![Page 1: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/1.jpg)
CHAPTER 5Measuring the
Economy’s Output
1
Slides prepared by Bruno Fullone, George Brown College
© 2010 McGraw-Hill Ryerson Limited
PART 2: GDP, GROWTH AND
FLUCTUATIONS
![Page 2: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/2.jpg)
• Learning Objective 5.1: How gross domestic product (GDP) is defined and measured
• Learning Objective 5.2 : Other measures of a nation’s production of goods and services
• Learning Objective 5.3 : The distinction between nominal GDP and real GDP
• Learning Objective 5.4 : The shortcomings of GDP as a measure of domestic output and well-being
2
In This Chapter You Will Learn:
![Page 3: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/3.jpg)
3LO5.1
• Gross Domestic Product is:• The main measure of the economy’s
performance• The total market value of all final goods and
services produced annually within the boundaries of Canada
• A Monetary Measure
5.1 Measuring the Economy’s Performance: GDP
![Page 4: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/4.jpg)
4LO5.1
• To avoid multiple counting, only final goods and services are counted
• Final goods: Goods and services purchased for final use and not for resale or further processing or manufacturing
• Intermediate goods are not counted• Intermediate goods: Products purchased for
resale or further processing or manufacturing
Avoiding Multiple Counting
![Page 5: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/5.jpg)
5LO5.1
(1)Stage of production
(2)Sales value ofmaterials or product
(3)Value added
0
Firm A, sheep ranch $ 120 $120 (= $120 – $ 0)
Firm B, wool processor 180 60 (= 180 – 120)
Firm C, suit manufacturer 220 40 (= 220 – 180)
Firm D, clothing wholesaler 270 50 (= 270 – 220)
Firm E, retail clothier 350 80 (= 350 – 270)
Total sales value $1140
Value added (total income) $350
Value Added in a Five Stage Production ProcessTable 5-2
![Page 6: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/6.jpg)
6LO5.1
Two types of nonproduction transactions:1. Financial transactions- Public Transfer Payments- Private Transfer Payments- Stock-Market Transactions2. Second-hand sales
GDP Excludes Nonproduction Transactions
![Page 7: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/7.jpg)
Table 5-3 Calculating GDP in 2008: The Expenditures Approach (billions of dollars)
![Page 8: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/8.jpg)
. 8
Stock of Stock of capitalcapital
January 1January 1
Net Net investmentinvestment StockStock
ofofcapitalcapital
December 31December 31
DepreciationDepreciation
Gross Investment
Figure 5-1 Gross Investment, Depreciation, Net Investment, and the Stock of Capital
![Page 9: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/9.jpg)
9LO5.1
• The Expenditures Approach: adds up all the expenditures made for final goods and services.
• The Expenditures Approach adds up: – personal consumption expenditures (C)– gross investment (Ig)– government purchases (G)– Net exports (Xn) = exports (X) – imports (M)
Two Ways of Calculating GDP: Expenditures and Income Approach
![Page 10: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/10.jpg)
Table 5-4 Calculating GDP in 2008: The Income Approach (billions of dollars)
![Page 11: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/11.jpg)
11
Table 5-3 Calculating GDP in 2008:The Expenditure Approach
GDP = C + IG+ G + XN
Table 5-3 GDP ($billions)
C 891
IG 309
G 375
XN 25
GDP $1600
![Page 12: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/12.jpg)
5-1 Global Perspective
![Page 13: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/13.jpg)
13LO5.1
• The Income Approach: adds up expenditures that are allocated as income to those producing the output
• The Income Approach adds up:– Wages, salaries, and supplementary labour income– Profits of corporations and government enterprises before
taxes– Interest and investment income – Net income of farm and unincorporated businesses– Taxes less subsidies on factors of production – Indirect taxes less subsidies on products– Capital consumption allowances
The Income Approach
![Page 14: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/14.jpg)
©2006 McGraw-Hill Ryerson Ltd.
Chapter 4.1 14
Table 5-4 Calculating GDP in 2008:The Income Approach
Table 5-4 GDP ($billions)
Wages, salaries, etc. $823
Profits of corporations, etc. 2231
Interest & investment income 81
Net income of farms & unincorp. businesses 93
Taxes less subsidies on factors of prod. 70.0
Indirect taxes less subsidies on products 93
Capital consumption allowances 208
Statistical discrepancy 1
GDP at market prices 1600
![Page 15: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/15.jpg)
15LO5.2
• Gross National Product (GNP)– The total income that residents of a country earn within
the year• Net Domestic Product (NDP)
– Measures the total annual output that the entire economy can consume without impairing its capacity to produce in ensuing years
• Net National Income at Basic Prices (NNI)– Includes all income earned through the use of Canadian-
owned factors, whether they are located at home or abroad
5.2 Other National Accounts
![Page 16: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/16.jpg)
16LO5.2
• Personal Income (PI)– Earned and unearned income available to resource
suppliers and others before the payment of personal income taxes
• Disposable Income (DI)– Personal income less personal taxes and other
personal transfers to government
5.2 Other National Accounts
![Page 17: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/17.jpg)
Global Perspective 5-1: Comparative GDP
Source: World Bank
Selected Nations GDPs, 2007
United StatesJapan
GermanyChina
United KingdomFrance
ItalyCanada
SpainBrazil
RussiaIndia
South KoreaMexico
Australia
0 1 2 3 4 5 6 7 8 9 10 12 13GDP in Trillions of Dollars
![Page 18: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/18.jpg)
18LO5.3
• Nominal GDP– GDP measured in terms of the price level at the time
of measurement (unadjusted for inflation)
• Real GDP– Nominal GDP adjusted for inflation.
