The Data of Macroeconomics

III
THE DATA OF MACROECONOMICS

5
Measuring a Nation’s Income
Microeconomics and Macroeconomics
• Microeconomics is the study of how individual households and firms
make decisions and how they interact with one another in markets
• Macroeconomics is the study of the economy as a whole
• Its goal is to explain the economic changes that affect many households,
firms, and markets at once
CHAPTER 5 MEASURING A NATION’S INCOME

Macroeconomics
• Macroeconomics answers questions like these:
• Why is average income high in some countries and low in others?
• Why do prices rise rapidly in some time periods while they are more stable in
others?
• Why do production and employment expand in some years and contract in
others?

The Role of Data
• To see whether there’s a problem, you first need data
The Role of Data
• In macroeconomics, data are crucial
1. Data help policy makers see what problems, if any, need to be
addressed
2. Data help macroeconomists identify the theories that make correct
predictions and the theories that make incorrect predictions
3. Data often reveal interesting puzzles that macroeconomic theories
need to solve

Total Income
• Recall that we need to measure the health of an economy
• When judging whether an economy is doing well or poorly, it is
natural to look at the total income that everyone in the economy is
earning

Total Income
• We can temporarily boost our standard of living by borrowing from
others.
• But we can’t keep borrowing forever
• This is why a nation’s standard of living depends heavily on its own
total income

Income = Expenditure
• We could measure either total income or total expenditure
• We would get the same number either way
• For an economy as a whole, income must equal expenditure because:
• Every transaction has a buyer and a seller.
• Every dollar of spending by some buyer is a dollar of income for some seller.

But what about saving?
• Q: People typically save part of what they earn. How then is income
equal to expenditure for the economy as a whole?
• A: What people save tends to get loaned to businesses who then
spend the money they borrowed. So, for the economy as a whole,
income must still equal expenditure.

International Trade
• We buy foreign-made goods and foreigners buy goods made by us
• Q: In that case, how can our total income be equal to our total
expenditure?
• A: Very good point! It is better to say that total income equals the
total expenditure on domestically produced goods

Gross Domestic Product

• Gross Domestic Product (GDP) is one measure of a country’s total
income
• There are other measures of total income, but GDP is the most popular
measure

• GDP is the total market value of all final goods and services produced
within a country in a given period of time.
• For example, the GDP of the United States in 2018 was $20,500.6 billion,
according to the U.S. Department of Commerce
• Given a mid-year population of 327,436,000 (est.) the per capita GDP was
$62,610
• GDP is also the total expenditure on all final goods and services
produced within a country in a given period of time.
• It is also the total income of all domestically located resources
GDP is the Market Value …
• In GDP, all output is valued at market prices.
• The market value of all sandwiches produced is both the total
expenditure of the buyers of those sandwiches and the total income
of the makers of those sandwiches
• As our goal is to measure total income, it therefore makes sense to
measure the market values of the various produced goods and add
them up

… Of All Final Goods …
• Final goods are those goods sold to their final users
• A pencil is a final good because, once produced, it is ready for use by
its final users
• The wood, the graphite, and other materials that disappeared in the
pencil are not final goods
• Their market value is already counted when the market value of the pencil is
counted
• So, counting them in GDP would count them twice
• GDP records only the value of final goods, not intermediate goods
• Intermediate goods are those goods that disappear inside other goods that
are produced for sale
• Final goods are goods that are not intermediate goods. These are goods sold
to their final users
• GDP is defined so that the value of intermediate goods is counted
only once, not twice or thrice.

• Intermediate goods are sold by their producers to producers of other
goods
• Examples: milk sold by a dairy to an ice-cream company, grapes sold by a
vineyard to a winemaker, printer paper sold to Kinko’s
• Final goods are goods that are sold to the final users of those goods
• Examples: milk you buy at the supermarket, table grapes you buy at the
farmer’s market, printer paper you buy for your computer printer
• All goods made this year but not sold by year’s end are regarded as final
goods (inventories)

