The big picture marcoeconomics 12e parkin chapter 04

16 6 0
  • Loading ...
1/16 trang

Thông tin tài liệu

Ngày đăng: 16/04/2018, 11:28

34 C h a p t e r MEASURING GDP AND ECONOMIC GROWTH** The Big Picture Where we have been: Chapter does not directly use the material developed in the previous chapters Where we are going: Chapter is the first of the macroeconomic chapters It provides some basic definitions (GDP, real GDP, aggregate expenditure, potential GDP, and business cycles) that are used in virtually all the remaining chapters The circular flow model and the national income accounting explained in this chapter serve as a general framework for macroeconomic analysis The fact that aggregate expenditure equals aggregate income equals the value of production is the key to understanding why changes in aggregate expenditure change aggregate income, which then changes aggregate expenditure The components of aggregate expenditure provide an underpinning for the theory of aggregate demand in Chapter 10 and the aggregate expenditure model and multiplier in Chapter 11 N e w i n t h e Tw e l f t h E d i t i o n The content within the chapter is substantially the same as the 11th edition but there are special icons indicating problems that use real-time data All of the data within the chapter have been updated to use 2014 data The current event topic is under the ‘Economics in the News’ section and discusses the continuing expansion in the United States during 2014 The Worked Problem presents some national accounts and then asks the students to calculate GDP using both the expenditure and income approaches, net domestic income at factor cost, and net domestic income at market prices The solutions show step-by-step how to calculate the required answers To include the new Worked Problem without lengthening the 34 35 chapter, some problems have been removed from the Study Plan Problem and Applications These problems are in the MyEconLab and are called Extra Problems 35 Lecture Notes Measuring GDP and Economic Growth    GDP is a measure of total production and total income Real GDP measures production of goods and services GDP can be used to make comparisons over time and across countries I Gross Domestic Product  GDP or gross domestic product is the market value of all the final goods and services produced within a country in a given time period How you add apples and oranges? You can pick any goods you like but I think it is helpful to show GDP as an equation early on You can start with real goods and then generalize to “n goods”: GDP = PAQA + POQO + … GDP = P1Q1 + P2Q2 + P3Q3 + … + PNQN GDP = ∑ PiQi You may find it useful to add slang while you discuss GDP, “GDP is the dollar value of all ‘stuff’ made over one year.” Be sure to repeat the definition as you move through all the chapters rather than assuming the your students always remember what is in GDP and how it is measured A solid understanding of GDP is crucial for other material to make sense      The items in GDP are valued at their market values, that is, at their prices So if 100,000,000 slices of pizza are sold for $3 each, slices of pizza contribute $300,000,000 to GDP Using market values means that the total value of output, that is, GDP will be in the dollars (or whatever the country’s currency unit might be) A final good is an item that is bought by its final user It contrasts with an intermediate good, which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service To avoid double counting, GDP includes only final goods and services (no intermediate goods and services are directly counted) Only the goods and services produced within a country are counted A Honda produced in North Carolina is counted in U.S GDP GDP is measured over a period of time, typically a quarter of a year or a year Gross Domestic Product The main challenge in teaching this topic is generating interest in it Many teachers are bored by it and not surprisingly, they bore their students If you are one of the many who lean toward boredom, start by recalling just how vital it is that we measure the value of production with reasonable accuracy Working through issues with GDP is vital since it serves as the basis of measurement of the standard of living, economic welfare, and making international comparisons Final goods versus intermediate goods The distinction between final and intermediate goods is one of the key points in this first section Use some standard examples to make the key point—tires and autos, chips and computers, and so on Also, if you want to spend a bit of time on this topic, tell your students about the Bureau of Economic Analysis (BEA) revision in the treatment of business spending on software The BEA began a major revision in 1998 and published the first revisions to reclassify software from intermediate to final good status in 1999 When the 1996 GDP was recalculated to include software as a final good, GDP increased by $115 billion, or 1.5 percent MEASURING GDP AND ECONOMIC GROWTH GDP and the Circular Flow of Expenditure and Income   The circular flow illustrates the equality of income, expenditure, and the value of production The circular flow diagram shows the transactions among four economic agents—households, firms, governments, and the rest of the world—in two