L> Measuring the Economy Measuring the Economy Some of the web links for this chapter are not functioning. instead I have included a chapter outline at the finish of the lecture. All of the statements in bold print are vital. also see: http://www.brickandmortarphilly.com.edu/mhealy/eco212/lectures/measecon/measecon.htm I know this is a little bit messy, but it will have to carry out for now OPTIONAL: Data: http://economics.about.com/money/economics/library/datapage/bltcbalpha.htm Definitions.: http://business economics.about.com/money/economics/library/datapage/bldefs.htm Online textbook: http://william-king.www.drexel.edu/top/prin/txt/GDPch/Ch15ToC.html IntroductionWe"ve been utilizing the AS - ADVERTISEMENT design to understand also the macroeconomic situation.The vertical axis actions the PRICE LEVEL which is the average levelof prices in an economy. The horizontal axis steps REAL DOMESTICOUTPUT which is all the products and also services developed in aneconomy.But WHAT NUMBERS execute we put on the axes? How perform we meacertain theprice level and real domestic output?We measure genuine domestic output via REAL GDP and we measure theprice level with a PRICE INDEX.In this lesson we"ll learn how to calculate actual GDP and a priceindex.Measuring Real Domestic Output: actual GDPGDP vs. GNP"domestic" manufacturing vs. manufacturing by American "nationals" or citizen How would the value of output developed at an American-owned manufacturing facility in the UNITED STATE be treated in GDP accounting? The value of output created at an American-owned manufacturing facility in the UNITED STATE would be treated as part of residential output in GDP accountancy. How would the worth of output developed at a foreign-owned factory in the U.S. be treated in GDP accounting? The value of output created at a foreign-owned factory in the U.S. would be treated as component of residential output in GDP bookkeeping. How would certainly the worth of output developed at an American-owned factory in Japan be treated in GDP accounting? The value of output produced at an American-owned manufacturing facility in Japan would NOT be treated as component of domestic output in GDP bookkeeping. Definition: GDPGross Domestic Product is the complete sector worth of all last items and also solutions that are created in the economic situation in one year. This is one definition that need to be memorized. As you have the right to view it has three components. (1) "complete sector value" The unit of measure for genuine residential output or real GDP is the industry value or $$$ GDP = SUM P x Q = P this year x Q this year (the amount of price times amount for every little thing created in a year) (2) "final products and services" Only last products and solutions are consisted of to protect against double counting Final items are bought and also used by the final consumer. When you buy a hamburger from McDonald"s the value of the hamburger is contained in GDP Intermediate items are bought so that they deserve to be remarketed or further procedures. When McDonald"s buys buns, and burger and ketchup the worth of these pruchases of intermediate items are NOT added to GDP considering that they will certainly be included as soon as a consumer buys the hamburger (a last good). If we contained the value of the hamberger AND the worth of the bun, burger, and ketchup then these would certainly be counted twice. Anvarious other way to avoid double counting is to usage the value-added method. (3) "produced in one year" GDP is a meacertain of what is produced or made in one year, therefore: a. secondhand sales are not included, and b. financial transactions not included A auto developed in 1999 is included in 1999"s GDP. Therefore, if a provided 1999 car is offered in the year 2001 we would certainly NOT encompass its price in the GDP for 2001 given that it was not produced then. We WOULD incorporate the earnings earned by the offered vehicle salesperkid in 2001 since he or she did clean, advertise, and also market the offered vehicle in that year, however we would certainly not incorporate the value of the 1999 auto itself. Also, many the "service news" that you hear concerning the billions of dollars spent on stocks and also bonds each day does not affect the GDP straight. When civilization buy stocks and bonds from whom carry out they buy them? If I buy $100 in IBM, from whom carry out I buy it? I may buy it through a stock broker, however whose stock execute I buy? I most likely didn"t buy it from IBM (unmuch less it was an IPO - Initial Public Offering), yet fairly I bought it from somebody that had actually bought it earlier. In other words, I bought :used" stock. But the main allude is, as soon as I buy $100 on IBM stock, nopoint is being created so the $100 is not added to GDP. REVIEW: (Textbook Concern 7-13) Which of the following are actually included in this years GDP? Exsimple your answer in each case. a. Interemainder on an AT&T bond. b. Social protection payments got by a reworn down factory worker. c. The services of a family members member in paint the family members home. d. The revenue of a dentist. e. The money received by Smith when she sells her economics textbook to a book buyer. f. The monthly