• Suppose a dairy farmer sells milk worth $50,000 to an ice-cream company.
• The farmer does not buy anything from any other firm.
• The total income of the dairy farmer and her employees is, therefore, $50,000
• The ice-cream company uses the milk to produce ice-cream which it sells for
$75,000.
• The ice-cream company does not buy anything from any firm other than the dairy.
• Therefore, the total income of the owners and employees of the ice-cream firm is
$25,000.
• Therefore, the total income of this country is $75,000
• This is accurately measured by the value of the ice-cream (the final good) alone
• Had we also counted milk, the intermediate good, we would have calculated total
income to be $125,000, which would have been an exaggeration.
… and Services …
• GDP includes both
• tangible goods (food, clothing, cars) and
• intangible services (haircuts, housecleaning, doctor visits, legal consultations).
• Trade in assets does not affect GDP.
• Such trade does not require new productive activity, it is merely the transfer
of ownership of an asset from one person to another

… Produced Within a Country …
• GDP measures the value of all production within the geographic
boundaries of a country.
• The citizenship of the owners of the resources used in production is
not the key issue
• Production by foreigners living in a country is counted in the country’s
GDP
• Production by a country’s citizens working in other countries is not
counted

… In a given period of time
• GDP measures the value of production that takes place within a
specific interval of time, usually a year or a quarter (three months).
• GDP includes goods and services currently produced, not transactions
involving goods produced in the past.
• Transactions involving used cars or buildings that were constructed in the past
are not counted

What’s not counted in GDP?
• GDP includes all items produced in the economy and sold legally in
markets.
• It excludes items produced and sold illicitly, such as illegal drugs.
• GDP excludes most items that are produced and consumed at home
and that never enter the marketplace.

What is Gross Domestic Product (GDP)?
• Video: https://youtu.be/mjJmo5mN5yA

Nominal and real GDP
How can we measure a nation’s productive activity so that the numbers can be
compared across time?
GDP: nominal and real
• The GDP we saw earlier is more precisely called Nominal GDP
• GDP comes in two flavors:
• Nominal GDP (also called GDP at current prices), and
• Real GDP (also called GDP at constant prices)
• So, when you see or hear a discussion of GDP, be sure to ask,
“Nominal or real?”
• For example, the GDP of the United States in 2018 was $20,500.6 billion,
according to the U.S. Department of Commerce
• Given a mid-year population of 327,436,000 (est.) the per capita GDP was
$62,610
We saw this slide earlier.

This is nominal GDP or current-prices GDP.
Gross Domestic Product, Nominal
• Nominal GDP is the total market value of all final goods and services
• The market value is calculated using current prices, the prices that prevailed
when the production took place.
• For example, the nominal GDP of the United States in 2018 was $20,500.6
billion, according to the U.S. Department of Commerce
• Given a mid-year population of 327,436,000 (est.) the per capita nominal GDP
was $62,610
Gross Domestic Product, Real
• Real GDP is the total market value of all final goods and services
• The market value is calculated using constant prices, the prices that prevailed
in a benchmark year called the base year.
• For example, the real GDP of the United States in 2018 was $18,571.3 billion
in 2012 dollars, according to the U.S. Department of Commerce
• Given a mid-year population of 327,436,000 (est.) the per capita real GDP was
$56,717 in 2012 dollars
Nominal and Real GDP
Apples Oranges
Price ($) Quantity Price ($) Quantity
2015 50 10 20 50
2016 100 20 30 100
2017 150 20 50 200
Nominal GDP $
2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500
2016 ($100 ✕ 20) + ($30 ✕ 100) = 5000 Note that the base
2017 ($150 ✕ 20) + ($50 ✕ 200) = 13000 year’s nominal and
real GDP must be
Real GDP (Base year 2015) 2015 $ the same.
2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500
2016 ($50 ✕ 20) + ($20 ✕ 100) = 3000
2017 ($50 ✕ 20) + ($20 ✕ 200) = 5000
Nominal and Real GDP
Apples Oranges
Price ($) Quantity Price ($) Quantity
2015 50 10 20 50
New value  Old value
2016 100 20 30 100 Growth Rate  100
Old value
2017 150 20 50 200
Nominal GDP $ Growth Rate (%)

2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500
2016 ($100 ✕ 20) + ($30 ✕ 100) = 5000 100 ✕ [(5000 – 1500)/ 1500] = 233
2017 ($150 ✕ 20) + ($50 ✕ 200) = 13000 100 ✕ [(13000 – 5000)/ 5000] = 160
Real GDP (Base year 2008) 2008 $