aggregate markets—goods markets and factor markets In the goods market, households, firms, governments, and foreigners buy goods and services For analytical purposes, we can categorize spending by these four agents in the calculation of GDP:  The total payment for goods and services by households in the goods markets is consumption expenditure , C  The purchases of new plants, equipment, and buildings and the additions to inventories are investment, I  Governments buy goods and services, called government expenditure or G, from firms  Firms sell goods and services to the rest of the world, exports or X, and buy goods and services from the rest of the world, imports or M Exports minus imports are called net exports, X  M Government transfer payments, such as Social Security payments, are not part of government expenditures because government expenditures include only funds used by the government to buy goods and services Transfer payments are not buying a good or service for the government and so are not included in government expenditures  In factor markets households receive income from selling the services of resources to firms The total income received is aggregate income It includes wages paid to workers, interest for the use of capital, rent for the use of land and natural resources, and profits paid to entrepreneurs; retained profits can be viewed as part of household income, lent back to firms The Circular Flow Model Start with a simpler picture than Figure 4.1—just households and firms, and just income and consumption Explain that you are starting from the basics, in which all goods and services produced are sold to consumers Explain that even beyond the assumption that all goods and services are consumption goods and services, we’re simplifying things in the picture but are not omitting anything that leads us into a misleading conclusion For instance the picture envisages all the income being paid to households Nothing is lost and clarity is gained by this device Emphasize that the blue flows are incomes and the red flows are expenditures on final goods and services Clearly in this simplest case aggregate income equals aggregate expenditure Then add investment It is still the case that aggregate expenditure (which is now C + I) equals aggregate income Next add the government and the flow of government expenditure Finally add the rest of the world and the flow of net exports In both cases you can continue to make the crucial point at aggregate expenditure equals aggregate income GDP Equals Expenditure Equals Income   Aggregate expenditure equals C + I + G + (X  M) Aggregate expenditure equals GDP because all the goods and services that are produced are sold to households, firms, governments, or foreigners (Goods and services not sold are included in investment as inventories and hence are “sold” to the producing firm.) Because firms pay out as income everything they receive as revenue from selling goods and services, aggregate income equals aggregate expenditure equals GDP Why “Domestic” and Why “Gross”?  Depreciation is the decrease in the stock of capital that results from wear and tear and obsolescence The total amount spent on purchases of new capital and on 35 36 CHAPTER  replacing depreciated capital is called gross investment The amount by which the stock of capital increases is net investment Net investment = Gross investment  Depreciation The “Gross” in gross domestic product reflects the fact that the investment in GDP is gross investment and so part of it goes to replace depreciating capital Net domestic product subtracts depreciation from GDP MEASURING GDP AND ECONOMIC GROWTH II Measuring U.S GDP Most of the income data used by the BEA to measure GDP come from the IRS Expenditure data come from a variety of sources The Expenditure Approach  The expenditure approach measures GDP as the sum of consumption expenditure, C, investment, I, government expenditure on goods and services, G, and net exports of goods and services, (X  M) So GDP = C + I + G + (X  M) or, in 2014 and in billions of dollars, $11,729 + $2,714 + $3,139 + $538 = $17,044 The Income Approach  The income approach measures GDP as the sum of compensation of employees, net interest, rental income, corporate profits, and proprietors’ income This sum equals net domestic income at factor costs To obtain GDP, indirect taxes (which are taxes paid by consumers when they buy goods and services) minus subsidies plus depreciation are included Finally any discrepancy between the expenditure approach and income approach is included in the income approach as “statistical discrepancy.” Measuring U.S GDP, the low cost of economic data You might like to tell your students that measuring real GDP is actually very cheap The BEA (in the Department of Commerce) employs fewer than 500 economists, accountants, statisticians, and IT specialists at an annual cost of less that $70 million It costs each American less than 0.25¢ (a quarter of a cent) to measure the value of the nation’s production For some further perspective, the National Oceanic and Atmospheric Administration (also in the Department of Commerce), whose mission is to “describe and predict changes in the Earth’s environment, and conserve and manage wisely the nation’s coastal and marine resources so