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MACRO Unit 3: Measuring Growth using GDP Economics “The stock market and economy are two different things..” -- Milton Friedman “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life..” -- Adam Smith MACRO Economics What Drives Long-run Growth? More Resources Capital Accumulation Technology Institutions Creativity MACRO Economics Gross Domestic Product, GDP, measures market value of all final goods and services produced during a year within a country. MACRO Economics GDP ignores free, household production, barter, and underground goods. MACRO Economics GDP has to estimate many transactions such as depreciation, rental income, and in-kind payments. MACRO Economics GDP data is very timely. But it’s the best we have. MACRO Economics GDP can be measured by counting either spending or income. National Income Identity: GDP = GDI Q=Y MACRO Economics GDI counts wages + returns to capital (profits, rent, interest) – the payments for production. We use “Y” for GDI. MACRO Economics Using expenditure approach, GDP = C + I + G + (X – M) Also called “Aggregate Expenditure” or “Aggregate Demand” MACRO Economics C, Personal Consumption spending includes durables, non-durables, and services. MACRO Economics I, Investment Spending, includes: New bldg & equip by firms New residential construction Net Change in Inventories MACRO Economics Think of “change in inventory” as unplanned Investment. I GDP = C + Iplanned + Iunplanned + G + (X-M) Change in inventory MACRO Economics I, Investment, does NOT count household durables, existing buildings/machines, or financial assets. X X MACRO Economics G, Government Purchases, includes all levels of government, but excludes transfer payments. MACRO Economics (X-M) is Net Exports, or the difference between eXports and iMports. MACRO Economics To make GDP more meaningful we need to adjust for inflation and population. MACRO Economics Nominal GDP is this year’s production at this year’s prices – GDP as observed. MACRO Economics “Real GDP” estimates the total volume of physical goods by adjusting nominal GDP to account for changes in price level. MACRO Economics Use a price index to convert from Nominal GDP to Real GDP. MACRO Economics GDP growth rates usually reported quarterly as annual percentage rate. MACRO Economics Per Capita GDP adjusts for changes or differences in population. MACRO Economics The GDP “gap” measures the difference between actual and estimated potential.
