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Transcript of Chapter 4 Part 2 - University Of Marylandterpconnect.umd.edu/~jneri/Econ201/files/Chapter 4... ·...
1
Chapter 4
Part 2
MEASURING GDP AND
ECONOMIC GROWTH
Value Added Approach to GDP
Important Concept - Not in the Book
• Value added
– Revenue a firm receives minus amount paid for
goods and services purchased from other firms
(intermediate goods)
• Value-added approach to GDP
– GDP = sum the values added by all firms in
the economy
– Value added = Wages + Interest + Rents + Profits
2
Value Added at Different Stages of Production
Notebook Example:
3
$5.00 is the value of the final expenditure
2
Value Added at Different Stages of Production
Notebook Example:
4
$5.00 is the value of the final expenditure
Intermediate
transactions
The Factor Payments Approach – Using the
Notebook Paper Example
Value Added goes to the factors of production
Exercise
A farmer grows a bushel of wheat and sells it to
a miller for $1.00.
The miller turns the wheat into flour and sells it
to a baker for $3.00.
The baker uses the flour to make a loaf of bread
and sells it to an engineer for $6.00.
The engineer eats the bread.
Compute:
• value added at each stage of production
• GDP
3
Exercise
Value added - farmer = ?
Value added - miller = ?
Value added - baker = ?
Total Value added = ? = GDP
Measuring U.S. GDP
GDP: Is it Nominal or Real?
Nominal GDP is the value of goods and services
produced during a given year valued at the prices
that prevailed in that same year.
Real GDP is the value of final goods and services
produced in a given year when valued at the
prices of a reference base year.
- Currently, the reference base year is 2009
- We describe real GDP as measured in 2009
dollars.
Calculating Real GDP
This table shows the
quantities produced and
the prices in 2009 (the
base year).
Nominal GDP in 2009 is
$100 million.
Because 2009 is the base
year, real GDP equals
nominal GDP and is $100
million.
Measuring U.S. GDP
4
Table (b) shows the
quantities produced and
the prices in 2014.
Nominal GDP in 2014 is
$300 million.
Nominal GDP in 2014 is
three times its value in
2009.
Measuring U.S. GDP
In Table (c), we calculate
real GDP in 2014.
The quantities are those
of 2014, as in part (b).
The prices are those in
the base year (2009), as
in part (a).
The sum of these
expenditures is real GDP
in 2014, which is $160
million.
Measuring U.S. GDP
Now You Try It
2011 2010 2009
205 $100 200 $102 192 $100 good B
1,050 $36 1,000 $31 900 $30 good A
Q P Q P Q P
Compute nominal GDP in each year
Compute real GDP in each year using 2009 as the
base year.
5
Example - Calculation of Real GDP
Nominal GDP multiply Ps & Qs from same year
2009:
2010:
2011:
Real GDP multiply each year’s Qs by 2009 Ps
2009:
2010:
2011:
How Real GDP Is Used
• Short-run
– Onset of a recession or a too-rapid
expansion that can overheat the economy
• Long-run
– Measure the long-run growth rate of the
economy’s output
– Real GDP needed to grow by about 3%
per year to provide enough jobs for a
workforce that is growing in number and
becoming more productive every year
14
Real GDP Growth Rate, 1970–2011
15
http://bea.gov/newsreleases/national/gdp/gdp_glance.htm
6
How Real GDP is Used
Measure the Standard of Living Over
Time
Real GDP per person is real GDP divided by the
population.
Real GDP per person tells us the value of goods
and services that the average person can enjoy.
By using real GDP, we remove any influence that
rising prices and rising cost of living might have
on our comparison.
How Real GDP is Used
How Real GDP is Used
Two features of expanding living standard are
The growth of potential GDP per person
Fluctuations of actual real GDP around potential GDP
Potential GDP - The value of real GDP when all the
economy’s labor, capital, land, and entrepreneurial ability
are fully employed. Its an estimate of the economy's
potential
Actual GDP – What actually happened.
7
This figure shows U.S.
real GDP per person.
Potential GDP grows at a
steady pace because the
quantities of the factors of
production and their
productivity grow at a
steady pace.