as to ensure sustainable economic opportunities,” employs more than 11,000 scientists and support personnel at an annual cost of $3.2 billion! Creative accounting and GDP measurement In recent years, the first estimates of GDP, which are based on companies’ reported profits, have been revised downward when data on company profits as reported to the IRS became available Enron-style accounting has contaminated the initial estimates of GDP but not the final estimates You can make a nice point with one example of creative accounting For some years, in its reports to stock holders AOL recorded its advertising expenditure as investment and amortized it over a number of years First, you can explain that the correct treatment of this item is as an expenditure on intermediate goods and services by AOL and as a charge against AOL profit The expenditure on AOL services is the value of AOL’s production And AOL’s expenditure on advertising is part of the value of the production of the advertising agencies used by AOL You can go on to explain that AOL accounting practice would misleadingly swell GDP by causing some double counting On the expenditure approach, AOL’s advertising expenditure shows up as investment in the national accounts On the income approach, because the expenditure is not a cost, it swells profit, so AOL’s corporate profit increases by the same amount as its “investment.” If AOL filed its income tax return in this same way, the national income accounts wouldn’t get corrected But if, when AOL files its tax returns, it calls its advertising a cost and lowers its profits by that amount, the BEA picks up these numbers from the IRS and the national accounts are adjusted appropriately Nominal GDP and Real GDP  The market value of production and hence GDP can increase either because the production of goods and services are higher or because the prices of goods and services are higher 37 38 CHAPTER   Real GDP allows the quantities of production to be compared across time 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 Nominal GDP is the value of the final goods and services produced in a given year valued at the prices that prevailed in that same year MEASURING GDP AND ECONOMIC GROWTH Calculating Real GDP     Traditionally, real GDP is calculated using prices of the reference base year (the year in which real GDP=nominal GDP) The tables to the right show this method of calculating real GDP for an economy that produces only books and coffee If 2014 is the reference base year, nominal GDP in 2014 in the top table equals real GDP in 2014 Real GDP in 2014 is $3,000 The second table shows the calculation for nominal GDP in 2015 Real GDP in 2015 is in the bottom table It values 2015 production using the prices from the reference base year, 2014 Real GDP in 2015 is $4,250 Data for 2014 Item Quanti ty Pric e Books 40 $25 Coffee 1,000 $2 Nominal GDP Market Value $1,000 $2,000 $3,000 Data for 2015 Item Quanti ty Pric e Books 50 $30 $1,500 Coffee 1,500 $3 $4,500 Nominal GDP Market Value $6,000 2015 Quantities and 2014 Prices Item Quanti ty Pric e Market Value Books 50 $25 $1,250 Coffee 1500 $2 $3,000 You may want to mention the GDP deflator at this point even though coverage of it is in next chapter Stress the separation of the “quantity effect,” measured by real GDP, and the “price effect,” measured by the price level Real GDP will be used to compute the economic growth rate while the price level will be used to compute the inflation rate REQUIRES MATHEMATICAL NOTE: Chained-Dollar Real GDP    The top table to the right has data GDP Data for 2014 for 2014 for an economy that Item Quanti Pric Market produces only books and coffee In ty e Value 2014, nominal GDP is $3,000 The Books 40 $25 $1,000 second table to the right has the same data for 2015 (These tables Coffee 1,000 $2 $2,000 are the same as used above to Nominal $3,000 calculate real GDP using the GDP standard method.) In 2015, nominal GDP is $6,000 GDP Data for 2015 Nominal GDP has doubled but how Item Quanti Pric Market much has real GDP changed ty e Value between these years? Books 50 $30 $1,500 To determine how real GDP changes, suppose that 2014 is the Coffee 1,500 $3 $4,500 base year Then we need to determine the growth rate between 2014 and 2015 by 39 40 CHAPTER    calculating the value of production in both years using 2014 prices and also calculating it in both years using 2015 prices Using 2014 prices, the value of production increases from $3,000 (the first table) to $4,250 (the third table) Using 2014 prices, the value of production has grown by 100  ($4,250  $3,000)/$3,000 = 41.7 percent Using 2015 prices, real GDP increases from $4,200 (the fourth table) to $6,000 (the second table) Using 2015 prices, the value of production has grown by 100  ($6,000  $4,200)/$4,200 = 42.9 percent The average growth rate is equal 2015 Quantities and 2014 Prices to (41.7 percent + 42.9 Item Quantit Pric percent)/2 = 42.3 percent So real y e GDP between these years has Books 50 $25 grown by 42.3 percent If 2014 is Coffee 1500 $2 the base year, real GDP in 2011 is Value of $3,000  1.423 = $4,269 production  Similar calculations are made for (2010 each pair of adjacent years from dollars) the reference base year onwards This procedure chains real GDP 2014 Quantities and 2015 