of capital that wears out during the Depreciation year in which GNP is measured GNP Not the same as corporate depreciation expense! Not 22 23 6 6 From the OJ Example • OI: • • OJ: • The GDP components are: GDP Wages B. Tax profits Wages B. Tax profits 24 Equivalence Of the Approaches • All three approaches to GDP accounting yield the same GDP result • Fundamental identity of national income accounting: Production = Expenditure = Income Production • First equality arises from using the market value to measure production. Consumers exhaust production with their expenditures • Second equality arises because individuals, businesses, and the government use their incomes to consume and invest 26 A Note on International Comparisons • When comparing GDP or per capita GDP GDP GDP across countries for a given year, one can use: Market Exchange Rates Market Unreliable for comparing living standards; does not Unreliable reflect relative purchasing power of two currencies (due to non-tradables, taxes, tariffs, price non- tradables, discrimination, and transport costs) Purchasing Power Parity (PPP) Exchange Rates Purchasing Takes into account above factors to yield a better Takes measure for comparisons. What does a $ really buy in each country? What 27 7 7 Measures of Savings • Distinguish between savings and wealth. Savings is a savings wealth flow, wealth is a stock flow stock • Savings of any economic entity is its current income minus its spending on current needs current • It is simplest to think of households doing all the saving and firms doing all the investing in machinery, factories, etc. • Imagine a closed economy with no government. Savings = Income - Consumption, i.e. S = Y - C. But Y = C + I, since G = NX = 0. Substitute for Y, to NX get S = I. (Savings = Investment) 28 Savings Measures (cnt.) cnt.) • A modified result holds in all economies • Note how this differs from the common usage of savings (what you deposit in banks) and investment (what you put in stocks, bonds & derivatives) NEED TO UNLEARN THIS USAGE FOR MACRO • In macroeconomics, anything you do not consume today is saving or taxes, no matter how you allocate it • Firms use households’ savings to invest in new capital households’ • We define three measures of saving: Private, Government, and National 29 Saving Measures (cnt.) cnt.) • Private (household + business) savings: Spvt = Private disposable income - Consumption = (Y + NFP + TR + INT ) – T - C NFP TR INT • Government (federal+state+local) savings: Sgovt = Govt. receipts - Govt. outlays = T - (G + TR + INT) TR INT • National savings: S = Spvt + Sgovt = Y + NFP - C - G NFP = I + (NX + NFP) NFP S = I + CA CA 30 8 8 Personal Saving Rate, 1947-2006 31 Household saving rates in many OECD OECD countries have fallen sharply in recent years. Economist, April 7 2005. 32 Example #2 • You are given the following information about an economy: Gross private domestic investment 40 Gross 40 Government purchase of G&S 30 Government GNP 200 GNP Current Account Balance –CA -20 Current Taxes 60 Taxes Gov transfer payments –TR 25 Gov Gov interest payments to priv. sector 15 Gov Factor income received from abroad 7 Factor Factor payments made to countries 9 Factor • GDP? NX? C? Private Saving? NX Saving? Government budget surplus? National 37 9 9 Price Indices and Inflation • Consumer Price Index (CPI) is the most commonly cited measure of prices CPI = CPI value of typical basket of goods at current prices current ÷ value of the same basket at base-year prices baseThere are measurement problems with the CPI which There CPI have political repercussions