You are on page 1of 21

Lecture 2:Measuring GDP

 What is the circular flow of income and expenditure?
 How are GDP, real GDP, and the average price level measured?

Your Weekend
 Parkin Chapter 6 and 7  Lecture Slides,  Homework when there is nothing else to do!!!!!!!

Economic Barometers  The Pakistani Bureau of Statistics publishes GDP every quarter (three months). telling us:  how fast it has grown  the rate of inflation  Companies use this data to forecast future demand for their products. These statistics are a barometer of the economy. .

.Gross Domestic Product  Gross domestic product (GDP) is the dollar value of total production of goods and services in a country during a calendar year.  the easiest way to understand GDP is to use a circular flow diagram.

The Circular Flow of Income and Expenditure .

Sectors of the Economy  The economy has four sectors:     households firms governments the rest of the world .

Markets of the Economy  The economy has three aggregate markets:  Resource or factor markets  goods and services markets (heart)  financial markets .

.Gross Domestic Product  Gross domestic product is the value of aggregate production in a country during a year.  GDP can be valued one of two ways:  By what buyers pay for it  By the Aggregate Income of Factor of Production.  These two ways of adding up GDP always give the same answer.

 Aggregate expenditure includes:     Consumption (C) Investment (I) Government purchases (G) Net exports (NX) .Aggregate Expenditure  The total amount that buyers pay for the goods produced is aggregate expenditure.

and net exports .Gross Domestic Product  Expenditure Equals Income Y = C + I + G + NX  Expenditure Approach  Uses data on consumption expenditure. investment. government purchases.

Gross Domestic Product  Expenditure Approach  Personal consumption expenditures are the expenditures by households on goods and services produced in Pakistan and the rest of the world  Consumption Function : C = a ( Y – T) a = Marginal Propensity to consume .

Gross Domestic Product  Expenditure Approach  Gross domestic investment is expenditure on capital equipment and buildings by firms.  Investment Function : I = I ( assumed exogenous) . Also. . it includes the change in inventories.Investment is inversely related to interest rate.

• Does not include transfer payments Government Exp. Function : G = G (exogenous) .Gross Domestic Product  Expenditure Approach  Government purchases of goods and services are the purchases of goods and services by all levels of government.

Gross Domestic Product  Expenditure Approach  Net exports of goods and services are the value of exports minus the value of imports.Im .  Net Export Function : Nx = Ex .

275 -98 15.GDP in 1997 Item Consumption (C) Investment (I) Government (G) Net exports (NX) GDP (Y) Amount % of (billion $) GDP 5.4 7.3 17.938 100.4 -1.628 68.133 1.7 1.0 .

•Using the circular flow Diagram below answer the following questions: .

Y = C+I+G+(X-M) Y-C-T=S (Private Savings = Income – consumption – taxes) T-G = S (Public Savings = Taxes – Government exp. D was 30 million and E was 6 million. C was 24 million. During the current fiscal year. Calculate: •Aggregate Expenditure •Aggregate Income •GDP •Government budget Deficit •Government Saving •National Saving •Borrowing from the rest of the world.) .The figure above shows the flows of expenditure and income for a typical economy. B was 60 million. A was 20 million.

•What is nominal and real GDP. Products Quantity Prices Year Balls Bats Balls Bats 100 20 50 30 1 5 2 6 2008 2009 .P. Calculate Real and Nominal G.D.

T=T I=I E = a(Y-T) + I + G .Elements of the Keynesian Cross consumption function: govt policy variables: for now. planned investment is exogenous: planned expenditure: equilibrium condition: actual expenditure = planned expenditure Y=E C = a(Y-T) G=G .

Investment = 1500. . = 1200 & Net Exports = 500 Calculate Aggregate Income. Govt. Taxes = 1000 .8 . Exp.T) + Ip + G + NX Given that Marginal Propensity to consume = 0.SAMPLE QUESTION General equilibrium: Solution procedure Start with the equation in general form: Y = a ( Y .

1000) + 1500 + 1200 + 500 Collect all the constant terms: Y = 3200 + 0.8 ( Y .800 Y = 2400 + 0.8 Y from both sides of the equation: 0.000 . multiply both sides by 1 / 0.SAMPLE QUESTION Keynesian equilbrium: Solution procedure Start with the equation in general form: Y = a ( Y .8Y .T) + Ip + G + NX Substitute in the given numbers: Y = 0.2 Y = 2400 Finally.2 = 5 Y = 5 (2400) = 12.8Y Subtract 0.