Prices back to the reference base year Item Quantit Pric y e III The Uses and Limitations of Market Value $1,250 $3,000 $4,250 Market Value Real GDP Books 40 $30 $1,200 The Standard of Living Over Time Coffee 1,000 $3 $3,000    One measure of the standard of Value of $4,200 living over time is real GDP per production person, or real GDP divided by the population Real GDP per person tells us the value of goods and services that the average person can enjoy The value of real GDP when all the economy’s labor, capital, land, and entrepreneurial ability are fully employed is called potential GDP Potential GDP grows at a steady pace because the quantities of the factors of production and their productivity grow at a steady pace The growth rate of real GDP slowed in the productivity growth slowdown after 1970 This slowdown created a Lucas wedge A Lucas wedge is the dollar value of the accumulated gap between what real GDP per person would have been if the growth rate had persisted and what real GDP per person actually turned out to be The Importance of the Lucas Wedge It is usually straightforward to interest students in the business cycle But it is perhaps a bit more difficult to motivate interest in economic growth and the Lucas wedge Yet economic growth and the Lucas wedge should be of immense importance to young students because they help determine the long-run living standard of their lives One way to make this point clear is to ask the students whether the difference between, say, percent annual growth in income versus percent annual growth is important This difference probably does not sound important But, suppose that the initial income was $35,000 After 10 years with percent growth, the income would be $47,037 and with percent growth the income would be $51,809 This difference of about $4,500 might not seem like much But point out to the students that this difference is for only ten years and that the annual difference will continue to enlarge: After 30 years with percent growth, the income would be $84,954 and with percent growth the income would be $113,519, a one year difference of about $40,000 And, over a 30-year working career, the total differences in income, which is the analog to the Lucas wedge, is approximately $420,000 Over a 40-year working career, the Lucas wedge difference is over $1,000,000! Viewed from this perspective, the seemingly slight percentage point difference in growth MEASURING GDP AND ECONOMIC GROWTH rates makes for an incredibly major difference in incomes, which should easily capture your students’ attention  Fluctuations in the pace of expansion of real GDP is denoted the business cycle, periodic but irregular increases and decreases in the total production and other measures of economic activity Each cycle is categorized by: trough, expansion, peak, recession The Business Cycle Students generally are interested in the topic of business cycles, particularly if the economy happens to be in a recession when this chapter is covered Often it is very difficult to tell the future path of the economy Stress to the students that it is not stupidity on the part of economists that prevents us from knowing where the economy is heading Rather it is the fact that forecasting is difficult for at least two reasons First, different sectors of the economy frequently send different signals For instance, retail sales may be down, signaling a start to a recession, but housing starts may be up, indicating that an expansion will continue for a while Second, the data that must be used always are at least a bit out-of-date For example, the preliminary estimate of GDP is not made until approximately six weeks after the end of the quarter, and the final revision of GDP doesn’t appear until years later Although economists’ forecasts are much better than those of others, forecasting GDP with complete accuracy is unlikely Conclude by mentioning that this fact is important in later chapters when we discuss implementation of counter-cyclical policies The Business Cycle, Part 2: The business cycle and its dating are interesting to students, especially when the economy is in or near a recession If you have the capacity to show or assign Web pages, look at the NBER Business Cycle Dating Committee’s page at http://www.nber.org/cycles/recessions.html You might like to look at the dating of the cycle in other countries This dating is done by the Economic Cycle Research Institute (ECRI) You can find their Web site at http://www.businesscycle.com/ Another page on the ECRI Web site shows the cycle peak and trough dates for 18 countries from 1948 nicely aligned in a table You can compare the timing of cycles internationally You can also compare the severity of U.S cycles over time Note that the recession that the NBER dates as beginning in March 2001 and ending in November 2001 was incredibly mild on all criteria except the labor market The “Great Recession” that started in 2007, however, is one of the worst since the great depression The Standard of Living Across Countries   Real GDP can be used to compare living standards across countries But two problems arise in using real GDP to compare living standards:  First, the real GDP of one country must be converted into the same currency unit as the real GDP of the other country