Macroeconomics (HUL213)

Lectures 03-04
Jan 08, 11; 2024
Measuring the Macroeconomy

In this lecture, we will learn

▶ The importance of gross domestic product (GDP).
▶ The composition of GDP, and how it has changed over time.
▶ How to use GDP to examine the evolution of living standards.
▶ Documenting the differences in living standards across
countries.
Introduction

National income accounting

▶ Method of aggregating the production of diverse goods into a
single measure of overall economic activity
National accounting:
▶ State of an economy at a given time
▶ Changes to an economy over time
▶ Differences across countries
Measuring the State of the Economy
Gross domestic product (GDP): The market value of the final
goods and services produced in an economy over a certain period
Measuring the State of the Economy
The Expenditure Approach to GDP
An example: income approach to GDP (2018, US)
The labour share to GDP in India
The labour share (in % to GDP) 1980-2022:
Developed+Developing world

Source: United Nations global policy model database: Labour share is calculated as the ratio of the sum of

compensation of employees and mixed income to GDP.

Total share of GDP to Inputs
▶ Share of GDP to Labour
▶ Two-thirds (approximately)
▶ Labour’s share of GDP has remained approximately constant
over time
▶ Share of GDP to capital
▶ One-third (approximately)
What Is Included in GDP and What Is Not?
GDP considers only final goods and services.
▶ Intermediate goods are not included in GDP calculations.
▶ For example, if Alcoa sells aluminum to Ford to make a Focus
ST, the sale of the car is included in GDP, but not the sale of
the aluminum.
Not included:
Included: ▶ Government transfer
payments
▶ Government spending on goods/services ▶
Environmental conditions
▶ Factory production ▶ A measure of a nation’s
▶ Healthcare expenditures health
▶ Ingredients and food purchased ▶ Time spent cooking at
▶ Kids in day care home
▶ Babysitter
Measures of Well-Being

▶ GDP is used by economists as a proxy for standards of living.

▶ https:
//www.gapminder.org/tools/#$chart-type=bubbles&url=v1
An example comparison
How large is China’s economy in comparison with the U.S.
economy? The national accounts for the two countries show that
in 2014: {U.S. GDP: $16.4 trillion.} {China’s GDP: 60.9 trillion
yuan}
▶ Both are measured in 2005 prices.
▶ The exchange rate: 6.14 yuan per dollar
▶ We need to use a common set of prices to calculate real GDP
in each country. adjust for the relative price level of goods in
the United States versus China.
▶ The value of Chinese GDP in U.S. dollars is:
60.9 trillion yuan x ($1/6.14 yuan) = $9.9 trillion
▶ In China, on average, goods cost about 59 percent of goods in
the United States. Hence, (US price level) / (China price
level) is roughly equal to 1/0.59.
▶ Therefore, size of China’s economy = $9.9 trillion × (1/0.59)
= $16.8 trillion
Measurement comparison

▶ Real GDP in China is about $16.8 trillion.

▶ At common prices, the Chinese economy is much larger than
it first appeared.
▶ China’s economy is about 2 percent larger than the U.S.
economy.
▶ Compare this to how it originally appeared to be 40 percent
smaller.
▶ Indeed, as of 2014, China had the largest economy in the
world measured at constant prices.
▶ However, this does not take into account the fact that China
has about four times as many people as the United States.
Thank You