krugman_can_4e_lecture_slides_ch07_macro

Chapter Overview

• This chapter focuses on tracking the macroeconomy using key measures.

  • Key topics include GDP (Gross Domestic Product), its calculation, and the Consumer Price Index (CPI).

Learning Objectives

• Understand how economists use aggregate measures to evaluate economic performance.

• Define GDP and detail its calculation methods.

• Distinguish between real GDP and nominal GDP, explaining why real GDP is preferred.

• Explain what a price index is and how it's used to compute inflation rates.

The National Accounts

Overview

• National accounts are essential for measuring and comparing economic performance across countries.

Key Components

• Spending Tracking: National accounts monitor:

  • Consumer spending

  • Producer sales

  • Investment spending

  • Government purchases

  • Other economic flows.

Expanded Circular-Flow Diagram

• A visual representation illustrating the flow of funds in the economy, between households, firms, and the government.

Components of GDP

Consumer Spending

• Household expenditures on goods and services.

Government Purchases

• Expenditures by federal, provincial, and municipal governments.

Investment Spending

• Spending on physical capital, machinery, buildings, and inventory changes.

Trade Balance

• Exports: Goods/services sold abroad.

• Imports: Goods/services bought from abroad.

• GDP Formula:

  • GDP = Consumer Spending + Investment Spending + Government Purchases + Exports - Imports.

Definition of GDP

• Goods and services are categorized as:

  • Final goods: Sold to the end-user.

  • Intermediate goods: Used in production; not sold directly to consumers.

• GDP measures the total value of all final goods/services produced within a country in a year.

Calculating GDP

Three Methods

1. Value of Final Goods: Total value produced.

2. Aggregate Expenditure: Total spending on domestically produced final goods/services.

3. Factor Income Method: Total income earned by households from firms.

• Note: Spending equals income at a macroeconomic level.

Value-Added Approach

• Accounts for the added value of each producer; avoids double counting by excluding intermediate goods' values.

Expenditure Approach

• Summarizes all spending on final goods/services:

  • GDP = C + I + G + (X - IM)

  • Variables explained:

    • C = Consumer Spending

    • I = Investment Spending

    • G = Government Purchases

    • X = Exports

    • IM = Imports

Income Approach

Components

• Factor Incomes: Salaries, rents, dividends, etc.

• Non-Factor Payments: Government income from net indirect taxes and capital depreciation.

Practice Questions

Question on Canadian GDP Inclusion

• Includes foreign tourist spending but not Canadian spending abroad. (Correct answer is the price paid by a German tourist when staying at a Montreal hotel.)

Pitfalls in GDP Calculation

Items Included

• Investments, domestically produced final goods/services, inventory changes.

Items Excluded

• Intermediate goods, used goods, financial assets, imports, household production, illegal activities, and environmental harm.

Canada’s GDP in 2019

• Illustration of two GDP calculation methods.

Understanding GDP

• GDP indicates the economy's size but does not account for price changes.

• Use real GDP for more accurate comparisons.

Net Exports Calculation

• Defined based on exports/imports between trading countries.

Measuring Real GDP

Overview

• Reflects output adjusted for price changes.

Example Calculation

• Described using a table of quantities and prices of goods over years.

Real vs. Nominal GDP

Differences

• Real GDP adjusts for inflation, while nominal GDP does not.

Use of Chained Dollars

• Method combining base years to calculate real GDP.

GDP and Quality of Life

General Insight

• Wealthier nations may exhibit higher well-being but these measures vary based on societal factors.

Price Indexes and Aggregate Price Level

Importance

• Price indexes simplify understanding overall price levels in the economy.

Calculation Method

• Aggregating costs of a market basket of goods/services.

CPI and Inflation

CPI Explained

• Measures cost trends of a typical urban family's expenditure.

Inflation Rate Calculation

• Changes in Percent:

  • Inflation Rate = (Price Index in Year 2 - Price Index in Year 1) / Price Index in Year 1 x 100.

Other Price Measures

Types

• Industrial Producer Price Index (IPPI): Similar to CPI, measures production goods prices.

• GDP Deflator: Ratio of nominal GDP to real GDP.

Summary of CPI, IPPI, and GDP Deflator

• Overview of the interrelation and trends in these price measures.