Second, the goods and services in both countries must be valued at the same prices Relative prices in countries will differ, so goods and services should be weighted accordingly For example, if more prices are lower in China than in the United States, China’s prices put a lower value on China’s production than would U.S prices If all the goods and services produced in China are valued using U.S prices, than a more valid comparison can be made of real GDP in the two countries This comparison using the same prices is called purchasing power parity (PPP) prices Big Mac Index (http://www.economist.com/content/big-mac-index): This is an impressive and interactive site for measuring PPP of the Big Mac Students will immediately relate to this example and you can ask them what country they want to check on 41 42 CHAPTER International comparisons and PPP prices Students sometimes see estimates of GDP per person in developing nations Most such estimates are extremely low, and students often ask how people can live on such low incomes Point out that the estimate is biased downward in two ways First, in poor nations, more transactions not go through a market than in rich nations For example, transportation services in developing nations include a lot of walking, which is not counted as part of GDP In richer nations, people ride a bus or subway and pay a fare, which is counted as part of GDP Second, many locally produced and consumed goods and services have extremely low prices in poor nations For example, a haircut that costs $20 in New York might cost $1 in Calcutta (You might get a better haircut in New York, but probably not one that is 20 times better!) Converting Indian GDP into U.S dollars at the market exchange rate leaves this bias in the data Using purchasing power parity prices to convert India’s GDP into U.S dollars avoids this bias Limitations of Real GDP  Some of the factors that influence the standard of living are not part of real GDP Omitted from GDP are:  Household Production: As more services, such as childcare, are provided in the marketplace, the measured growth rate overstates development of all economic activity  Underground Economic Activity: If the underground economy is a reasonably stable proportion of all economic activity, though the level of GDP will be too low, the growth rate will be accurate  Health and Life Expectancy: Better health and long life are not directly included in real GDP  Leisure Time: Increases in leisure time lower the economic growth rate, but we value our leisure time and we are better off with it  Environmental Quality: Pollution does not directly lower the economic growth rate  Political Freedom and Social Justice: Political freedom and social justice are not measured by real GDP The At Issue feature debates whether GNNP (Green net National Product) should replace GDP Advocates say that a green measure is needed to take account of environmental damage that results from production; opponents say that other omissions from GDP are more important than environmental damage An Economics in Action describes the United Nation’s broader measure of wellbeing, the Human development Index The Economics in the News section discusses the rapid growth in the second quarter of 2014 and the role played by business inventories in the expansion YouTube Video: This is a wonderful video that should get anyone excited about data and its ability to help tell a story Hans Rosling's 200 Countries, 200 Years, Minutes - The Joy of Stats - BBC Four http://youtu.be/jbkSRLYSojo Measuring Real GDP and Economic Growth A discussion of omissions from GDP can arouse students’ interest For example, you might point out that if you mow your own lawn, the value of your production doesn’t show up in GDP But if you hire a student to mow your lawn (and if your student reports the income earned correctly to the IRS), the value of the student’s production does show up in GDP Why don’t we measure all lawn mowing as part MEASURING GDP AND ECONOMIC GROWTH of GDP? Some reasons are the cost of collecting data and the degree of intrusiveness we’d be willing to tolerate But note how little we spend on collecting the GDP data and how relatively inexpensive it would be to add some questions about domestic production to either the Labor Force Survey or the Family Expenditure Survey You might like to explain how the omission of illegal goods and services also leads to some misleading comparisons For instance, the day before prohibition ended, the production of (illegal) beer was not counted as part of GDP But the day after prohibition ended, the production of (now legal) beer counted Ask your students to suggest two good reasons why illegal goods and services are omitted First, the data are hard (but not impossible) to obtain Second, there may be the moral position that illegal activities should not be included in GDP This latter observation can lead to an interesting discussion Ask the students if they think that the production of, say, marijuana should be included in GDP Some, maybe even many, of them will see no problem with this Then ask about the production of murder-for-hire The response, we hope, will be significantly different Does such a good have any value? 