Real GDP fluctuates
around potential GDP.
How Real GDP is Used
Real GDP per person in
the United States:
Doubled between 1960
and 1987.
Was 3 times its 1960 level
in 2013.
How Real GDP is Used
How Real GDP is Used
Productivity Growth Slowdown
The growth rate of real GDP per person slowed after 1970.
How costly was that slowdown?
The answer is provided by a number that we’ll call the
Lucas wedge.
The Lucas wedge is the dollar value of the accumulated
gap between what real GDP per person would have been
if the 1960s growth rate had persisted and what real GDP
per person turned out to be.
8
Figure 21.3 illustrates the
Lucas wedge.
The red line is actual real
GDP per person.
The thin black line is the
trend that real GDP per
person would have followed
if the 1960s growth rate of
potential GDP had
persisted.
The shaded area is the
Lucas wedge.
How Real GDP is Used
How Real GDP is Used
The Business Cycle - Real GDP Fluctuations
A business cycle is a periodic but irregular up-and-down
movement of total production and other measures of
economic activity.
Every cycle has two phases:
1. Expansion
2. Recession
and two turning points:
1. Peak
2. Trough
business cycle The cycle of short-term ups and downs in
the economy.
aggregate output The total quantity of goods and services
produced in an economy in a given period – called GDP
recession A period during which aggregate output
declines. Conventionally, a period in which aggregate
output declines for two consecutive quarters.
depression A prolonged and deep recession.
Output and Growth – Important Concepts
expansion or boom The period in the business cycle from
a trough up to a peak during which output and employment
grow.
contraction, recession, or slump The period in the
business cycle from a peak down to a trough during which
output and employment fall.
9
The Business Cycle
peak
trough
+3%
+4%
-2%
Three growth rates presented:
(1) the long-run upward trend is 3%;
(2) in a recession, output falls (growth is negative);
(3) in the expansion phase of the cycle, growth rate is higher than the trend.
• What drives trend growth?
• What causes expansions and recessions?
• What macroeconomic policies can be used to
offset recessions or to sustain expansions?
• What has caused the recent/current
recession - often referred to as the “Great
Recession”?
Economic Growth Questions
This figure illustrates the
current business cycle.
An expansion is a period
during which real GDP
increases—from a trough
to a peak.
Recession is a period
during which real GDP
decreases—its growth
rate is negative for at least
two successive quarters.
How Real GDP is Used
http://cafehayek.com/2012/09/the-numbers-game.html
10
LIMITATIONS OF THE GDP CONCEPT
GDP AND SOCIAL WELFARE If crime levels went down, society would be better off, but a
decrease in crime is not an increase in output and is not
reflected in GDP.
An increase in leisure is also an increase in social welfare, but
sometimes associated with a decrease in GDP.
Most nonmarket and domestic activities, such as housework
and child care, are not counted in GDP even though they
amount to real production.
Environmental quality.
LIMITATIONS OF THE GDP CONCEPT
underground economy The part of the economy
in which transactions take place and in which
income is generated that is unreported and
therefore not counted in GDP.
Mathematical Note:
SKIP Chained-Dollar Real GDP
The BLS uses a measure of real GDP called chained-
dollar real GDP.
Three steps are needed to calculate this measure:
Value production in the prices of adjacent years
Find the average of two percentage changes
Link (chain) back to the reference year
11
A time-series graph
measures
Time on the x-axis
The variable in which
we are interested on
the y-axis.
Graphs:
The Graph on the Previous Slide is a Time-Series Graph
Figure in the appendix
shows the average prices
paid by consumers 1974 to
2014.
In 1974, the price is set at
100.
The price in other years is
measured as a percentage
of the 1974 level.
Prices look as if they rose at
a fairly constant rate.
Time-Series Graph – Ratio Scale
On the y-axis of a normal
graph, the gap between 100
and 200 is the same as that
between 300 and 400.
On a graph with a ratio
scale, the gap between 100
and 200 is same as that
between 200 and 400.
The ratio of 200 to 100
equals the ratio of 400 to
200—a constant ratio gap.
Time-Series Graph - Using a Ratio
Scale