Macroeconomics Chapter 2: Macroeconomic Data and Variables Gross Domestic Product(GDP) Defintion: GDP is the total market value of all final goods and services produced by a country > Final versus Intermediate:by"final, we mean the goods and service that are purchased for final use by purchaser and not for resale or further processing. The meaning intermediate is opposite to final Value Added: GDP not only reflects the market value of final goods and service, but also reflect the income generated from producing these final goods and service. This income feature of GDP can be revealed by the process of value added
1 Macroeconomics Chapter 2: Macroeconomic Data and Variables Gross Domestic Product (GDP) ➢ Defintion: GDP is the total market value of all final goods and services produced by a country. ➢ Final versus Intermediate: By "final", we mean the goods and service that are purchased for final use by purchaser and not for resale or further processing. The meaning intermediate is opposite to final. ➢ Value Added: GDP not only reflects the market value of final goods and service, but also reflect the income generated from producing these final goods and service. This income feature of GDP can be revealed by the process of value added
Expenditure Approach to Calculate GDP One way to calculate the gDP is to look at how the final goods and services are used. This approach is called expenditure approach. The following is the composition of GDP in terms of the expenditure(or demand) Private Consumption Gross private Investment Net investment= Gross Investment- Depreciation Government Expenditure Net Export (Export-Import) Change in Inventories Remark The consumption, investment and government expenditure defined above includes the purchases on the imported goods. This is the reason why import must be deducted from the export
2 Expenditure Approach to Calculate GDP One way to calculate the GDP is to look at how the final goods and services are used. This approach is called expenditure approach. The following is the composition of GDP in terms of the expenditure (or demand) ➢ Private Consumption ➢ Gross Private Investment Net investment = Gross Investment - Depreciation ➢ Government Expenditure ➢ Net Export (Export - Import) ➢ Change in Inventories Remark: The consumption, investment and government expenditure defined above includes the purchases on the imported goods. This is the reason why import must be deducted from the export
Income Approach to Calculate GDP Another way is to look at the composition of value added(or income). The following is the composition of gDP in terms of income > Wage Rents Interest rate Proprietor's income Corporate Profit tax dividends retained profit Some statistic Adjustment Indirect Tax(Sales tax) Depreciation Net foreign factor income earned in U. S Remark: Similarly, the wage, profit, etc. include the income of domestic people or company earned in other country. This is the reason why we use net foreign income
3 Income Approach to Calculate GDP Another way is to look at the composition of value added (or income). The following is the composition of GDP in terms of income ➢ Wage ➢ Rents ➢ Interest Rate ➢ Proprietor's income ➢ Corporate Profit ➢ tax ➢ dividends ➢ retained profit ➢ Some Statistic Adjustment ➢ Indirect Tax (Sales tax) ➢ Depreciation ➢ Net foreign factor income earned in U. S. Remark: Similarly, the wage, profit, etc. include the income of domestic people or company earned in other country. This is the reason why we use net foreign income
Other related variables in National Income account Net domestic product Net Domestic Product= GDP-Depreciation National income National income Net domestic product Net Foreign Factor Income-Indirect Tax Personal Income Personal income= National income Social security Contribution Corporate Income Tax Retained Profit- Transfer payment Disposable Income Disposable Income= Personal Income-Personal Tax
4 Other Related Variables in National Income Account ➢ Net Domestic Product Net Domestic Product = GDP – Depreciation ➢ National Income National Income = Net Domestic Product - Net Foreign Factor Income - Indirect Tax ➢ Personal Income Personal Income = National Income - Social Security Contribution - Corporate Income Tax - Retained Profit - Transfer Payment ➢ Disposable Income Disposable Income = Personal Income - Personal Tax
Nominal gdp. real gdp and inflation index Nominal gdp is the value of final goods and services calculated at current market price The real GDP is the value of final goods and services calculated at fixed price GDP deflator(GdP price index): an index that reflects the general price level. The relationship among real and nominal gDP and gdp deflator can be expressed as Real gDP=(Nominal GDP/gdP deflator)x 100 Consumer Price Index: another index that reflects the general price level. Its calculation is based on selected consumer goods
5 Nominal GDP, Real GDP and Inflation Index ➢ Nominal GDP is the value of final goods and services calculated at current market price. ➢ The real GDP is the value of final goods and services calculated at fixed price. ➢ GDP deflator (GDP price index): an index that reflects the general price level. The relationship among real and nominal GDP and GDP deflator can be expressed as Real GDP = (Nominal GDP/GDP deflator) 100 ➢ Consumer Price Index: another index that reflects the general price level. Its calculation is based on selected consumer goods
Employment and unemployment rate Employment rate and unemployment rate are the indices that measure joplessness of an economy In particular Employment rate Number of employed Labor force Unmployment Rate Number of Unemployed Labor force The Natural Rate of Unemployment is the unemployment rate at equilibrium or at the steady state A Simple Model of Natural Rate of Unemployment (presented in class) 6
6 Employment and Unemployment Rate ➢ Employment rate and unemployment rate are the indices that measure joplessness of an economy. In particular, Labor Force Number of Employed Employment Rate = Labor Force Number of Unemploye d Unmploymen t Rate = ➢ The Natural Rate of Unemployment is the unemployment rate at equilibrium or at the steady state. ➢ A Simple Model of Natural Rate of Unemployment (presented in class):