43 44 CHAPTER Additional Problems Figure 4.1 shows the flows of expenditure and income for a small nation During 2014, flow A was –$15 million, flow B was $40 million, flow C was $90 million, and flow D was $45 million Calculate a Aggregate expenditure b Aggregate income c GDP The transactions in Jupiter last year are in the table to the right a Calculate Jupiter’s aggregate expenditure b Calculate Jupiter’s net exports c Calculate Jupiter’s government expenditure The table shows data from the United Kingdom in 2005 a Calculate GDP in the United Kingdom b Explain the approach (expenditure or income) that you used to calculate GDP Item GDP Consumption expenditure Taxes Transfer payments Profits Investment Exports Saving Imports Item Wages paid to labor Consumption expenditure Taxes Transfer payments Profits Investment Government expenditure Exports Saving Imports Dollars 1.400,000 700,000 350,000 150,000 300,000 350,000 400,000 400,000 350,000 Billions of pounds 685 791 394 267 273 209 267 322 38 366 MEASURING GDP AND ECONOMIC GROWTH Desert Kingdom produces only dates and and the tables give the Quantities quantities produced and Dates prices in 2014 and 2015 Camel rides Calculate Desert Kingdom’s Prices a Nominal GDP and real Dates GDP in 2014 and 2015 Camel rides b Real GDP in 2015 in terms of the base-year prices 45 camel rides The base year is 2014, 2014 1,000 pounds 50 rides 2015 1,100 pounds 60 rides $1 per pound $100 per ride $2 per pound $120 per ride the Desert Kingdom (described in problem 3) decides to use the chain-weighted output index method of calculating real GDP Using this method, calculate a The growth rate of real GDP in 2015 b Compare and comment on the differences in real GDP in terms of the baseyear prices and real GDP calculated using the chain-weighted output index method Solutions to Additional Problems a Aggregate expenditure is $160 million Aggregate expenditure is the sum of consumption expenditure, investment, government expenditure, and net exports In the figure, flow C is consumption expenditure, flow D is investment, flow B is government expenditure, and flow A is net exports So aggregate expenditure equals $90 million plus $45 million plus $40 million minus $15 million, which is $160 million b Aggregate income is $160 million Aggregate income equals aggregate expenditure, which from part a is $160 million c GDP is $160 million GDP equals aggregate expenditure, which from part a is $160 million a Jupiter’s aggregate expenditure is $1,400,000 Aggregate expenditure equals GDP and Jupiter’s GDP is $1,400,000 b Jupiter’s net exports equal $50,000 Net exports equal exports, $400,000, minus imports, $350,000 c Jupiter’s government expenditure was $300,000 Aggregate expenditure equals the sum of consumption expenditure, investment, government expenditure, and exports minus imports That is, $1,400,000 equals $700,000 plus $350,000 plus government expenditure plus $400,000 minus $350,000 Solving this equation for government expenditure gives $300,000 a GDP in the United Kingdom was £1,223 billion b The expenditure approach was used; that is, GDP was calculated by adding consumption expenditure, investment, government expenditure, and exports, and subtracting imports a In 2014, nominal GDP is $6,000 In 2009, nominal GDP is $9,400 46 CHAPTER Nominal GDP in 2014 is equal to total expenditure on the goods and services produced by Desert Kingdom in 2014 Expenditure on dates is 1,000 pounds at $1 a pound, which is $1,000 Expenditure on camel rides is 50 rides at $100 a ride, which is $5,000 Total expenditure is $6,000, so nominal GDP in 2014 is $6,000 Nominal GDP in 2015 is equal to total expenditure on the goods and services produced by Desert Kingdom in 2015 Expenditure on dates is 1,100 pounds at $2 a pound, which is $2,200 Expenditure on camel rides is 60 rides at $120 a ride, which is $7,200 Total expenditure is $9,400, so nominal GDP in 2015 is $9,400 b Real GDP in 2015 in terms of base-year prices is $7,100 To calculate real GDP in 2015 in terms of base-year prices, we calculate market value of the 2015 quantities at the base-year prices of 2014 To value the 2015 output at 2014 prices, expenditure on dates is 1,100 pounds at $1 a pound (which is $1,100), and expenditure on camel rides is 60 rides at $100 a ride (which is $6,000) So real GDP in 2015 in terms of base-year prices is $7,100 a The growth rate of real GDP in 2015 is 17.9 percent The chain-weighted output index method uses the prices of 2014 and 2015 to calculate the growth rate in 2015 The value of the 2014 quantities at 2014 prices is $6,000 The value of the 2015 quantities at 2014 prices is $7,100 We now compare these values The increase in the value is $1,100 The percentage increase is ($1,100  $6,000)  100, which is 18.33 percent The value of the 2014 quantities at 2015 prices is $8,000 The value of the 2015 quantities at 2015 prices is $9,400 We now compare these values The increase in the value is $1,400 The percentage increase is ($1,400  8,000)  100, which is 17.5 percent The chain-weighted output index calculates the growth rate as the average of these two percentage growth rates That is, the growth rate in 2015 is 17.9 percent b Real GDP in 2015 in terms of base-year prices is $7,100 Real GDP in 2015 using the chain-weighted output index method is $7,074 Real GDP growth is fastest