Lecture Macroeconomics - Chapter 6: Measuring domestic output and the price level

Chapter 6

Measuring Domestic Output
and
the Price Level
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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In this chapter you will learn
What gross domestic product (GDP) is
and what it measures
The expenditure approach to measuring
gross domestic product (GDP)
The income approach to measuring
gross domestic product (GDP)

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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In this chapter you will learn
The distinction between nominal GDP
and real GDP
What the Consumer Price Index (CPI) is
and how it is constructed
The shortcomings of GDP as a
measure of a country’s well-being

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Chapter 6 Topics
Assessing the Economy’s Performance
Gross Domestic Product
The Expenditures Approach
Income Approach
Other National Accounts
Nominal GDP vs Real GDP
The Consumer Price Index
Shortcomings of GDP
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Assessing the Economy’s
Performance
National income accounting is useful
to assess the health of the
economy

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Assessing the Economy’s
Performance
National income accounting is useful
to assess the health of the
economy
to track the long-run course over
time

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Assessing the Economy’s
Performance
National income accounting is useful
to assess the health of the
economy
to track the long-run course over
time
as a basis for policy formation
© 2002 McGraw-Hill Ryerson Ltd.

7

Macroeconomics, Chapter 6

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Chapter 6 Topics
Assessing the Economy’s Performance
Gross Domestic Product
The Expenditures Approach
Income Approach

Other National Accounts
Nominal GDP vs Real GDP
The Consumer Price Index
Shortcomings of GDP
© 2002 McGraw-Hill Ryerson Ltd.

8

Macroeconomics, Chapter 6

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Gross
Gross Domestic
Domestic Product
Product
the total market value of all final
goods and services produced in
the economy in one year
• A Monetary Measure

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Gross
Gross Domestic
Domestic Product
Product
the total market value of all final
goods and services produced in
the economy in one year
• A Monetary Measure
• Avoiding Multiple Counting

illustrated...
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP
GDP &
& Value
Value Added:
Added:
The
The Story
Story of
of aa Suit

Suit
Table 6-2

Production Stage Sales Value Value Added
$120
Sheep Ranch
$120
$ 60
Wool Processor
$180
Suit Manufacturer

$220

$ 40

Wholesaler

$270

$ 50

$350
$1140

$ 80
$350

Retailer
Total

© 2002 McGraw-Hill Ryerson Ltd.

11

Macroeconomics, Chapter 6

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GDP
GDP &
& Value
Value Added:
Added:
The
The Story
Story of
of aa Suit
Suit
Table 6-2

Production Stage Sales Value Value Added
$120
Sheep Ranch
$120
intermediate
intermediate $180
$ 60
Wool Processor

good
good
Suit Manufacturer

$220

$ 40

Wholesaler

$270

$ 50

$350
$1140

$ 80
$350

Retailer
Total
© 2002 McGraw-Hill Ryerson Ltd.

12

Macroeconomics, Chapter 6

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GDP
GDP &
& Value
Value Added:
Added:
The
The Story
Story of
of aa Suit
Suit
Table 6-2

Production Stage Sales Value Value Added
$120
Sheep Ranch
$120
$ 60
Wool Processor
$180

final
Suit Manufacturer
final good
good

$220

$ 40

Wholesaler

$270

$ 50

$350
$1140

$ 80
$350

Retailer
Total
© 2002 McGraw-Hill Ryerson Ltd.

13

Macroeconomics, Chapter 6

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Gross
Gross Domestic
Domestic Product
Product
the total market value of all final
goods and services produced in
the economy in one year

• A Monetary Measure
• Avoiding Multiple Counting
• Excludes Nonproduction Transactions
Financial Transactions
- Public Transfer Payments
- Private Transfer Payments
- Stock-Market Transactions
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Gross
Gross Domestic
Domestic Product
Product
the total market value of all final
goods and services produced in
the economy in one year
• A Monetary Measure
• Avoiding Multiple Counting
• Excludes Nonproduction Transactions
Financial Transactions
Second-hand Sales

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP
GDP
Expenditures Approach
Amount spent to purchase
this year’s total output
Income Approach
The money income derived from
production of this year’s output
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Figure 6-1
Expenditures approach
Consumption
Consumption
expenditures

expenditures by
by
households
households
++
Investment
Investment expenditures
expenditures
by
by businesses
businesses
++
Government
Government purchases
purchases
of
of goods
goods &
& services
services
++
Expenditures
Expenditures by
by
foreigners
foreigners

© 2002 McGraw-Hill Ryerson Ltd.

=GDP=

Income approach

Wages
Wages
++
Rents
Rents
++
Interest
Interest
++
Profits
Profits
++
Statistical
Statistical discrepancy
discrepancy

Macroeconomics, Chapter 6

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Chapter 6 Topics
Assessing the Economy’s Performance
Gross Domestic Product
The Expenditures Approach
Income Approach
Other National Accounts

Nominal GDP vs Real GDP
The Consumer Price Index
Shortcomings of GDP
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Gross
Gross Domestic
Domestic Product
Product
Expenditures Approach
Everything that is produced either
is purchased, or
ends up in inventory

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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Gross
Gross Domestic
Domestic Product
Product
Expenditures Approach
Amount spent to purchase
this year’s total output
GDP = C + Ig + G + Xn

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP:
GDP: Expenditures
Expenditures Approach
Approach
Personal Consumption Expenditure ( C )

• Durables
• Nondurables
• Semi-durables
• Services

© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP:
GDP: Expenditures
Expenditures Approach
Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )

• Machinery, Equipment, & Tools
• All Construction
• Changes in Inventories
Gross vs Net Investment
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP:
GDP: Expenditures

Expenditures Approach
Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
NOTES:

• Machinery, Equipment, & Tools
Net Investment:
• All Construction
In= Ig- depreciation
• Changes in Inventories

Gross vs Net Investment
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP:
GDP: Expenditures
Expenditures Approach
Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases
(G)

NOTES:
G Excludes
Transfer Payments
© 2002 McGraw-Hill Ryerson Ltd.

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Macroeconomics, Chapter 6

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GDP:
GDP: Expenditures
Expenditures Approach
Approach
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment
( Ig )
Government Purchases
(G)
NOTES:
Net Exports ( Xn )
© 2002 McGraw-Hill Ryerson Ltd.

Net Exports
= Exports - Imports
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