2015 ($50 ✕ 10) + ($20 ✕ 50) = 1500
2016 ($50 ✕ 20) + ($20 ✕ 100) = 3000 100 ✕ [(3000 – 1500)/ 1500] = 100
2017 ($50 ✕ 20) + ($20 ✕ 200) = 5000 100 ✕ [(5000 – 3000)/ 3000] = 67
Real and Nominal GDP of USA
Nominal GDP: https://fred.stlouisfed.org/series/GDPA

Real GDP: https://fred.stlouisfed.org/series/GDPCA
Growth Rate of Real GDP, USA
Source: https://fred.stlouisfed.org/series/A191RL1A225NBEA
Nominal vs. Real GDP
• Video: https://youtu.be/rGqhTQyY6g4

Real GDP and Potential Real GDP
Table 2: Real and Nominal GDP
This table shows how to calculate real GDP, nominal GDP, and the GDP deflator for a hypothetical economy that produces
only hot dogs and hamburgers.
The GDP Deflator
• The GDP deflator is a measure of the overall level of the prices of the
final goods and services produced within a country during a given
period of time

The GDP Deflator
• The GDP Deflator tells us how the overall level of prices in a particular
year compare to the overall level of prices in the base year.
• USA data: https://fred.stlouisfed.org/series/A191RD3A086NBEA

• The GDP Deflator for 2017 compared to base year 2012 was 107.948.
• This means that, for domestically produced final goods and services, prices in
2017 were, on average, 7.948 percent higher than in 2012.
• In this way, the overall level of prices for various years can be compared (by
comparing each year’s prices to the base year).

The GDP Deflator
• The GDP Deflator is calculated as follows:

Market value of all
domestically produced final
goods and services produced
GDP Deflator in 2017 at 2017 prices
for 2017 with = × 100
base year 2009 Market value of all
in 2017 at 2009 prices
$600
= × 100
$200
= 300
Market value of all
for 2017 with = × 100
Why are the goods goods and services produced
produced in 2017 worth in 2017 at 2009 prices
3 times as much at 2017
prices as at 2009 prices?
It must be that 2017
prices are, on average, 3
times as high as 2009 $600
prices. = × 100
This is what the GDP $200
Deflator is saying. = 300
Market value of all
for 2017 with = × 100
The GDP Deflator is 300. goods and services produced
This indicates that the in 2017 at 2009 prices
2017 prices of
domestically produced
final goods and services
were on average 300
percent of the $600
corresponding prices in = × 100
2009, the base year. $200
= 300
Example: 2017
• US Nominal GDP was $19,485.394 billion
• US Real GDP was $18,050.693 billion (chained 2012 dollars)
• US GDP Deflator = (19,485.394 / 18,050.693) × 100 = 107.948
• This means that the final goods and services domestically produced in 2017
had a market value in 2017 prices that was 107.948 percent of their market
value in 2012 prices
• This means that, domestically produced final goods and services were on
average 7.948% pricier in 2017 compared to 2012

GDP Deflator: USA (Price Level)
Source: https://fred.stlouisfed.org/series/A191RD3A086NBEA
GDP Deflator: USA (Inflation)
Source: https://fred.stlouisfed.org/series/A191RI1A225NBEA
The GDP Deflator
• Why call it a deflator?
• Nominal GDP changes from one year to the next partly because of
inflation
• Real GDP, on the other hand, changes because of changes in
production alone
• The GDP Deflator can convert Nominal GDP to Real GDP by deflating
the effect of inflation in Nominal GDP

Converting Nominal GDP to Real GDP
• We just saw that
• Therefore,
• Therefore, if you know the Nominal GDP and the GDP Deflator, you
can calculate the Real GDP

The Components of GDP

Components of GDP
• We need to pay attention not only to the total expenditure on all final
goods and services made in a country (that is, GDP), we also need to
watch where the expenditure is coming from
• That way, when there’s a recession, we’ll know which sector needs
the most attention
• GDP = Consumption Spending +
Investment Spending +
Government Spending +
Exports – Imports
Components of GDP
• Expenditure on “Made in USA” final goods and services can come
from only these four sources:
• Households (Consumption expenditure)
• Businesses (Investment expenditure)
• Government entities (Government purchases)
• Foreigners (Exports)
• So, one might think …
Government Spending + Exports
• But that would be incorrect!
Components of GDP
Government Spending +
Exports – Imports
• Q: Why do we subtract imports?
• A: GDP is the market value of all final “Made in USA” goods. But
consumption, investment, and government purchases all include
spending on foreign goods. Therefore, to make the two sides of the
equation the same, we must take out all the imports.
• Exports – Imports is called Net Exports
The Components Of GDP
• Consumption (C):
• The spending by households on goods and services, with the exception of
purchases of new housing.
• Investment (I):
• The spending on capital equipment, inventories, and structures, including
new housing.

