Ch. 5 : MEASURING GDP AND ECONOMIC GROWTHGross Domestic ProductSlide 3Suppose that inventories are $20 billion at the end of 2008 and $24 billion at the end of 2009, this means that $4 billion of goods :Suppose that inventories are $20 billion at the end of 2008 and $15 billion at the end of 2009, this means that $5 billion of goods :Circular Flow Red=expenditures, Blue=income, Green=borrowing/lending/taxesCircular Flow NotationCircular FlowSlide 9Slide 10Expenditure Components of US GDP: 2008 (billions of $)Slide 12Slide 13Slide 14Stocks versus flowsStocks vs flowsIf wealth is $26 trillion at the end of 2008 and $27.3 trillion at the end of 2009, then saving wasIf capital is $8 trillion at the end of 2008 and $7.7 trillion at the end of 2009Slide 19Investment and DepreciationMeasuring U.S. GDPSlide 22Real GDP and the Price LevelSlide 24Slide 25Nominal GDP in 2002 is _____Nominal GDP in 2003 is _____Real GDP in 2002 using 2002 as base year is ______.Real GDP in 2003 using 2002 as base year is ______.Real GDP in 2002 using 2003 as base year is ______.Real GDP in 2003 using 2003 as base year is ______.Chain-weighted method for real GDPSlide 33Interpreting the GDP-deflatorSlide 35Nominal and Real GDPThe GDP-deflator in 2007 is _____ (give answer rounded to 1 decimal point – e.g. 103.2)The prices in 2007 are ____ percent higher than in 2000. (Give answer rounded to 1 decimal point and exclude % sign – e.g. 5.2 is 5.2%)The prices in 2007 are ____ percent higher than in 1990. (Give answer rounded to 1 decimal point and exclude % sign – e.g. 5.2 is 5.2%)Measuring Economic GrowthR-GDP as a measure of economic welfare.If environmental quality worsens, the growth rate in real GDP will _____ the growth rate in the standard of livingIf more people begin to hire someone to take care of home projects instead of doing it themselves, the growth rate in real GDP will _____ the growth rate in the standard of livingSuppose U.S. GDP per capita is higher than that in Japan. If people in the U.S. average less hours of work per week than people in Japan, the extra GDP per capita in the U.S. will be an ____ of how much better off people in the U.S are compared to those in Japan.Exchange rates and comparisons across countries.Ch. 5 : MEASURING GDP AND ECONOMIC GROWTHDefine GDPCircular flow modelRelationship between aggregate expenditure and aggregate income. Measurement of real GDP and the GDP deflatorReal GDP as a measure of economic growth and the limitations of our measureGross Domestic Product GDP: gross domestic product the market value of all final goods and services produced in a country by domestically located resources in a given time period.This definition has four parts:• Market value• Final goods and services –sales of intermediate goods not counted• Produced within a country by domestically located resources• In a given time period–Inventory changes between periods for partially completed productsGross Domestic Product GDP and the Circular Flow of Expenditure and IncomeGDP measures the value of production• equals total expenditure on final goods• equals total income from production. The circular flow diagram illustrates the equality of income, expenditure, and the value of production.Suppose that inventories are $20 billion at the end of 2008 and $24 billion at the end of 2009, this means that $4 billion of goods :201. Produced in 2008 were not sold in 20082. Produced in 2009 were not sold in 20093. Produced in 2008 were sold in 2009Suppose that inventories are $20 billion at the end of 2008 and $15 billion at the end of 2009, this means that $5 billion of goods :201. Sold in 2008 were produced prior to 20082. Sold in 2009 were produced prior to 20093. Produced in 2009 were unsold in 2009Circular FlowRed=expenditures, Blue=income, Green=borrowing/lending/taxesCircular Flow Notation•Y=Total income•C=consumption•I=investment•G=government purchases•X-M=exports-imports (net exports•T=net taxes=taxes-transfers•S=household savingCircular Flow For any given sector, inflows=outflows•Household sector:Y=C+S+T •Factor marketsY=C+I+G+(X-M)•GovernmentT-G=government lending (borrowing)Circular Flow •Rest of WorldX-M=U.S. lending (borrowing) with rest of world•Financial marketsS + government budget surplus (deficit) = lending (borrowing) with rest of worldGross Domestic Product Two ways to measure GDP: Expenditure Approach:•Aggregate expenditure = C + I + G + (X-M)  Income Approach•Aggregate income = Y = Wages + Rent + Interest + Profit Because Income and expenditure approach both measure GDP:Y = C + I + G + (X-M)Expenditure Components of US GDP: 2008 (billions of $)Gross Domestic Product Financial FlowsY = C + S + TY = C + I + G + (X-M)S+T = I+G+(X-M)Gross Domestic Product How Investment Is FinancedThe last equation could also be reorganized as:I = S + (T-G) + (M-X)Investment is financed from three sources: Private saving, S Government budget surplus, (T – G)•S + (T-G) is “national saving” Borrowing from the rest of the world (M – X).Gross Domestic Product Gross vs. Net Domestic Product“Gross” means before accounting for the depreciation of capital. Net Domestic Product = GDP – Capital Consumption Allowance.Stocks versus flowsWealth a stock representing the value of all the things that people ownSaving A flow that is the source of changes in the stock of wealth.Capital A stock representing the plant, equipment, and inventories of raw and semi-finished materials that are used to produce other goodsInvestment A flow representing the purchases of new capitalDepreciation (capital consumption)A flow representing the decrease in the capital stock that results from wear and tear, and obsolescence.Stocks vs flowsWealth(t)=Wealth(t-1)+savingCapital(t)=Capital(t-1) + gross investment-depreciation =Capital(t-1) + net investmentIf wealth is $26 trillion at the end of 2008 and $27.3 trillion at the end of 2009, then saving was201. $1.3 trillion during 20082. $1.3 trillion during 20093. -$1.3 trillion during 20084. -$1.3 trillion during 2009.If capital is $8 trillion at the end of 2008 and $7.7 trillion at the end of 2009201. Gross investment is $.3 trillion in 20092. Gross investment is $.3 trillion in 20093. Net investment is $.3 in 20094. Net investment is -$.3 trillion in 2009Gross Domestic Product The relationships among capital, gross investment, depreciation,