allowance a college student receives from house. g. Rent received on a two-bedroom apartment. h. The money received by Josh when he resells his current-year-version Honda automobile to Kim. i. Interest received on corpoprice bonds. j. A 2-hour decrease in the length of the workweek. k. The purchase of an AT&T corpoprice bond. l. A $2 billion boost in service inventories. m. The purchase of 100 shares of GM widespread stock. n. The purchase of an insurance plan. ANSWERS Circular Flow ModelThe circular circulation design have the right to help us to understand also the twophilosophies offered to meacertain GDP1. expenditures method 2. revenue approachArrow # 3 is genuine GDP. This is output produced by organization andmarketed in the product sectors to consumers (households). To measurethis level of developed output we have the right to meacertain arrow #4 which are theexpenditures spent on this output. This is the EXPENDITURESAPPROACH.We have the right to likewise measure arrowhead #1 which is the income earned byfamily members once they sell their resources (arrowhead #2) to businesses.The value of output developed (GDP) is equal to the value of ALL theincome earned by everyone that had anypoint to execute via developing theoutput. If a $20,000 vehicle is offered, then $20,000 was earned by everyonethat was associated in developing and also selling the auto. So to measure GDP( the worth of the assets produced) we have the right to sum up all the incomeearned in creating that level of GDP. This is the INCOME APPROACH tocalculating GDP.Expenditures Approach GDP = C + Ig + G + Xn GDP = C + Ig + G + Xn1. individual usage expenditures (C) 2. gross personal domestic investment (Ig) a. includes: 1) all last purchases of machinery, equipment, and also tools by businesses 2) all construction 3) changes in inventories b. gross vs. net domestic investment (In) c. net investment and also economic expansion 1) widening economy 2) static economic situation 3) decreasing economic situation 3. government purchases (G) 4. net exports (Xn) Practice Problem Given the information below, use the EXPENDITURES APPROACH to calculate GDP. Answer the next question(s) on the basis of the adhering to national revenue data for the economic situation. All figures are in billions. Personal intake expenditures $400 Government purchases 128 Gross private domestic investment 88 Net exports 7 Net foreign aspect revenue earned in the U.S 0 Consumption of solved funding 43 Indirect company taxes 50 Compensation of employees 369 Rents 12 Interest 15 Proprietors" revenue 52 Corpoprice earnings taxes 36 Dividends 24 Undistributed corporate earnings 22 R-1 REF07059 ANSWER: Before scrolling down, pick up some paper and also a pencil and also actually calculate GDP. DOING it yourself is much better than reading it. . . . GDP = C + I + G + Xn . . From the table we get: GDP = C + I + G + Xn GDP = 400 + 128 + 88 + 7 GDP = C + I + G + Xn = 400 + 128 + 88 + 7 = $ 623Income Approach --calculating national earnings (NI)1. circular flow: expenditures = income? NI = Weras + Rents + Interemainder + Corp. Profits + Prop. Income 2. resource payments a. compensation of employees (wages) b. rent c. interemainder d. profit 1) proprietor"s earnings 2) corporate earnings Practice Problem Given the data below, usage the INCOME APPROACH to calculate National Income (NI). Answer the following question(s) on the basis of the adhering to national income data for the economic situation. All figures are in billions. Personal intake expenditures $400 Government purchases 128 Gross personal residential investment 88 Net exports 7 Net international variable earnings earned in the U.S 0 Consumption of addressed capital 43 Instraight service taxes 50 Compensation of employees 369 Rents 12 Interemainder 15 Proprietors" income 52 Corporate income taxes 36 Dividends 24 Undistributed corporate profits 22 R-1 REF07059 ANSWER: Before scrolling dvery own, pick up some paper and also a pencil and actually calculate GDP. DOING it yourself is better than analysis it. . . . NI = Wperiods + Rents + Interest + Corp. Profits + Prop. Income . . From the table we get: NI = Wperiods + Rents + Interest + Corp. Profits + Proprietor"s Income NI = 369 + 12 + 15 + 82 + 52 NI = Wperiods + Rents + Interest + Corp. Profits + Prop. Income Corporate revenues are offered for three various purposes: Corporate earnings taxes = 36 Dividends = 24 Undispersed corpoprice revenues = 22 Corpoprice profits then equal 36 + 24 + 22 = 82 . On the exam I will certainly provide you "corporate profits". NI = 369 + 12 + 15 + 82 + 52 = $ 530 As you deserve to watch, National income does not equal GDP. tbelow are some expenditures (that are contained in the expenditures approach) that are not earnings (therefore not included in the income approach). they are instraight company taxes ( 50), depreciation (43), and also net international income variable ( 0 ) GDP = C + I + G + Xn = 400 + 128 + 88 + 7 = $ 623 3. National Inconcerned GDP NI + IBT + Depreciation (CCA) = GDP NI + IBT + Depreciation (CCA) = 530 + 50 + 43 = 623 = GDP a. indirect business taxes (IBT) b. depreciation 4. Other Social Accounts a. Net Domestic Product (NDP) GDP - Depreciation (CCA) = NDP b. National Income (NI) NI = Weras + Rents + Interest + Corporate Profits + Proprietor"s Income NI is income EARNED by the factors of manufacturing (resources) c. Personal Income (PI) PI is the income RECEIVED by the components of manufacturing (resources) d. Disposable Personal Income (DPI) DPI is your SPENDABLE earnings 7-8 (Key Question) Below is a list of residential output and nationwide income numbers for a provided year. All figures are in billions. The taking place inquiries ask you to determine the significant national income measures by both the expenditure and also income methods. Answers obtained by each strategy need to be the very same. a. Using the over information, recognize GDP and NDP by the expenditure approach. b. Calculate National Income (NI) by the revenue method. Personal consumption expenditures.............. Net international variable income earned Transfer payments........................... Rents Consumption of addressed funding (depreciation)....... Social security contributions Interest....... Proprietors revenue Net exports.......................................... Dividends (part of corporate profits) Compensation of employees............. Indirect organization taxes Undispersed corpoprice earnings (part of profits).... Personal taxes Corpoprice earnings taxes (part of corpoprice profits).... Corpoprice earnings Government purchases........ Net exclusive domestic investment Personal saving....... ....$245 4 ....12 14 ....27 20 ....13 33 .....11 16 ....223 18 ....21 26 ....19 56 ......72 33 .......20 ANSWERS: a. Using the over data, identify GDP and NDP by the expenditure approach. GDP = $388 GDP = C + Igross + G + Xnet Igross = Inet + depreciation = 33 + 27 = 60 GDP = 245 + 60 + 72 + 11 = 388 NDP = $361 NDP + C + Inet + G + Xnet NDP = 245 + 33 + 72 + 11 = 361 or NDP = GDP - depreciation NDP = 388 - 27 = 361 b. Calculate National Income (NI) by the income technique. NI = $339 NI = weras + leas + interest + revenues earnings = corporate earnings + proprietor"s earnings revenues = 56 + 33 = 89 NI = 223 + 14 + 13 + 89 = 339 GDP and also Economic Well-BeingGDP per capita is frequently supplied to meacertain a country"s well being ortraditional of living. The higher the GDP per capita for a nation thebetter off the country is. But tright here are some problems with using GDPper capita to meacertain a country"s typical of living.Problems via using GDP to Measure the Standard ofLiving:1. non-market transactions are not contained in GDP 2. leisure boosts a standard of living however isn"t counted 3. boosted product high quality often isn"t accounted for in GDP 4. We must usage per capita GDP 5. boosts in GDP might injury the setting and decrease the conventional of living 6. the underground economic climate is not contained in GDPShortcomings of GDP (pp. 125-126) GDP is often supplied a a meassure of Economic Well-Being in a nation, yet there are problems: 1. GDP doesnt measure some exceptionally beneficial output because it is unpassist (homemakers services, parental son care, volunteer efforts, house advancement projects). Called non-market transactions 2. GDP doesnt measure renovations in product high quality unmuch less they are incuded in the price. 3. GDP doesnt measure improved living conditions as a result of even more leicertain. 4. GDP makes no worth adjustments for changes in the composition of output. Nominal GDP ssuggest adds the dollar value of what is produced; it provides no distinction if the product is a semiautomatic rifle or a jar of baby food. 5. GDP renders no value adjustments for alters in the distribution of income. Per capita GDP might give some hint regarding the loved one typical of living in the economy; but GDP figures execute not provide indevelopment about exactly how the revenue is dispersed. 6. GDP does not incorporate output from the Underground Economy. Illegal activities are not counted in GDP (estimated to be approximately 8% of UNITED STATE GDP). Legal financial activity may likewise be part of the underground, generally in an effort to protect against tax. 7. GDP and also the environment: The harmful impacts of air pollution are not deducted from GDP (oil spills, increased incidence of cancer, damage of habitat for wildlife, the loss of a clear unobstructed view). GDP does encompass payments produced cleaning up oil spills and also the expense of health and wellness treatment for cancer victims. Resouce depletion can bring about reduced future output 8. Noneconomic Sources of health choose courtesy, crime reduction, and so on, are not covered in GDP. 9. GDP does not account for a feasible future decrease in output because of resource depletion. 10. Per-capita earnings have to be used to compare the financial health of different countries. Which nation has actually a higher GDP, Switzerland or India? Which has a higher level of economic well-being: Switzerland: GDP: $239.3 billion (2003 est.) Population: 7,450,867 (July 2004 est.) GDP per capita: $32,700 (2003 est.) India: GDP: $3.033 trillion (2003 est.) Population:1,065,070,607 (July 2004 est.) GDP per capita: $2,900 (2003 est.) GDP per capita = GDP / populace REVIEW: Do each of the adhering to cause GDP to OVERSTATE the economic well-being of a nation or UNDERSTATE it? 1. non-industry transactions (Does GDP OVERstate or UNDERstate economic well-being?) not contained so, GDP UNDERclaims wellness. 