The Components Of GDP
• Government Purchases (G):
• The spending on goods and services by local, state, and federal governments.
• Does not include transfer payments because they are not made in exchange
for currently produced goods or services.
• Net Exports (NX):
• Exports minus imports.

Table 1: GDP and Its Components
This table shows total GDP for the U.S. economy in 2012 and the breakdown of GDP among its four
components. When reading this table, recall the identity
Y = C + I + G + NX.
55
Gross Domestic Product and its components, 2017

Source: Bureau of Economic Analysis, U.S. Department of Commerce, bea.gov
Last Revised on: March 28, 2018 - Next Release Date April 27, 2018

Total Percent of GDP Per Person
$ millions % $
1 Gross domestic product 19,390,605 100 59,483.49
2 Personal consumption expenditures 13,395,505 69.1 41,092.65
3 Goods 4,295,313 22.2 13,176.49
4 Durable goods 1,473,802 7.6 4,521.10
5 Nondurable goods 2,821,511 14.6 8,655.39
6 Services 9,100,192 46.9 27,916.16
7 Gross private domestic investment 3,212,828 16.6 9,855.81
8 Fixed investment 3,197,164 16.5 9,807.76
9 Nonresidential 2,449,581 12.6 7,514.44
10 Structures 560,180 2.9 1,718.43
11 Equipment 1,098,360 5.7 3,369.38
12 Intellectual property products 791,040 4.1 2,426.63
13 Residential 747,583 3.9 2,293.32
14 Change in private inventories 15,664 0.1 48.05
15 Net exports of goods and services -571,563 -2.9 -1,753.35
16 Exports 2,343,988 12.1 7,190.52
17 Goods 1,546,843 8 4,745.16
18 Services 797,146 4.1 2,445.36
19 Imports 2,915,551 15 8,943.87
20 Goods 2,381,754 12.3 7,306.37
21 Services 533,797 2.8 1,637.50
22 Government consumption expenditures and gross investment 3,353,834 17.3 10,288.37
23 Federal 1,260,656 6.5 3,867.24
24 National defense 744,421 3.8 2,283.62
25 Nondefense 516,235 2.7 1,583.63
26 State and local 2,093,178 10.8 6,421.13

Population (midperiod, thousands) 325,983
Splitting GDP
• Video: https://youtu.be/ChnRwedmO64

Consumption, as a share of GDP
Investment, as a share of GDP
Government Purchases, as a share of GDP
Exports, Imports, Net Exports, as a share of
GDP
Net Exports, as a share of GDP
Where to find US data
• Bureau of Economic Analysis, U.S. Department of Commerce:
http://bea.gov
• Federal Reserve Bank of St. Louis:
http://research.stlouisfed.org/fred2/categories/18

International GDP comparisons
How can we measure national productive activity so that the numbers can be
compared across nations?
International Comparisons
• When the GDP numbers for various countries’ are compared, the
same currency units must be used
• There are two ways of converting from national countries to a
common currency, such as the US dollar
• Use market exchange rates
• Use a common set of prices (PPP)
Market Exchange Rate Method
• Step 1: Look up Mexico’s GDP in Mexico’s currency, the peso
• Step 2: Look up how many US dollars one Mexican peso is worth
• Step 3: Multiply the numbers in Steps 1 and 2
• This gives you Mexico’s GDP in US dollars
• If the GDPs of two countries are both expressed in US dollars, they can be
compared head to head
• There’s another way to calculate Mexico’s GDP in US dollars …

