Schiller_Macro_Ch5A_GDP+v+Real+GDP

Chapter Goals

  • The chapter focuses on how aggregate economic activity is measured, addressing questions like:

    • How much output is being produced?

    • What is it being used for?

    • How much income is generated in the marketplace?

    • What's happening to prices and wages?

National Income Accounting

  • Developed in the 1930s to measure the health of the economy.

  • National income accounting measures aggregate economic activity, focusing particularly on:

    • National income

    • Its components

Gross Domestic Product (GDP)

  • Definition: Total market value of all final goods and services produced within a nation's borders in a specified time period.

  • Determined by the price of goods and services, which serves as a measure of value for calculating total output.

Measurement of Output

  • Last Year’s Output:

    • Physical terms:

      • Oranges: 3 billion

      • Bicycles: 3 million

      • Rock concerts: 700

      • Total: ?

    • Monetary terms:

      • 3 billion oranges @ $0.40 each = $1,200 million

      • 2 million bicycles @ $100 each = $200 million

      • 700 rock concerts @ $1 million each = $700 million

      • Total: $2,100 million

  • This Year’s Output:

    • Physical terms:

      • Oranges: 4 billion

      • Bicycles: 4 million

      • Rock concerts: 600

      • Total: ?

    • Monetary terms:

      • 4 billion oranges @ $0.40 each = $1,600 million

      • 4 million bicycles @ $100 each = $400 million

      • 600 rock concerts @ $1 million each = $600 million

      • Total: $2,600 million

GDP per Capita

  • Calculation: Total GDP divided by total population.

  • Useful for international comparisons of total output.

  • Per capita GDP is merely a statistical average and does not reflect distribution or usage of GDP, which can hide inequalities.

Global Inequities

  • Per capita GDP can obscure real living conditions, as low GDP reflects significant deprivation.

U.S. States: GDP Comparisons

  • Comparison of GDP of U.S. states to various countries shows stark differences in economic capacity.

  • Example: California's GDP equivalent to countries like Canada.

Measurement Problems

  • Nonmarket Activities: GDP excludes many goods/services that are produced but not sold in markets.

  • Unreported Income: Market activities not reported to tax authorities skew GDP statistics.

Challenges to GDP

  • Robert Kennedy highlighted issues with GDP as a sole metric for a nation's success.

Value Added Approach

  • GDP can also be calculated by summing the value added at each production stage:

    1. Farmer grows wheat, sells it to miller: Value added = $0.12

    2. Miller converts wheat to flour, sells to baker: Value added = $0.16

    3. Baker bakes bagel, sells it to bagel store: Value added = $0.32

    4. Bagel store sells bagel to consumer: Value added = $0.15

    • Total Value Added: $0.75

Real vs. Nominal GDP

  • Nominal GDP: Current prices; does not account for inflation.

  • Real GDP: Adjusted for inflation; reflects the value of output more accurately over time.

  • Comparison of nominal vs real GDP can illustrate differences in economic growth versus inflation effects.

Chain-Weighted Price Adjustments

  • To avoid issues with fixed price indexes, chain-weighted indexes use moving averages to adjust for inflation.

Net Domestic Product (NDP)

  • NDP is calculated as GDP less depreciation.

  • Represents output that could be consumed without reducing capital stock (i.e., plant and equipment).