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Unformatted text preview: Measuring the Economy’s Health I Output Definitions are a necessary, but very boring first step in doing economic analysis. Therefore, bear with me. Definition 2 Nominal Gross Domestic Product (NGDP). Current market value of all fin- ished goods and services produced domestically in a specified time. • what? finished goods and services (not resold). • where? Domestic production. • when? A specified period (usually one year) See graph. About $14.9 trillion in 2010. Notes: • This is a measure of the total output of the economy. By market value, we mean prices. • The current market value of a beer at Titanic is say $5. If the Titanic economy made 1,000 beers the NGDP would be $5,000. A Calculating NGDP: Value Added Approach Definition 3 NGDP equals Value Added which equals revenue less cost of goods sold. NGDP = revenue- cost of goods sold. (1) Remember from microeconomics: the price equals the value of a good. Consider an example, a Jeep: firm Q price revenue cost of goods value added US Steel 2 tons steel $3,000 per ton $6,000 $6,000 Chrysler 1 jeep $26,000 $26,000 $6,000 $20,000 Dealer 1 jeep $28,000 $28,000 $26,000 $2,000 total mkt. value $28,000 $28,000 6 Suppose US steel mines some iron and refines that iron into two tons of steel. US steel sells the steel to Chrysler, which uses the steel to make a jeep. Chrysler then sells the Jeep to a retailer, who in turn sells the Jeep to a consumer. Trick is to count only the “value added” to the product at each step. That is, don’t count the value of the product at each step, since that would be like assuming both Chrysler and US steel refined the iron into steel. Instead, US steel only converted the iron into steel, worth $6,000, Chrysler turned the steel into a Jeep, worth $26,000. To calculate the NGDP, we add only the additional cost added to the product at each step or count the product at the retail level only. The value added approach gives NGDP from the production side. B Income Approach Definition 4 NGDP equals Total Income which equals wages plus profits. NGDP = Total Income = wages + profits. (2) profits = revenues- wages- cost of goods . (3) Consider our example again: firm Q revenue - cost of goods = VA wages paid profits US Steel 2 tons $6,000 5*$1,000=$5,000 $1,000 Chrysler 1 jeep $20,000 10*$1,500=$15,000 $5,000 Dealer 1 jeep $2,000 1*1,000=$1,000 $1,000 total $28,000 $21,000 $7,000 So the total income, consisting of both profits and wages, is $21 , 000 + $7 , 000 = $28 , 000. Notice that income equals NGDP. This is true in general (add the two equations above). More generally, the income approach works like this (numbers are fourth quarter 2009): 1. Count all labor income: wages, salaries, and fringe benefits ($8.1 trillion, ‘compensation of employees, NIPA’). Wages are up about 3% after inflation, benefits 5.5%....
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This note was uploaded on 01/08/2012 for the course ECO 212 taught by Professor Lorca,m during the Summer '08 term at University of Miami.
- Summer '08