Chapter 2 The Data of Macroeconomics IN THIS CHAPTER YOU WILL LEARN the meaning and measurement of the most important macroeconomic statistics gross domestic product GDP the consumer price index CPI the unemployment rate CHAPTER 2 The Data of Macroeconomics 2 Gross Domestic Product Expenditure and Income Two definitions Total expenditure on domestically produced final goods and services Total income earned by domestically located factors of production Expenditure equals income because every dollar a buyer spends becomes income to the seller CHAPTER 2 The Data of Macroeconomics 3 The Circular Flow Income Labor Firms Households Goods Expenditure CHAPTER 2 The Data of Macroeconomics 4 Value added Value added The value of output minus the value of the intermediate goods used to produce that output CHAPTER 2 The Data of Macroeconomics 5 NOW YOU TRY Identifying value added A farmer grows a bushel of wheat and sells it to a miller for 1 00 The miller turns the wheat into flour and sells it to a baker for 3 00 The baker uses the flour to make a loaf of bread and sells it to an engineer for 6 00 The engineer eats the bread Compute value added at each stage of production and GDP CHAPTER 2 The Data of Macroeconomics 6 Final goods value added and GDP GDP value of final goods produced sum of value added at all stages production of The value of the final goods already includes the value of the intermediate goods so including intermediate and final goods in GDP would be double counting CHAPTER 2 The Data of Macroeconomics 7 The expenditure components of GDP consumption C investment I government spending G net exports NX An important identity Y value of total output CHAPTER 2 C I G NX aggregate expenditure The Data of Macroeconomics 8 Consumption C definition The value of all goods and services bought by households Includes durable goods CHAPTER 2 The Data of Macroeconomics last a long time e g cars home appliances nondurable goods last a short time e g food clothing services intangible items purchased by consumers e g dry cleaning air travel 9 U S consumption 2011 billions Consumption CHAPTER 2 of GDP 10 726 71 1 Durables 1 163 7 7 Nondurables 2 484 16 5 Services 7 079 46 9 The Data of Macroeconomics 10 Investment I Spending on capital a physical asset used in future production Includes Business fixed investment Spending on plant and equipment Residential fixed investment Spending by consumers and landlords on housing units Inventory investment The change in the value of all firms inventories CHAPTER 2 The Data of Macroeconomics 11 U S Investment 2011 billions Investment Business fixed Residential 1 916 12 7 1 532 10 2 338 2 2 46 0 3 Inventory CHAPTER 2 of GDP The Data of Macroeconomics 12 Investment vs Capital Note Investment is spending on new capital Example assumes no depreciation 1 1 2012 Economy has 10 trillion worth of capital during 2012 Investment 2 trillion 1 1 2013 Economy will have 12 trillion worth of capital CHAPTER 2 The Data of Macroeconomics 13 Stocks vs Flows Flow Stock A stock is a quantity measured at a point in time E g The U S capital stock was 10 trillion on January 1 2012 A flow is a quantity measured per unit of time E g U S investment was 2 trillion during 2012 CHAPTER 2 The Data of Macroeconomics 14 Stocks vs Flows examples CHAPTER 2 stock flow a person s wealth a person s annual saving of people with college degrees of new college graduates this year the govt debt the govt budget deficit The Data of Macroeconomics 15 NOW YOU TRY Stock or Flow the balance on your credit card statement how much you study economics outside of class the size of your compact disc or MP3 collection the inflation rate the unemployment rate CHAPTER 2 The Data of Macroeconomics 16 Government spending G G includes all government spending on goods and services G excludes transfer payments e g unemployment insurance payments because they do not represent spending on goods and services CHAPTER 2 The Data of Macroeconomics 17 U S Government Spending 2011 billions of GDP Govt spending 3 031 20 1 Federal 1 233 8 2 Non defense 408 2 7 Defense 825 5 5 1 798 11 9 State local CHAPTER 2 The Data of Macroeconomics 18 Net exports NX NX exports imports exports the value of g s sold to other countries imports the value of g s purchased from other countries Hence NX equals net spending from abroad on our g s CHAPTER 2 The Data of Macroeconomics 19 U S Net Exports 2011 billions Net exports of g s Exports Goods Services Imports Goods Services CHAPTER 2 The Data of Macroeconomics of GDP 579 3 8 2 086 13 8 1 473 9 8 612 4 1 2 664 17 7 2 238 14 8 426 2 8 20 NOW YOU TRY An expenditure output puzzle Suppose a firm produces 10 million worth of final goods only sells 9 million worth Does this violate the expenditure output identity CHAPTER 2 The Data of Macroeconomics 21 Why output expenditure Unsold output goes into inventory and is counted as inventory investment whether or not the inventory buildup was intentional In effect we are assuming that firms purchase their unsold output CHAPTER 2 The Data of Macroeconomics 22 GDP An important and versatile concept We have now seen that GDP measures total income total output total expenditure the sum of value added at all stages in the production of final goods CHAPTER 2 The Data of Macroeconomics 23 GNP vs GDP Gross national product GNP Total income earned by the nation s factors of production regardless of where located Gross domestic product GDP Total income earned by domestically located factors of production regardless of nationality GNP GDP factor payments from abroad minus factor payments to abroad Examples of factor payments wages profits rent interest dividends on assets CHAPTER 2 The Data of Macroeconomics 24 NOW YOU TRY Discussion Question In your country which would you want to be bigger GDP or GNP Why CHAPTER 2 The Data of Macroeconomics 25 GNP vs GDP in select countries 2010 Country Bangladesh GNP GDP GNP GDP of GDP 109 695 100 357 9 3 Japan 5 601 557 5 458 837 2 6 China 5 957 012 5 926 612 0 5 14 635 600 14 586 736 0 3 India 1 712 645 1 727 111 0 8 Canada 1 549 652 1 577 040 1 7 Greece 292 874 301 083 2 7 77 842 82 150 5 2 171 260 206 612 17 1 United States Iraq Ireland CHAPTER 2 GDP The Data of Macroeconomics GNP and in millions of current U S dollars 26 Real vs nominal GDP GDP is the value of all final goods and services produced Nominal GDP measures these values using current prices Real GDP measure these values using the prices of a base year CHAPTER 2