5.3 Nominal GDP versus Real GDP
![Page 19: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/19.jpg)
19LO5.3
Year (1) Units of output (Q)
(2)Price of pizzaper unit (P)
(3)Price index(year 1 = 100)
(4)Unadjusted, ornominal, GDP(Q) x (P)
(5)Adjusted, orreal, GDP
1 5 $10 100 $50 $50
2 7 20 200 140 70
3 8 25 250 200 80
4 10 30 ? ? ?
5 11 28 ? ? ?
Table 5-5 Calculating Real GDP
![Page 20: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/20.jpg)
20LO5.3
• a measure of the price of a specified collection of goods and services, called a “market basket,” in a specific year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year
Price Index
![Page 21: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/21.jpg)
21LO5.3
How do we calculate a price index?
For example, if in year 2, price of basket is $20, and price of same basket in base year is $10, then:
![Page 22: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/22.jpg)
22LO5.3
For example, if in year 2, nominal GDP is $140 and price index is 200, then:
How do we calculate Real GDP?
![Page 23: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/23.jpg)
23LO5.3
Year (1) Units of output (Q)
(2)Price of pizzaper unit (P)
(3)Price index(year 1 = 100)
(4)Unadjusted, ornominal, GDP(Q) x (P)
(5)Adjusted, orreal, GDP
1 5 $10 100 $50 $50
2 7 20 200 140 70
3 8 25 250 200 80
4 10 30 300 300 100
5 11 28 280 308 110
Revisiting Table 5-5 Calculating Real GDP
![Page 24: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/24.jpg)
24LO5.3
An implicit price index
For example, if in year 2, nominal GDP = 140, real GDP = 70, then,
GDP Deflator
![Page 25: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/25.jpg)
25LO5.3
• Method 1: 1. Find nominal GDP for each year.2. Compute a price index.3. Divide each year’s nominal GDP by that year’s price
index, then multiply by 100 to determine real GDP.
Table 5-6 Steps for Deriving Real GDP from Nominal GDP
![Page 26: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/26.jpg)
• Method 2:• 1. Break down nominal GDP into physical
quantities of output and prices for each year.• 2. Find real GDP for each year by determining
the dollar amount that each year’s physical output would have sold for if base-year prices had prevailed.
26LO 5.3
Table 5-6 Steps for Deriving Real GDP from Nominal GDP
![Page 27: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/27.jpg)
27LO5.3
• Links each year to the previous year through the use of both the prior-year prices and current-year prices.
• For example, the calculation of the chain-weighted index would use both 2008 and 2009 prices to calculate real GDP growth in 2009. Since the 2008 chain-weighted index was arrived at using both 2007 and 2008 prices, the year 2009 is linked back—as the links of a chain are—to 2008, 2007, and previous years as well.
Chain-Weighted Index
![Page 28: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/28.jpg)
28LO5.4
• Measurement Shortcomings: Non-Market Transactions not included: services of
self-supplied household services etc (hiring a nanny vs. doing it yourself)
The Underground Economy not included: illegal drugs, prostitution etc.
Leisure amount of leisure not included: two countries might have same GDP, but one achieves with population working half time, therefore has more leisure time
Improved Quality: quality of g & s not included
5.4 Shortcomings of GDP
![Page 29: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/29.jpg)
29LO5.4
• Shortcomings of the Well-Being Measure GDP and the environment: environment not considered
(two countries with same GDP, but one produces with clean technology)
Composition and Distribution of Output: GDP doesn’t tell us if composition of output is welfare enhancing (g & s) or not (output for war); also doesn’t tell us if the wealth in a country is concentrated or equally distributed.
Non-material sources of well-being: material output doesn’t necessarily measure “total happiness”
5.4 Shortcomings of GDP
![Page 30: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/30.jpg)
The Last Word: Value Added and GDP
• The value added approach sums up the value of total output less the value of intermediate goods and services.
• The expenditure approach sums up the expenditure on final goods and services.
• The income approach tallies earnings of all factors of productions.
![Page 31: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/31.jpg)
31LO5.1
• The value added approach sums up the value of total output less the value of intermediate goods and services
• The expenditure approach sums up the expenditure on final goods and services
• The income approach tallies earnings of all factors of productions
The Last Word: Value Added and GDP
![Page 32: CHAPTER 5 Measuring the Economy’s Output 1 Slides prepared by Bruno Fullone, George Brown College © 2010 McGraw-Hill Ryerson Limited PART 2: GDP, GROWTH](https://reader035.vdocuments.us/reader035/viewer/2022062314/56649e7a5503460f94b7aca3/html5/thumbnails/32.jpg)
32
5.1 Measuring the Economy’s Performance: GDP5.2 Other National Accounts5.3 Nominal GDP versus Real GDP5.4 Shortcomings of GDP
Chapter 5 Summary