Purchasing Power Parity Method
• Step 1: Find out the quantities of all the final goods that were
produced in Mexico during 2016
• Step 2: Find out the prices of those goods in the United States—not
Mexico—in 2016.
• These prices are in US dollars
• Step 3: Calculate Mexico’s GDP in US dollars, by
• Step 3a: multiplying the quantities in Step 1 by the corresponding prices in
Step 2 and
• Step 3b: then adding the results obtained in Step 3a
Let’s Compare!
• GDP per capita (current US$): https://
data.worldbank.org/indicator/NY.GDP.PCAP.CD
• GDP per capita, PPP (current international $): https://
data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD
• GDP per capita (constant 2010 US $): https://
data.worldbank.org/indicator/NY.GDP.PCAP.KD
• GDP per capita, PPP (constant 2011 international $): https://
data.worldbank.org/indicator/NY.GDP.PCAP.PP.KD
Let’s Compare GDP!
Let’s Compare GDP per capita!
By GDP per capita, a citizen By GDP per capita PPP, a

of Luxembourg is roughly citizen of Qatar is roughly
500 times as rich as a citizen 182 times as rich as a citizen
of Burundi! of Central African Republic!
Basic Facts of Wealth
• Video: https://youtu.be/PzAr_mL0Qd8

Is GDP a good measure of
economic well-being?
No, but it is the best one-number measure we have

There’s a lot that’s missing in GDP
• Where to begin!
• Inequality, work done in home, volunteer work, illegal work, leisure,
environment, disasters, …
Income Inequality
Trends in US Poverty Rate
Leisure Reduces GDP
GDP Doesn’t Count Illegal Work
Jesse: “All this hard work, Mr. White! What’s the point? They
won’t even count it in GDP!”
GDP Doesn’t Count Work at Home
GDP Doesn’t Count Volunteer Work
GDP Ignores Environmental Damage
GDP Ignores Consumer Surplus
• Free digital technology
• Free Apps, Google, Google maps, Wikipedia, OpenOffice, YouTube
• Freely available education
• Khan Academy, Coursera
• None of this adds to GDP

• Users would be willing to pay but don’t. They get Consumer Surplus

Disasters May Raise GDP
GDP And Economic Well-being
• GDP is the best single measure of the economic well-being of a
society.
• GDP per person tells us the income and expenditure of the average
person in the economy.

Table 3: GDP and the Quality of Life
The table shows GDP per person and three other measures of the quality of life for twelve major countries.
Robert Kennedy on GDP
• [Gross Domestic Product] does not allow for the health of our
children, the quality of their education, or the joy of their play. It does
not include the beauty of our poetry or the strength of our marriages,
the intelligence of our public debate or the integrity of our public
officials. It measures neither our courage, nor our wisdom, nor our
devotion to our country. It measures everything, in short, except that
which makes life worthwhile, and it can tell us everything about
America except why we are proud that we are Americans.

Real GDP Per Capita and the Standard of
Living
• Video: https://youtu.be/Z0qHA93oOSc

Any questions?

Summary
• Because every transaction has a buyer and a seller, the total
expenditure in the economy must equal the total income in the
economy.
• Gross Domestic Product (GDP) measures an economy’s total
expenditure on newly produced goods and services and the total
income earned from the production of these goods and services.

Summary
• GDP is the market value of all final goods and services produced
• GDP is divided among four components of expenditure: consumption,
investment, government purchases, and net exports.

Summary
• Nominal GDP uses current prices to value the economy’s production.
Real GDP uses constant base-year prices to value the economy’s
production of goods and services.
• The GDP deflator—calculated from the ratio of nominal to real GDP—
measures the level of prices in the economy.

Summary
• GDP is a good measure of economic well-being because people prefer
higher to lower incomes.
• It is not a perfect measure of well-being because some things, such as
leisure time and a clean environment, aren’t measured by GDP.

The Data of Macroeconomics

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Data of Macroeconomics

Uploaded by

Copyright:

Available Formats

III

THE DATA OF MACROECONOMICS

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

We saw this slide earlier.

Nominal GDP $ Growth Rate (%)

Real GDP (Base year 2008) 2008 $

Nominal GDP: https://fred.stlouisfed.org/series/GDPA

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

• USA data: https://fred.stlouisfed.org/series/A191RD3A086NBEA

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

• There’s another way to calculate Mexico’s GDP in US dollars …

By GDP per capita, a citizen By GDP per capita PPP, a

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

• None of this adds to GDP

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

CHAPTER 5 MEASURING A NATION’S INCOME

You might also like