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ECO2007: Measurement

Professor Yun Jung Kim


Sogang University

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Measurement

Topics
Measuring GDP
Three approaches
An example
Nominal and real GDP

Measuring business cycles


Regularities in GDP fluctuations
Comovement
Behavior of Key Macroeconomic Variables

Measuring the price level and inflation


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Measurement

Measuring GDP

Gross Domestic Product

GDP: The value of all final goods and services produced during a
given period of time within a countrys borders.
Three approaches measuring GDP
The product approach
The expenditure approach
The income approach.

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Measurement

Measuring GDP

Measuring GDP an Identity

The measurement of GDP is based on a fundamental identity for an


economy:

Value of total final domestic production

Total expenditures on domestic goods

Total income paid to factors used in domestic production

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Measurement

Measuring GDP

Measuring GDP Three Ways

Product Approach: Add up value of final outputs from domestic firms


and the government

Expenditure Approach: Add up expenditures by domestic households


(consumption C), domestic firms (investment I), the government
(G) and foreigners (EX) and subtract off the expenditures by
domestic agents on foreign goods (IM)

Income Approach: Add up incomes from factors used in domestic


production (wages/salaries/benefits, interest income, rental income,
corporate profits, taxes, etc)

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Measurement

Measuring GDP

Measuring GDP Why Three Ways?


They lead to the same result after all (come from identities).
They cut the total pie in different interesting ways and help to answer
different questions.
Production Approach: In which industries was the pie produced?
Expenditure Approach: Who ate the pie?
Income Approach: What kind of production factors were rewarded
while producing the pie?
Income-expenditure identity:
Y C + I + G + NX
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Measurement

Measuring GDP

Measuring GDP An Example


Coconut producer:
12 units worth of coconuts sold to a restaurant, 8 to consumers, 6
cant be sold and are stored.
5 units of wages paid, 0.5 interest on a loan, 1.5 taxes.
Restaurant:
30 units of meals are served.
12 units of coconuts are bought from the domestic coconut producer,
4 from abroad.
4 units of wages paid, 3 of taxes.
Government:
Produces national security against coconut terrorists, and pays 5.5
units of wages.
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Measurement

Measuring GDP

Measuring GDP Product Approach

Also called value-added approach.


Definition: Value added revenue minus expenditures for
intermediate goods
It avoids double counting in that it isolates the economic contribution
of each production step towards the final good.

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ECO2007

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Measurement

Measuring GDP

Measuring GDP Expenditure Approach


Units that absorb or use the produced final good pie.
Households - Consumption on durables, nondurables, services.
Firms - Fixed non-residential investment (structures, equipment),
inventory investment. Residential investment (housing) is counted as
investment.
Foreigners - Exports.
Government - Government consumption and investment.
Have to subtract imports, because C, I , G in general include
expenditures on foreign goods, but we are interested in expenditures
on domestic goods

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Measurement

Measuring GDP

Measuring GDP Income Approach

Factor payments from domestic production, not at factor payments to


domestic factors (GNP).
Compensation for employees: wages, salaries, benefits.
Corporate profits, Rental income
Interest
Taxes
Depreciation of capital, has to added back in, because it was taken out
from profits

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Measurement

Measuring GDP

Measuring GDP Nominal v.s. Real


Table 2.10
Data
Howfor
doesReal
GDPGDP
add upExample
apples and oranges?
Prices: GDP accounting uses (market) prices to convert
incommensurable quantities into comparable (Dollar, Won) values.
Example

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Measurement

Measuring GDP

Measuring GDP Nominal v.s. Real


Nominal GDP in period t = Pt Yt
Real GDP in period t = Yt
Pick some year as base year
Calculate real GDP in subsequent years as quantities times base year
prices

Nominal GDP
Real GDP (Yr 1)
Real GDP (Yr 2)
Chain-weighted Real GDP (Yr 1)
Chain-weighted Real GDP (Yr 2)

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Year 1
$ 130.00
$ 130.00
$ 222.50
$ 130.00
$ 219.05

ECO2007

Year 2
$ 292.00
$ 176.00
$ 292.00
$ 173.29
$ 292.00

Growth Factor
2.246
1.354
1.312
1.333
1.333

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Measurement

Measuring GDP

Figure
Nominal
and 2.1
Real GDP

Nominal GDP and Chain-Weighted Real GDP


Nominal GDP and Chain-Weighted Real GDP

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University)
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Education, Inc.

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Measurement

Measuring GDP

Components of GDP
Yt = Ct + It + Gt + NXt
C: consumption of non-durables and services and durable goods by
households (70%)
I : expenditure of firms on new plant and equipment, new residential
construction, and changes in inventories (15%)
G: government expenditure (roads, military, police, etc.) (20%)
NX: net exports of goods and service (-5%)
Korea: C 53%, I 30%, G 15%, NX 2%

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Measurement

Measuring GDP

Post-War Quarterly Real GDP

Post-War Quarterly Real GDP


Real
GDP
logLog
Real
GDP
16.8
16.4
16.0
15.6
15.2
14.8
14.4
14.0
50
Sims (ND)

55

60

65

70

75

80

85

90

95

Introduction

00

05

10

Fall 2010

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Dominant feature, by far, is the upward trend


In comparison to the trend, recessions are minor (even the current
one!)
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Measurement