CPI uses a typical basket of consumer goods, while CPI the producer price index (PPI) uses a typical basket of intermediate goods CPI is an example of a fixed-weight price index CPI fixed40 Price Indices (cnt.) cnt.) • Fixed-weight price index = Fixed• value of base-year goods at current prices basecurrent ÷ value of base-year goods at base-year prices basebaseIt measures how the price of a fixed basket of goods It changes How else would you measure price changes? How Disadvantage: it overstates the cost of living because Disadvantage: it doesn’t take into account consumer adjustment to doesn’ changes in relative prices 41 CPI Example With Two Goods CPI 0 = P0, x X 0 + P0, yY0 CPI1 = P , x X 0 + P , yY0 1 1 This shows that CPI is prices weighed by base-year goods CPI baseconsumed • X0, Y0, … represent consumption goods X & Y, consumed at time = 0 (the initial or “base” time period) base” • Subscripts 0 and 1 refer to the 0th (base) and the 1st (or a subsequent) period 42 10 10 Inflation • Inflation: Rate of growth of the price level measured by the CPI CPI Inflationt , t +1 = CPI t +1 − CPI t CPI t +1 ≡ −1 CPI t CPI t Or any other index you want to use Or 43 CPI Example Oranges Bread 2003 Consumption Data Quantity Price Value 20 $1.00 6 $4.00 Consumption CPI 44 CPI Example (cnt.) cnt.) Oranges Bread 2004 Consumption Data Quantity Price Value 18 $1.20 7 $4.10 Consumption 46 11 11 CPI Example (cnt.) cnt.) 2003 Quantities/2004 Prices Oranges Bread Quantity 20 6 Price $1.20 $4.10 Value Cost of the 2003 bundle in 2004 48 CPI Example (cnt.) cnt.) The CPI inflation between 2003 & 2004 is? CPI 50 Measuring GDP With Two Goods GDP GDP0 = P0,x X0 + P0,y Y0 GDP1 = P1,x X1 + P1,y Y1 • X and Y represent goods produced Subscript 0 means the good was produced in the Subscript initial or base period Subscript 1 means the good was produced in Subscript period = 1 (a subsequent period, generally the current period) 53 12 12 GDP , RGDP, and GDPD RGDP GDPD • Real vs Nominal GDP GDP The goal is to measure the increase in GDP coming The GDP from more goods and services rather than from more higher prices prices Current period goods at base period prices base compared to compared Last period’s goods at base period prices period’ base How else would you measure changes in output? How output 55 GDP , RGDP, and GDPD (cnt.) RGDP GDPD cnt.) • Real vs Nominal GDP GDP Nominal GDP is the value of output at current Nominal GDP current prices Real GDP is the value of output in base year prices Real GDP (these days Y2000) • Easy to calculate the growth rate of real GDP Sometimes referred to as RGDP Sometimes RGDP 56 GDP , RGDP, and GDPD (cnt.) RGDP GDPD cnt.) • The RGDP calculation involves current goods at RGDP past prices Disadvantage: some “current goods” did not exist Disadvantage: goods” during the base year All the new stuff! All Have to “make up” prices for such goods Have up” Good news: their quantities are usually small! Good 57 13 13 GDP , RGDP, and GDPD (cnt.) RGDP GDPD cnt.) • Real vs Nominal GDP GDP This calculation also gives us the GDP Deflator! This GDP GDPD GDPD A price index for GDP price GDP The GDP Deflator is calculated as a “residual” The residual” GDPD = Nominal GDP / Real GDP GDPD GDP GDP Nominal Quantity = Real Quantity*Price Nominal 58 GDPD Example With Two Goods GDP1 = P1,x X1 + P1,y Y1 RGDP0 = P0,x X0 + P0,y Y0 RGDP1 = P0,x X1 + P0,y Y1 GDPD1 = P , x X 1 + P , yY1 GDP 1 1 1 ≡ RGDP P0, x X 1 + P0, yY1 1 This shows that for GDPD prices are weighed by current goods produced GDPD The CPI uses time=0 quantities! The CPI 59 GDP, RGDP, & GDPD Example RGDP GDPD Oranges