Chapter 6 - Measuring domestic output and the price level. After studying this chapter you will be able to understand: What gross domestic product (GDP) is and what it measures, the expenditure approach to measuring gross domestic product (GDP), the income approach to measuring gross domestic product (GDP), the distinction between nominal GDP and real GDP, what the Consumer Price Index (CPI) is and how it is constructed, the shortcomings of GDP as a measure of a country’s well-being.
Chapter Measuring Domestic Output and the Price Level SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn What gross domestic product (GDP) is and what it measures The expenditure approach to measuring gross domestic product (GDP) The income approach to measuring gross domestic product (GDP) © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn The distinction between nominal GDP and real GDP What the Consumer Price Index (CPI) is and how it is constructed The shortcomings of GDP as a measure of a country’s well-being © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Assessing the Economy’s Performance Gross Domestic Product The Expenditures Approach Income Approach Other National Accounts Nominal GDP vs Real GDP The Consumer Price Index Shortcomings of GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Assessing the Economy’s Performance National income accounting is useful to assess the health of the economy © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Assessing the Economy’s Performance National income accounting is useful to assess the health of the economy to track the long-run course over time © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter 6 Assessing the Economy’s Performance National income accounting is useful to assess the health of the economy to track the long-run course over time as a basis for policy formation © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Assessing the Economy’s Performance Gross Domestic Product The Expenditures Approach Income Approach Other National Accounts Nominal GDP vs Real GDP The Consumer Price Index Shortcomings of GDP © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Gross Gross Domestic Domestic Product Product the total market value of all final goods and services produced in the economy in one year • A Monetary Measure © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Gross Gross Domestic Domestic Product Product the total market value of all final goods and services produced in the economy in one year • A Monetary Measure • Avoiding Multiple Counting illustrated © 2002 McGraw-Hill Ryerson Ltd 10 Macroeconomics, Chapter 10 Nominal GDP vs Real GDP NOMINAL GDP measures the value of current production in current prices REAL GDP measures the value of current production in base year prices © 2002 McGraw-Hill Ryerson Ltd 41 Macroeconomics, Chapter 41 Nominal GDP vs Real GDP NOTES: The GDP Price Index: Price Index price index is a % (do not write % sign) Nominal GDP use decimal form Real GDP for calculations e.g., 103% = 1.03 = © 2002 McGraw-Hill Ryerson Ltd 42 Macroeconomics, Chapter 42 Nominal GDP vs Real GDP The GDP Deflator: Price Index Real GDP = Nominal GDP Real GDP = Nominal GDP Price Index © 2002 McGraw-Hill Ryerson Ltd 43 Macroeconomics, Chapter 43 Calculating Real GDP Table 6-4 Year Units of output Price Price Index Nominal GDP Real GDP $10 100 $50 $50 20 200 140 70 25 250 200 80 10 30 11 28 300 280 300 308 100 110 © 2002 McGraw-Hill Ryerson Ltd 44 Macroeconomics, Chapter 44 Table 6-6 Year Nominal GDP Real GDP GDP Price Index 1970 90.4 351.4 17.2 1980 315.2 535.1 58.9 1993 725.0 714.6 101.5 1995 807.1 769.4 104.9 © 2002 McGraw-Hill Ryerson Ltd 45 Macroeconomics, Chapter 45 Chapter Topics Assessing the Economy’s Performance Gross Domestic Product The Expenditures Approach Income Approach Other National Accounts Nominal GDP vs Real GDP The Consumer Price Index Shortcomings of GDP © 2002 McGraw-Hill Ryerson Ltd 46 Macroeconomics, Chapter 46 Consumer Price Index (CPI) compares the cost of a FIXED basket of CONSUMER goods in the base year & the year of interest note the GDP deflator is calculated with a CHANGING basket of ALL goods © 2002 McGraw-Hill Ryerson Ltd 47 Macroeconomics, Chapter 47 Consumer Price Index (CPI) CPI = basket @ current prices basket @ base year prices © 2002 McGraw-Hill Ryerson Ltd 48 Macroeconomics, Chapter 48 Chapter Topics Assessing the Economy’s Performance Gross Domestic Product The Expenditures Approach Income Approach Other National Accounts Nominal GDP vs Real GDP The Consumer Price Index Shortcomings of GDP © 2002 McGraw-Hill Ryerson Ltd 49 Macroeconomics, Chapter 49 Shortcomings of GDP GDP has several shortcomings, both • as a measure of total output • as a measure of well-being © 2002 McGraw-Hill Ryerson Ltd 50 Macroeconomics, Chapter 50 Shortcomings of GDP Non-Market Transactions Leisure Improved Product Quality The Underground Economy © 2002 McGraw-Hill Ryerson Ltd 51 Macroeconomics, Chapter 51 GLOBAL PERSPECTIVE 6-2 The underground economy as a % of GDP Greece Italy Spain Portugal Belgium Sweden Canada France Germany Holland Britain Japan United States Switzerland © 2002 McGraw-Hill Ryerson Ltd 10 15 20 25 30 35 52 Macroeconomics, Chapter 52 Shortcomings of GDP Non-Market Transactions Leisure Improved Product Quality The Underground Economy GDP & the Environment Composition & Distribution of Output Per Capita Output Non-Economic Sources of Well-Being © 2002 McGraw-Hill Ryerson Ltd 53 Macroeconomics, Chapter 53 Chapter Topics Assessing the Economy’s Performance Gross Domestic Product The Expenditures Approach Income Approach Other National Accounts Nominal GDP vs Real GDP The Consumer Price Index Shortcomings of GDP © 2002 McGraw-Hill Ryerson Ltd 54 Macroeconomics, Chapter 54 NEXT INTRODUCTION TO ECONOMIC GROWTH & FLUCTUATIONS Chapter © 2002 McGraw-Hill Ryerson Ltd 55 Macroeconomics, Chapter 55 ... McGraw-Hill Ryerson Ltd Macroeconomics, Chapter In this chapter you will learn The distinction between nominal GDP and real GDP What the Consumer Price Index (CPI) is and how it is constructed The. .. - Public Transfer Payments - Private Transfer Payments - Stock-Market Transactions © 2002 McGraw-Hill Ryerson Ltd 14 Macroeconomics, Chapter 14 Gross Gross Domestic Domestic Product Product the. .. country’s well-being © 2002 McGraw-Hill Ryerson Ltd Macroeconomics, Chapter Chapter Topics Assessing the Economy’s Performance Gross Domestic Product The Expenditures Approach Income Approach Other National