Econ 303 UIUC Section I Growth theory Chapter 2 Three approaches to measure GDP Gross Domestic Product GDP is the market value of an economy s domestically produced goods and services over a specified period of time Measured by product approach GDP sum of value added in all production units value of all final goods Intermediate Macro Zhao 1 Econ 303 UIUC Produced Economists very abstract view of production process Output GDP Inputs Intermediate goods materials any other goods and services used Labor any hired personnel Capital any structure equipment and software used factors Land Value added total sales cost of intermediate goods Value added is generated by factors of production Factors Goods and services Capital or Labor a Meals cooked by Applebee b Oven at Applebee c Busboy at Applebee d cars on dealer s lot e cars bought by Jimmy Johns for delivery f Professor Zhao got a hair cut g Hair stylist June works 6 days a week h John works for Papa Johns as accountant i Papa Johns use Price Waterhouse Cooper to balance its book Intermediate Macro Zhao 2 Econ 303 UIUC Why value added double counting Measure GDP page 11 Intermediate Macro Zhao 3 Econ 303 UIUC Value Added by Industry as a Percentage of GDP 2006 100 Gross domestic product 87 5 Private industries 0 9 Agriculture forestry fishing and hunting 1 7 Mining 1 8 Utilities 4 9 Construction 12 3 Manufacturing Motor vehicles bodies and trailers and parts 0 8 5 8 Wholesale trade 6 5 Retail trade 2 9 Transportation and warehousing 4 4 Information 8 2 Finance and insurance 12 5 Real estate and rental and leasing 11 7 Professional and business services 1 Educational services 6 6 Health care and social assistance 1 Arts entertainment and recreation 2 9 Accommodation and food services 2 5 Other services except government 12 5 Government 3 9 Federal 8 5 State and local 2010 100 86 4 1 1 1 6 1 8 3 5 11 7 0 4 5 5 6 1 2 8 4 3 8 5 12 2 12 3 1 1 7 6 1 2 9 2 5 13 6 4 5 9 1 Civilian Non Farm Payroll Employment by Sector Nov 2009 Intermediate Macro Zhao 4 Econ 303 UIUC The Circular Flow Diagram Money Households Money Goods and services Factors Expenditure approach Goods and services Money Income approach Product approach Firms Factor Markets Factors Money What is capital Households includes non profit organizations Buildings and structures i e houses Firms Buildings and structures Equipment and machineries Software Fixed capital Inventory produced but not sold yet bought but not used yet New guideline R D counted as investment hence an increase of fixed capital Intermediate Macro Zhao 5 Econ 303 UIUC Is it Capital A Dorm building of University of Chicago B Oil rigs C Headquarter of Coca Cola in Atlanta D Automatic data processing equipment and software E Professor Zhao s washing machine F Interior decoration of MacDonald s G Plates and eating utensils of a restaurant H Car on dealer s lot that hasn t been sold yet Goods and services has to be bought by someone Buyers Households Private consumption C New houses Residential investment part of I Firms Intermediate goods not included in GDP Non residential investment the other part of I fixed and inventory Governments Government consumption expenditures and gross investment aka Public consumption or Government spending G Foreigners Export Intermediate Macro Zhao 6 Econ 303 UIUC Which is which Part I 1 New house built for Mr and Mrs Jones 2 New headquarter built for coke cola 3 New office building for the state government of Georgia 4 New Church 5 New highway A Consumption B Investment C Government spending and gross investment D Export Which is which Part II 1 Refrigerators bought by Mr and Mrs Smith 2 Refrigerators bought by Chick fil A 3 Refrigerators bought by White house 4 Refrigerators bought by Women s Shelter 5 Refrigerators bought by Mr Sanchez a Mexican visiting the US Intermediate Macro Zhao A Consumption B Investment C Government spending and gross investment D Export 7 Econ 303 UIUC Which is which Part III 1 Flour bought by Mrs Williams 2 Flour bought by Sweet and Delightful a bakery 3 Flour in Great Mill 4 Flour bought by the White House for a state dinner 5 Flour bought by salvation army and shipped to Africa 6 Flour bought by COFCO in China A Consumption B Investment C Government spending and gross investment D Export E None of the above Measuring GDP using expenditure approach But some of C I G may not come from domestically produced goods Goods market equilibrium Quantity supplied Quantity demanded Market value of goods and services produced expenditure on them National account identity Intermediate Macro Zhao Net export 8 Econ 303 UIUC Factor payment Labor services provided by households Paid through wages and benefits right to use Capital services provided by household A firm can use capital without owning it Ways a firm obtain the right to use a piece of capital Form of payment a firm pays out to the owner of the capital Purchased using money from owners or shareholders Profits Purchased using borrowed money Interests Rented Rents Why value added double counting Intermediate Macro Zhao 9 Econ 303 UIUC NIPA system three approaches to calculate GDP Product approach GDP sum of value added in all production units Expenditure approach national account identity GDP consumption investment government spending net export Income approach GDP wage interests rents and profits indirect taxes depreciation Net value of production Measure GDP page 12 Intermediate Macro Zhao 10 Econ 303 UIUC GDP vs GNP Gross National Product Location vs Ownership GNP GDP compensation to foreign owned factors compensation by foreign countries to factors owned by domestic country Billions of dollars 2009 Gross domestic product 2010 13 939 0 14 526 5 639 8 487 5 702 9 513 5 Equals Gross national product 14 091 2 14 715 9 Less Consumption of fixed capital Equals National income 1 866 2 1 874 9 12 147 6 12 840 1 Plus Income receipts from the rest of the world Less Income payments to the rest of the world US NIPA tables from BEA Measuring GDP using income method 2003 revision GNP GDP compensation by home firms to foreign owned factors compensation by foreign firms to factors owned by home country GNP depreciation National Income Intermediate Macro Zhao 11