2. enhanced product top quality (Does GDP OVERstate or UNDERstate economic well-being?) not accounted for, so GDP UNDERsays wellness. 3. even more leicertain (Does GDP OVERstate or UNDERstate financial well-being?) not accounted for, so GDP UNDERsays wellness. 4. the complace of output (Does GDP OVERstate or UNDERstate financial well-being?) if "bad" things are being created, then GDP OVERstates well-being. 5. the distribution of income (Does GDP OVERstate or UNDERstate financial well-being?) an unequal distributin of earnings would bring about GDP OVERstating the wellness of the majority of of a country"s populace 6. the underground economy (Does GDP OVERstate or UNDERstate economic well-being?) not accounted for, so GDP UNDERclaims well-being 7. GDP and also the setting (Does GDP OVERstate or UNDERstate economic well-being?) harmful results of contamination and also prices of contamination reduction are not deducted from GDP, so GDP OVERclaims health. 8. Non-economic resources of health (Does GDP OVERstate or UNDERstate economic well-being?) not accounted for, so GDP UNDERclaims wellness 9. per-capita income (Does GDP OVERstate or UNDERstate financial well-being?) GDP OVERclaims well-being in countries through large populaces and UNDERclaims well-being in nations with tiny populations Measuring the Price LevelIntroductionWe"ve been making use of the AS - AD design to understand the macroeconomic situation.The vertical axis steps the PRICE LEVEL which is the average levelof prices in an economy. The horizontal axis procedures REAL DOMESTICOUTPUT which is all the goods and also services created in aneconomic climate.But WHAT NUMBERS do we put on the axes? How carry out we meacertain theprice level and actual domestic output?We have actually watched that you meacertain real residential output via REAL GDPand we have actually learned how to calculate GDP. Now we will learn just how tomeacertain the general price level. We meacertain the price level through aPRICE INDEX.Definitionsnominal GDP and also actual GDP http://william-king.www.drexel.edu/top/prin/txt/GDPch/GDP28.html http://william-king.www.drexel.edu/top/prin/txt/GDPch/GDP28a.html http://william-king.www.drexel.edu/top/prin/txt/GDPch/GDP29.html Nominal GDP = SUM (this year"s prices x this year"s quantities) = P this year x Q this year As such, if nominal GDP boosts is it bereason we are producing more ( Q this year ) or is it because the Price Level boosted ( P this year ) ? In fact it is feasible for nominal GDP to increase also though the quantity produced has DECREASED. How? Nom. GDP = P this year x Q this year Nom. GDP = P this year x Q this year So if we recognize that nominal GDP has increased, we still carry out not understand if we are creating more (and reducing scarcity) or if the price level has actually simply boosted. Real GDP = SUM (base year"s prices x this year"s quantities) = P base year x Q this year By utilizing the same price level (base year prices) we remove the effects of a greater price level (inflation) and also if REAL GDP increases we understand that the economic climate is producing even more and scarcity is being decreased..genuine GDP actual GDP = SUM P base year x Q specific year certain year"s quantities x base years prices Real GDP = SUM (base year"s prices x this year"s quantities) = P base year x Q this year By making use of the very same price level (base year prices) we rerelocate the impacts of a greater price level (inflation) and also if REAL GDP increases we know that the economic situation is developing more and scarcity is being decreased.. Calculating a price indexTo meacertain the price level we use a price index. A price index isa meacertain of the price level as a percent of the price level in aBASE year. This is different from inflation which is the price ofrise in the price level from the PREVIOUS year.As you have check out to calculate a price index a year is selected asa base year. the average level of prices for that year is assigned aworth of 100. Then the price levels for all various other years arecalculated as a percent of the base year.GDP Price Index (GDP deflator) 1. definition a price index is a measure of the price of a mentioned arsenal of goods and services, dubbed a "industry basket", in a offered year as compared to the price of an identicle (or extremely similar) repertoire of items and solutions in a referral year (called the "base year") 2. calculating a GDP price index price index in a provided year = (price of mkt basket inparticular year / price of exact same mkt basket in base year) x 100 3. calculating actual GDP REVIEW The complying with information present nominal GDP and also the proper price index for a number of years. Compute real GDP for annually. In which year(s) was there a recession (decrease in real GDP)?.
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All GDP are in billions. NominalPrice level YearGDPindexReal GDP 1$117120___ 2124104___ 314385___ 414996___ 5178112___ 6220143___ The answers are below: ANSWERS: NominalPrice level YearGDPindexReal GDP 1$117120$ 98 2124104119 314385168 414996155 5178112159 6220143154