Measuring GDP

Components of GDP
Components
of GDP
Consumption

Investment

9.5

8.0
7.5

9.0

7.0
8.5
6.5
8.0
6.0
7.5

5.5

7.0

5.0
1950

1960

1970

1980

1990

2000

2010

1950

1960

Government Spending

1970

1980

1990

2000

2010

2000

2010

Net Export Share

8.0

.02

7.5

.00

7.0
-.02
6.5
-.04

6.0

5.5

-.06
1950

1960

1970

1980

1990

2000

2010

1950

1960

1970

1980

1990

Sims (ND) investment, andIntroduction


Fall 2010
/ 26 too
Consumption,
government spending all
trend15 up
Consumption is smoother than investment, but series tend to go up
and down together (co-movement)

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Measurement

Measuring GDP

Detrending

Macro is traditionally divided into two time scales long run and
short run
Business cycles defined as movements around long run trend
To see cycles more clearly, want to remove this trend Detrending

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Figure 1.13
Measurement
Measuring GDP
Percentage Deviation From Trend in Real GDP
Detrended GDP

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Measurement

Measuring GDP

Observations
Great Moderation:
Plot looks smoother after early 1980s
1950-1982: average 2 recessions per decade; 1982-: about 1.5
Post 1982 recessions not nearly as deep (Great Recession is the
exception)

Great Recession:
Rooted in the financial crisis in the U.S., and subsequently spread to
the rest of the world
Illustrates the importance of financial market factors for aggregate
economy.

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Measurement

Business Cycle Measurement

Describing Business Cycles

Business Cycles are deviations from trend in real GDP


Peaks and troughs: local turning points.
Amplitude: how strong is the cycle?
Frequency: how often does a peak/trough occur?
Boom: persistent positive deviations from trend
Recession: persistent negative deviations from trend
Recovery: the early period after a trough.

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Measurement
Figure 3.1
Idealized Business
Cycles
Describing
Business Cycles

Business Cycle Measurement

Illustration of Business Cycles

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Measurement

Business Cycle Measurement

Business
Cycles
Figure
3.2
Percentage Deviations from Trend in
Real
GDP
Percentage Deviations from Trend in Per Capita Real GDP

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Education, Inc.
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University)

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Measurement

Business Cycle Measurement

Features of GDP

Persistence and reversion to trend


Choppiness
No regular amplitude
No regular frequency

Makes forecasting hard, especially longer-term forecasting!

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Measurement

Business Cycle Measurement

Describing Business Cycles Comovement


If the deviations from trend in a macroeconomic variable are
positively
correlated with the deviations from trend in
Figure(negatively)
3.3
realTime
GDP,Series
then that
variable
is procyclical
(countercyclical).
Plots of x and
y
If a macroeconomic variable is neither procyclical nor countercyclical,
it is acyclical.

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Measurement

Business Cycle Measurement

Describing Business Cycles Leads and Lags


Leading: If a macroeconomic variable tends to aid in predicting the
Figure
future
path 3.7
of real GDP, it is a leading variable
Leading and Lagging Variables
If real compare GDP helps to predict the future path of a particular
macroeconomic variable, it is a lagging variable.

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Measurement

Business Cycle Measurement

Figure 3.9
Behavior
of Key Macroeconomic Variables Consumption
Percentage Deviations from Trend in
Real Consumption and Real GDP

Percentage Deviations from Trend in Real Consumption and Real GDP

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Measurement

Business Cycle Measurement

Figure
3.10Macroeconomic Variables Investment
Behavior
of Key
Percentage Deviations from Trend in Real
Investment and Real GDP

Percentage Deviations from Trend in Real Investment and Real GDP

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Measurement

Business Cycle Measurement

Behavior
of Key
Figure
3.12Macroeconomic Variables Prices
Price Level and GDP
Percentage Deviations from Trend in the Price Level and Real GDP

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Measurement

Business Cycle Measurement

Behavior
of Key
Figure
3.13 Macroeconomic Variables Money Supply
Percentage Deviations from Trend in the
Money
Supply
andfrom
Real
GDP
Percentage
Deviations
Trend
in Money Supply and Real GDP

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Measurement

Business Cycle Measurement

Figure
3.14Macroeconomic Variables Employment
Behavior
of Key
Percentage Deviations from Trend in Employment
and Real GDP
Percentage Deviations from Trend in Employment and Real GDP

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Measurement

Business Cycle Measurement

Figure
Behavior
of 3.16
Key Macroeconomic Variables APN

Percentage Deviations from Trend in Average Labor


Productivity and Real GDP

Percentage Deviations from Trend in Average Labor Productivity and Real GDP

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Measurement

Business Cycle Measurement

Table 3.1

Behavior
of Key Macroeconomic
Variables
Correlation
Coefficients and Variability
of Summary
Percentage Deviations from Trend

1-

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Measurement

Business Cycle Measurement

Behavior of Key Macroeconomic Variables Summary

These are the stylized facts we try to understand!


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Measurement

Measuring the Price Level

Measuring the Price Level


GDP deflator:

Nominal GDP
100
Real GDP

CPI:
Cost of base year quantities at current prices
100
Cost of base year quantities at base year prices
Inflation is Pt /Pt 1 1.
Problems
Consumers substitute away from products with higher than average
price growth
Changes in the quality of goods
New goods

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Measurement

Measuring the Price Level

Measuring
the Price Level
Figure 2.3
The Price Level as Measured by the CPI and the
Implicit GDP Price Deflator

The Price Level Measured by CPI and GDP deflator

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CPI tends
to overestimate inflation

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Measurement

Measuring the Price Level

Figure
Measuring
the2.2Price Level

Inflation Rate Calculated from the CPI and from the


Implicit GDP Price Deflator
CPI Inflation vs. Deflator Inflation

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