Chapter_19_Slides

Chapter 19: Measuring the Size of the Economy

1. Overview

• The chapter focuses on measuring the size of the economy through Gross Domestic Product (GDP), which is often abbreviated as Y.

• Key topics include:

  • Nominal vs Real Values

  • Tracking Real GDP over time

  • Comparing GDP across countries

  • Limitations of GDP

• The concept of GDP helps summarize movements in prices and quantities of myriad goods and services in the economy at one time.

2. Historical Context of GDP Measurement

• During the 1930s, global economies faced severe challenges, including:

  • Droughts leading to crop failures.

  • The 1929 stock market crash which eliminated billions in wealth, curtailing household spending and business investment.

  • Numerous factory closures and widespread unemployment, exacerbated by the absence of safety nets like Employment Insurance.

• Governments lacked a clear metric to assess overall economic performance due to limited indicators, such as:

  • Agricultural output

  • Railroad and automobile production

3. Birth of Macroeconomics

• The field of macroeconomics emerged in the 1930s, particularly after the publication of J. M. Keynes’ "The General Theory of Employment, Interest and Money" in 1936.

• Keynes proposed means to measure and study the economy holistically and suggested government intervention during economic downturns.

• For instance, increased government expenditure could help stimulate the economy when private demand dwindled.

  • This principle guided the federal government's Economic Action Plan in response to the 2008-09 economic crisis.

4. Adoption of GDP Measurement

• Following WWII, countries adopted Keynes' ideas to refine their economic monitoring to prevent repeating 1930s failures.

• The U.S. began measuring GDP in 1947; Canada followed suit in 1953.

5. Definition of GDP

• Gross Domestic Product is defined as:

  1. Market value: Total value of all final goods and services produced in a country.

  2. Final goods and services: Only items consumed by end-users are counted; intermediate goods are not included in GDP.

  3. Within a country: GDP captures the output produced within national borders.

  4. Given time period: GDP is typically measured monthly, quarterly, or annually.

6. Calculating GDP

• Simple example using hockey sticks and pucks:

  • 5,000 hockey sticks at $200 = $1,000,000

  • 100,000 hockey pucks at $2 = $200,000

  • Total GDP = $1,200,000

7. Methods to Compute GDP

• GDP can be computed in two major ways:

  1. By expenditures: Measuring the spending by households, firms, government, and foreign entities.

  2. By income: Calculating the incomes generated from labor, capital, land, and government.

8. Components of Canada’s GDP (2019Q3)

• Key components include:

  • Household Consumption (C): $1.3T

  • Business Investment (I): $0.52T

  • Government Expenditure (G): $0.49T

  • Exports (X): $0.73T, and Imports (IM): $0.76T.

  • Total GDP = $2.3T with a per capita income of $60,846.

9. Gross Domestic Product Growth

• GDP in Canada doubled from $1.1 Trillion in 2001 to $2.2 Trillion in 2018 with an average growth rate of about 4% annually.

• GDP can increase due to an increase in production and consumption or due to inflation.

• Real GDP accounts for inflation, representing actual volume changes rather than price changes.

10. Key Components of Household Consumption (C)

• Diverse areas of consumption in 2018 included:

  • Housing: $298 Billion

  • Transportation: $196 Billion

  • Miscellaneous goods: $176 Billion

  • Food: $112 Billion

11. Understanding Investment (I)

• Business Investment involves purchases that yield future income (e.g., machinery, inventory buildup, and new home construction).

12. Government Expenditure (G)

• Encompasses all goods and services purchased by government entities.

13. Understanding GDP: Nominal vs. Real

• Importance of differentiating nominal GDP (which includes price changes) from real GDP that accounts for only quantity changes.

14. Price Movements and the GDP Deflator

• The GDP Deflator illustrates price level changes for GDP components, enabling better welfare comparisons over time.

15. Tracking GDP Over Time

• A method for assessing the performance of the economy through nominal GDP, GDP deflator, and calculation of real GDP over multiple years.

16. Comparing GDP Across Countries

• To compare GDP standards across countries:

  • Adjust for currency differences.

  • Account for population size.

  • Example: In 2018, Japan and Canada's GDP comparisons demonstrate how to assess GDP per capita correctly.

17. Limitations of GDP

• While GDP serves as an important economic indicator, its limitations include:

  1. The underground economy, which can account for 5% to 10% of GDP.

  2. Home-based work is often untracked.

  3. Health and leisure aspects are not reflected.

  4. Environmental quality is omitted in calculations.

• Despite these limitations, GDP per capita often correlates well with overall well-being.

18. Appendix: Fun with Numbers

• Definitions of large numbers:

  • 1 million = 1,000,000

  • 1 billion = 1,000,000,000

  • 1 trillion = 1,000,000,000,000

  • 1 quadrillion = 1,000,000,000,000,000