chapter 2: the measurement and structure of the …ccfour/mt2.pdfchapter 2: the measurement and...
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Chapter 2: The Measurement and Structure of theNational Economy
Cheng Chen
School of Economics and Finance
The University of Hong Kong
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Chapter Outline
National Income Accounting: The Measurement of Production,Income, and Expenditure
Gross Domestic Product
Saving and Wealth
Real GDP, Price Indexes, and In�ation
Interest Rates
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National Income Accounting
National income accounting
National income accounts: an accounting framework used inmeasuring current economic activity.
Three alternative approaches give the same measurements:
I Product approach: the amount of output produced.I Income approach: the incomes generated by production.I Expenditure approach: the amount of spending by purchasers.
Juice business example (In Chapter 2.1).
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National Income Accounting
Why are the three approaches equivalent?
They must be, by de�nition: Any output produced (product approach)is purchased by someone (expenditure approach) and results in incometo someone (income approach).
The fundamental identity of national income accounting:
total production = total income = total expenditure. (1)
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Gross Domestic Product
Gross domestic product
The product approach to measuring GDP:
Market value: allows adding together unlike items by valuing them attheir market prices.
Newly produced: counts only things produced in the given period;excludes things produced earlier.
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Gross Domestic Product
Gross domestic product (Cont.)
Final goods and services:
I Don't count intermediate goods and services.I Final goodsI Capital goodsI Inventory investmentI Adding up value added works well.
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Gross Domestic Product
GNP vs. GDP
GNP (gross national product) = output produced by domesticallyowned factors of production.
GDP = output produced within a nation:
GDP = GNP −NFP (2)
where NFP=net factor payments from abroad= payments todomestically owned factors located abroad minus payments to foreignfactors located domestically.
Example:.
Di�erence between GNP and GDP is small for the U.S., about 0.2%,but higher for countries that have many citizens working abroad.
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Gross Domestic Product
GNP/GDP in Hong Kong
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Gross Domestic Product
The expenditure approach to measuring GDP
Measures total spending on �nal goods and services produced within anation during a speci�ed period of time.
Four main categories of spending: consumption (C ), investment (I ),government purchases of goods and services (G ), and net exports(NX ). The income-expenditure identity:
Y = C + I + G +NX .
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Gross Domestic Product
Consumption
Consumption: spending by domestic households on �nal goods andservices (including those produced abroad). About 2/3 of U.S. GDP.
Three categories:
I Consumer durables (examples: cars, TV sets, furniture, majorappliances).
I Nondurable goods (examples: food, clothing, fuel).I Services (examples: education, health care, �nancial services,
transportation).
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Gross Domestic Product
Investment
Investment: spending for new capital goods (�xed investment) plusinventory investment. About 1/6 of U.S. GDP
Three categories:
I Business (or nonresidential) �xed investment.I Residential �xed investment.I Inventory investment.
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Gross Domestic Product
Government purchases
Government purchases of goods and services: spending by thegovernment on goods or services. About 1/5 of U.S. GDP.
Most by state and local governments, not federal government.
Not all government expenditures are purchases of goods and services.
Some government spending is for capital goods that add to thenation's capital stock, such as highways, airports, bridges, and waterand sewer systems.
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Gross Domestic Product
Net exports: exports minus imports
Exports: goods produced in the country that are purchased byforeigners.
Imports: goods produced abroad that are purchased by residents inthe country.
Imports are subtracted from GDP, as they represent goods producedabroad, and were included in consumption, investment, andgovernment purchases.
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Gross Domestic Product
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-18
Table 2.1 Expenditure Approach to Measuring GDP in the United States, 2011
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Gross Domestic Product
The income approach to measuring GDP
Adds up income generated by production (including pro�ts and taxespaid to the government).
National income = compensation of employees (including bene�ts) +proprietors' income + rental income of persons + ...
National income + statistical discrepancy = net national product.
Net national product + depreciation (the value of capital that wearsout in the period) = gross national product (GNP).
GNP � net factor payments (NFP) = GDP .
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Gross Domestic Product
Private sector and government sector income
Private disposable income = income of the private sector = privatesector income earned at home (Y or GDP) and abroad (NFP) + ...