when real GDP is measured in terms of base-year prices Additional Discussion Questions 11 To estimate GDP you add the value of all the goods and services produced, both final and intermediate goods Is this procedure correct? Why? Adding all the goods and services produced is incorrect because it will lead to significant double counting Intermediate goods and services will be double counted For instance, if a CPU produced by Intel and then used in a Dell computer is counted both as a CPU from Intel and as part of the computer from Dell, the CPU has been double counted 12 What is the relationship between aggregate income and aggregate production? Why does this relationship exist? Aggregate income equals aggregate production The circular flow shows this result: The flow of production out of business firms equals the flow of expenditure into business firms The flow of expenditure into business firms equals the flow of costs out of business firms And the flow of costs out of business firms is the same as the flow of aggregate income to households 13 Does my purchase of a domestically produced Ford automobile that was manufactured in 2010 add to the current U.S GDP? Why? How about my purchase of a domestically produced, newly produced Ford? Why? The purchase of the used Ford does not add to the current U.S GDP though it did add to U.S GDP in 2010 when the car was newly produced GDP MEASURING GDP AND ECONOMIC GROWTH measures production within a given time period and the used Ford was not produced within the current year A new Ford automobile, however, is counted in current U.S GDP because it was produced in the current year Does my purchase of 100 shares of stock in Google add to the nation’s GDP? Why? Purchasing shares of stock does not add to the nation’s GDP GDP measures production Shares of stock are not the production of a good or service and therefore are not included in GDP If a homeowner cuts his or her lawn, is the value of this work included in real GDP? Suppose that the homeowner hires a neighborhood kid to cut the lawn Is this activity included in real GDP? Comment on your answers The homeowner’s work around his or her home is not included in GDP because home production is excluded Hiring a neighborhood kid to cut the lawn is, in theory, included in GDP because it is a service that has been sold in a market This difference in the treatment of these two activities shows a flaw in how GDP is computed In both cases the precise same lawn is mowed But in one case GDP is unaffected and in the other GDP increases It is paradoxical that the effect on GDP of producing the same service depends on who produces the service In 1900, the average work week was 65 hours; today it is approximately 35 hours How did this change affect real GDP within the United States? How did it affect the standard of living within the United States? Comment on your answers The decrease in the average work week decreases real GDP from what it would have been if the work week had remained at 65 hours because less time is spent at production of goods and services Taken by itself, the decrease in real GDP means that the standard of living within the United States is lower However the fall in the average work week also means a significant increase in people’s leisure time, which raises the standard of living For many people it is likely the case that their standard of living is higher with the shorter work week—and hence lower level of real GDP—that it would be with the longer work week because they value their leisure more than the goods and services that would have been produced But at the least, looking only at the change in real GDP as the sole measure of the standard of living is incorrect because that view ignores the gain in the standard of living from the increased leisure In the United States, many children receive day-care from commercial providers In Africa, this is unknown; children are almost all cared for by relatives How would this difference affect comparisons of GDP per person? This difference means that U.S GDP per person is biased higher than GDP per person in African countries In both the United States and in Africa children are cared for so the same service is produced in both regions But in the United States this service is included in GDP because it is purchased in a market; however, in Africa the service is not included in GDP because it is performed as household production 47 ... percent The value of the 2014 quantities at 2015 prices is $8,000 The value of the 2015 quantities at 2015 prices is $9,400 We now compare these values The increase in the value is $1,400 The percentage... at the dating of the cycle in other countries This dating is done by the Economic Cycle Research Institute (ECRI) You can find their Web site at http://www.businesscycle.com/ Another page on the. .. First, the real GDP of one country must be converted into the same currency unit as the real GDP of the other country Second, the goods and services in both countries must be valued at the same
- Xem thêm -

Xem thêm: The big picture marcoeconomics 12e parkin chapter 04 , The big picture marcoeconomics 12e parkin chapter 04 , III. The Uses and Limitations of Real GDP

Gợi ý tài liệu liên quan cho bạn

Nhận lời giải ngay chưa đến 10 phút Đăng bài tập ngay