Bread 2003 GDP Data GDP Quantity Price Value 22 $1.00 8 $4.00 Output (GDP) 60 14 14 GDP, RGDP, & GDPD Example (cnt.) cnt.) RGDP GDPD Oranges Bread 2004 GDP Data GDP Quantity Price Value 25 $1.20 9 $4.10 GDP 62 GDP, RGDP, & GDPD Example (cnt.) cnt.) RGDP GDPD 2004 Quantities @ 2003 Prices Quantity Price Value Oranges 25 $1.00 Bread 9 $4.00 GDP 64 GDP, RGDP, & GDPD Example (cnt.) cnt.) RGDP GDPD • GDP growth: • RGDP (2004): • RGDP growth: 66 15 15 Ja n4 Ja 8 n5 Ja 1 n5 Ja 4 n5 Ja 7 n6 Ja 0 n6 Ja 3 n6 Ja 6 n6 Ja 9 n7 Ja 2 n7 Ja 5 n7 Ja 8 n8 Ja 1 n8 Ja 4 n8 Ja 7 n9 Ja 0 n9 Ja 3 n9 Ja 6 n9 Ja 9 n0 Ja 2 n05 Ja n4 Ja 7 n5 Ja 0 n5 Ja 3 n5 Ja 6 n5 Ja 9 n6 Ja 2 n6 Ja 5 n6 Ja 8 n7 Ja 1 n7 Ja 4 n7 Ja 7 n8 Ja 0 n8 Ja 3 n8 Ja 6 nJa 89 n9 Ja 2 n9 Ja 5 n9 Ja 8 n0 Ja 1 n0 Ja 4 n07 GDP, RGDP, & GDPD Example (concl.) concl.) RGDP GDPD • GDPD (2004): • GDPD growth: So, total GDP growth is composed of: GDP 69 CPI Level 250 U.S. CPI 200 CPIAUCSL 150 100 50 0 75 12-Month MA CPI Inflation 12- 14% U.S. CPI 12% 10% CPI_12M-MA 8% 6% 4% 2% -2% 0% -4% 76 16 16 The Real Interest Rate • Real Interest Rate (real return): Rate at which the total return on an asset (generally a riskless Rate total bond) increases your purchasing power • Nominal (Market) Interest Rate (nominal return): Rate at which the total return on an asset (generally a riskless Rate total bond) increases your $ wealth • Real interest rate = Nominal interest rate - expected inflation rate r=i-π re = i - πe • When you borrow or lend the inflation rate is unknown. People form expectations of inflation, and therefore we expectations talk of the expected real interest rate expected 78 The Real Interest Rate (cnt.) cnt.) • Positive real return increases purchasing power real 1+ i = 1+ r 1+ π i = r + π + rπ ≅ r + π ⇒ r = i −π 1* 79 Interest Rates and Expectations 1-Year Nominal & Inflation Expectations 18 16 1-Year Nominal Infl Exp Med 14 12 Percent 10 8 6 4 2 0 4 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 l -5 -2 Jul - Jul- Jul- Jul - Jul- Jul- Jul - Jul - Jul- Jul - Jul - Jul- Jul - Jul - Jul- Jul- Jul Ju 80 17 17 Ex-Ante and Ex-Post Real Interest Rates ExEx1-Year Ex-Ante & Ex-Post Real Rates 10 8 1-Y Ex-Ante Real 1-Y Ex-Post Real 6 Percent 4 2 0 5 2 7 4 3 0 6 9 2 5 8 1 4 7 0 3 6 9 l-5 l-5 ul-6 ul-6 ul-6 ul-6 ul-7 ul-7 ul -7 ul-8 ul-8 ul-8 ul-9 ul-9 ul-9 ul-9 ul-0 ul -0 J Ju J J J J J J J J J J J J J J J -2 Ju -4 -6 81 Example #3 • For the consumer price index values shown, calculate the rate of inflation in each year from 1930 to 1933. What is unusual about this period, relative to recent experience? Year 1929 1930 1931 1932 1933 CPI 51.3 50.0 45.6 40.9 38.8 82 Example #4 • Consider an economy that produces 3 types of fruit. Base and current year data are below: Base Year: Fruit Quantity Price Fruit Apples 3,000 bags Bananas 6,000 bunches Oranges 8,000 bags Current year: Fruit Quantity Price Fruit Apples 4,000 bags Bananas 14,000 bunches Oranges 32,000 bags $2/bag $3/bunch $4/bag $3/bag $2/bunch $5/bag • What are GDP(nominal), RGDP, GDPD, and their % GDP RGDP GDPD increases? 84 18 18 Glossary of Terms GDP NFP GNP C I G X M NX S T TR INT Pt CA r π Gross Domestic Product (also Y) Net Factor Payments Gross National Product = GDP + NFP GDP NFP National Consumption National Investment Government Expenditure Exports Imports Net exports = X - M National Saving = Spvt + Sgovt Total taxes Transfer payments Interest payments General price level at time t Current Account Balance = NX + NFP NX NFP real interest rate inflation rate 85 THE END 86 19 19 ...
View Full Document

Ask a homework question - tutors are online