Government's net income:
T − TR − INT . (3)
Private disposable income + government's net income:
GDP +NFP = GNP. (4)
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Gross Domestic Product
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-21
Table 2.2 Income Approach to Measuring GDP in the United States, 2011
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Saving and Wealth
Wealth
Household wealth = a household's assets minus its liabilities.
National wealth = sum of all households', �rms', and governments'wealth within the nation.
Saving by individuals, businesses, and government determine wealth.
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Saving and Wealth
Measures of aggregate saving
Saving = current income � current spending.
Saving rate = saving/current income.
Private saving = private disposable income � consumption:
Spvt = (Y +NFP − T + TR + INT )− C . (5)
Government saving = net government income � government purchasesof goods and services:
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Saving and Wealth
Measures of aggregate saving (Cont.)
Government saving = government budget surplus = governmentreceipts � government outlays:
I Government receipts = tax revenue (T ).I Government outlays = ...I Government budget de�cit = − Sgovt .
Simpli�cation: count government investment as governmentpurchases, not investment.
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Saving and Wealth
National saving
National saving = private saving + government saving:
Figure 2.1 plots national saving, private saving, and governmentsaving relative to GDP.
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Saving and Wealth
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-26
Figure 2.1 U.S. saving measures as a percentage of GDP, 1960–2012
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Saving and Wealth
The uses of private saving
The uses-of-saving identity�saving is used in three ways: (1)investment (I ); (2) government budget de�cit (−Sgovt); and (3)current account balance (CA)
S = I + (NX +NFP) (6)
= I + CA,
where CA = NX +NFP is current account balance.
Since S = Spvt + Sgovt , we have...
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Saving and Wealth
Relating saving and wealth
Stocks and �ows:
I Flow variables: measured per unit of time (GDP, income, saving,investment).
I Stock variables: measured at a point in time (quantity of money, valueof houses, capital stock).
I Flow variables often equal rates of change of stock variables.
Wealth and saving as stock and �ow (wealth is a stock, saving is a�ow).
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Saving and Wealth
National wealth
National wealth: domestic physical assets + net foreign assets.
I Country's domestic physical assets (capital goods and land).I Country's net foreign assets.I Wealth matters because the economic well-being of a country depends
on it.
Changes in national wealth
I Change in value of existing assets and liabilities.I National saving (S = I + CA) raises wealth.
Comparison of U.S. saving and investment with other countries
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Saving and Wealth
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-32
Summary 1 Measures of the Aggregate Savings
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Real GDP, Price Indexes, and In�ation
Real GDP
Nominal variables are those in dollar terms.
Problem: Do changes in nominal values re�ect changes in prices orquantities?
Real variables: adjust for price changes; re�ect only quantity changes.
Nominal GDP is the dollar value of an economy's �nal outputmeasured at current market prices.
Real GDP is an estimate of the value of an economy's �nal output,adjusting for changes in the overall price level.
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Real GDP, Price Indexes, and In�ation
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-35
Table 2.3 Production and Price Data
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Real GDP, Price Indexes, and In�ation
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Real GDP, Price Indexes, and In�ation
Price Indexes
A price index measures the average level of prices for some speci�edset of goods and services, relative to the prices in a speci�ed base year.
GDP de�ator = 100×nominal GDP/real GDP. Note that base yearP = 100.
Consumer Price Index (CPI)
The computer revolution and chain-weighted GDP
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Real GDP, Price Indexes, and In�ation
Price Indexes
A price index measures the average level of prices for some speci�edset of goods and services, relative to the prices in a speci�ed base year.
GDP de�ator = 100×nominal GDP/real GDP. Note that base yearP = 100.
Consumer Price Index (CPI)
The computer revolution and chain-weighted GDP
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Real GDP, Price Indexes, and In�ation
In�ation
Calculate the in�ation rate:
πt+1 =Pt+1 − Pt
Pt=
∆Pt+1
Pt. (7)
Fig. 2.2 shows the U.S. in�ation rate since 1960 for the GDP de�ator.
Does CPI in�ation overstate increases in the cost of living?
I The Boskin Commission reported that the CPI was biased upwards.I Price indexes with �xed sets of goods don't re�ect substitution by
consumers when one good becomes relatively cheaper than another(i.e., the substitution bias).
I If in�ation is overstated, then real incomes are higher than we thoughtand we've overindexed payments like Social Security.
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Real GDP, Price Indexes, and In�ation
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-41
Figure 2.2 The Inflation Rate in the United States, 1960-2011
Source: Implicit price deflator for GDP, from FRED database, Federal Reserve Bank of St. Louis, research.stlouisfed.org/fred2/series/GDPCTPI.
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Real GDP, Price Indexes, and In�ation
Application: The Fed's preferred in�ation measures
The Federal Reserve focuses its attention on the personal consumptionexpenditures (PCE) price index.
The Fed forecasts both the overall PCE price index and the core PCEprice index.
The Fed uses the core PCE price index to measure the underlyingtrend in in�ation.
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Real GDP, Price Indexes, and In�ation
Application: The Fed's preferred in�ation measures
The Federal Reserve focuses its attention on the personal consumptionexpenditures (PCE) price index.
The Fed forecasts both the overall PCE price index and the core PCEprice index.
The Fed uses the core PCE price index to measure the underlyingtrend in in�ation.
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Real GDP, Price Indexes, and In�ation
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-47
Figure 2.3 Overall PCE inflation rate and core PCE inflation rate, 1960-2011
Source: Federal Reserve Bank of St. Louis FRED database at research.stlouisfed.org/fred2/series/PCEPI and PCEPILFE.
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Real GDP, Price Indexes, and In�ation
Interesting Video to Watch
Hyperin�ation in Hell
Website: https://www.youtube.com/watch?v=TsdSxk-qxZE
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Interest Rates
Real vs. nominal interest rates
Interest rate: a rate of return promised by a borrower to a lender.
Real interest rate.
Nominal interest rate.
Real interest rate = i − π. Fig. 2.4 plots nominal and real interestrates for the U.S. since 1960.
The expected real interest rate:
r = i − πe (8)
If π = πe , real interest rate = expected real interest rate.
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Interest Rates
Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-50
Figure 2.4 Nominal and real interest rates in the United States, 1960-2011
Source: The implicit price Deflator for GDP is the same as for Fig. 2.2. Inflation rates for 2012 and 2013 are assumed to be 2%. The nominal interest rate on three-year Treasury securities is from the Board of Governors of the Federal Reserve System, Statistical Release H15, www.federalReserve.gov/releases.
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Consumption and Investment in China and Hong Kong
Comparison
Mainland China: compared with the U.S.,I Household consumption;I Investment;I Government purchases,I Net exports.
HK: compared with the U.S.,I Household consumption;I Investment;I Government purchases,I Net exports.
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Consumption and Investment in China and Hong Kong
Comparison
Mainland China: compared with the U.S.,I Household consumption;I Investment;I Government purchases,I Net exports.
HK: compared with the U.S.,I Household consumption;I Investment;I Government purchases,I Net exports.
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Consumption and Investment in China and Hong Kong
Short Essay
Questions:I Is economic structure of mainland China di�erent from the U.S.?
Consumption level? Level of investment? Exports and imports?I Why? (corruption, social safety net, housing market, inventory change
and made in China)I Is economic structure of HK di�erent from the U.S.? Government
purchases? Exports and Imports?I Why? (size of government and dependence on international trade)
How to write an essay?I Para. one: State your argument and present data (you can use my
tables as well).I Para. two: Why are there such di�erences between mainland China (or
HK) and the U.S. (collect data by yourself and use it)?
(Cheng Chen (HKU)) ECON2102/2220: Intermediate Macroeconomics 39 / 43
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Consumption and Investment in China and Hong Kong
Short Essay
Questions:I Is economic structure of mainland China di�erent from the U.S.?
Consumption level? Level of investment? Exports and imports?I Why? (corruption, social safety net, housing market, inventory change
and made in China)I Is economic structure of HK di�erent from the U.S.? Government
purchases? Exports and Imports?I Why? (size of government and dependence on international trade)
How to write an essay?I Para. one: State your argument and present data (you can use my
tables as well).I Para. two: Why are there such di�erences between mainland China (or
HK) and the U.S. (collect data by yourself and use it)?
(Cheng Chen (HKU)) ECON2102/2220: Intermediate Macroeconomics 39 / 43
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Consumption and Investment in China and Hong Kong
Composition of China's GDP
Country or AreaYear Item Value
China, People's Republic of2012 Final consumption expenditure 4.11258E+12
China, People's Republic of2012 Household consumption expenditure (including Non-profit institutions serving households)2.99276E+12
China, People's Republic of2012 General government final consumption expenditure 1.11982E+12
China, People's Republic of2012 Gross capital formation 4.01626E+12
China, People's Republic of2012 Gross fixed capital formation (including Acquisitions less disposals of valuables)3.85198E+12
China, People's Republic of2012 Changes in inventories 1.64282E+11
China, People's Republic of2012 Exports of goods and services 2.31277E+12
China, People's Republic of2012 Imports of goods and services 2.07007E+12
China, People's Republic of2012 Gross Domestic Product (GDP) 8.3584E+12
China, People's Republic of2003 Final consumption expenditure 9.38567E+11
China, People's Republic of2003 Household consumption expenditure (including Non-profit institutions serving households)6.96503E+11
China, People's Republic of2003 General government final consumption expenditure 2.42064E+11
China, People's Republic of2003 Gross capital formation 6.76124E+11
China, People's Republic of2003 Gross fixed capital formation (including Acquisitions less disposals of valuables)6.46254E+11
China, People's Republic of2003 Changes in inventories 29869385622
China, People's Republic of2003 Exports of goods and services 4.85027E+11
China, People's Republic of2003 Imports of goods and services 4.49206E+11
China, People's Republic of2003 Gross Domestic Product (GDP) 1.65051E+12
China, People's Republic of1996 Final consumption expenditure 5.28248E+11
China, People's Republic of1996 Household consumption expenditure (including Non-profit institutions serving households)4.0841E+11
China, People's Republic of1996 General government final consumption expenditure 1.19839E+11
China, People's Republic of1996 Gross capital formation 3.46215E+11
China, People's Republic of1996 Gross fixed capital formation (including Acquisitions less disposals of valuables)2.89242E+11
China, People's Republic of1996 Changes in inventories 56972579961
China, People's Republic of1996 Exports of goods and services 1.71666E+11
China, People's Republic of1996 Imports of goods and services 1.46661E+11
China, People's Republic of1996 Gross Domestic Product (GDP) 8.92014E+11
(Cheng Chen (HKU)) ECON2102/2220: Intermediate Macroeconomics 40 / 43
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Consumption and Investment in China and Hong Kong
Composition of Hong Kong's GDP
Country or Area Year Item Value
China: Hong Kong SAR2012 Final consumption expenditure 1.92E+11
China: Hong Kong SAR2012 Household consumption expenditure (including Non-profit institutions serving households)1.68E+11
China: Hong Kong SAR2012 General government final consumption expenditure 2.39E+10
China: Hong Kong SAR2012 Gross capital formation 6.85E+10
China: Hong Kong SAR2012 Gross fixed capital formation (including Acquisitions less disposals of valuables)6.95E+10
China: Hong Kong SAR2012 Changes in inventories -1E+09
China: Hong Kong SAR2012 Exports of goods and services 5.92E+11
China: Hong Kong SAR2012 Imports of goods and services 5.88E+11
China: Hong Kong SAR2012 Gross Domestic Product (GDP) 2.63E+11
China: Hong Kong SAR2003 Final consumption expenditure 1.11E+11
China: Hong Kong SAR2003 Household consumption expenditure (including Non-profit institutions serving households)9.28E+10
China: Hong Kong SAR2003 General government final consumption expenditure 1.77E+10
China: Hong Kong SAR2003 Gross capital formation 3.61E+10
China: Hong Kong SAR2003 Gross fixed capital formation (including Acquisitions less disposals of valuables)3.49E+10
China: Hong Kong SAR2003 Changes in inventories 1.17E+09
China: Hong Kong SAR2003 Exports of goods and services 2.71E+11
China: Hong Kong SAR2003 Imports of goods and services 2.57E+11
China: Hong Kong SAR2003 Gross Domestic Product (GDP) 1.61E+11
(Cheng Chen (HKU)) ECON2102/2220: Intermediate Macroeconomics 41 / 43
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Consumption and Investment in China and Hong Kong
Graphic Representation of China's GDP
(Cheng Chen (HKU)) ECON2102/2220: Intermediate Macroeconomics 42 / 43
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Consumption and Investment in China and Hong Kong
Graphic Representation of Hong Kong's GDP
(Cheng Chen (HKU)) ECON2102/2220: Intermediate Macroeconomics 43 / 43