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Berkeley ECON 100B - Lecture Notes

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11Economic OutputAgenda• Economic Output¾ Defining GDP¾ Measuring Real GDP• The Expenditure Side• The Income Side¾ Why We Care about GDP2Economic Output•Gross Domestic Product (GDP)¾ The official measure of a country’s economic output.3GDP: Definition• Market value of• all final goods and services¾ Goods can be re-sold¾ Services are consumed immediately• that are currently produced• in the country• during a given time period.4GDP: Definition• Market value (sold through a market):¾ Permits combining different goods & services.¾ Prices serve as relative weights.¾ Exclusions• No value for non-paid personal time.• No value for volunteer time.• No value for externalities.• No illegal activities.– Even if a market exists.– The underground economy.5GDP: Definition• All final goods and services:¾ Final goods versus intermediate goods.• Intermediate goods are used in the production of final goods.– Avoids the problem of double counting.– The special case of inventories (change in).6GDP: Definition• Currently produced:¾ No used goods.¾ No financial transactions or capital gains/losses.¾ No transfer payments.• However, the services provided in the above transactions are counted in GDP.27GDP: Definition• In the country:¾ Gross Domestic Product.¾ versus Gross NationalProduct.• Difference is Net Foreign Factor Income (NFFI).• GNP = GDP + NFFI8GDP: Definition• During a given time period:¾ Usually a quarter or year.9Nominal GDP• Nominal GDP:¾ Dollar value of output at current market prices.¾ Prices serve as relative weights.¾ Price changes will change nominal GDP.• Comparisons over time become irrelevant.10Nominal GDP• Calculating Nominal GDPMarket Percent PercentQuantity, Price, Nominal Change, Change,Q X P = GDP Q GDP100 $10 $1,000100 $20 $2,000 0% 100%200 $10 $2,000 100% 0%11Real GDP• Real GDP:¾ Attempts to measure physical output.¾Dollar value of output at constantmarket prices.• Prices are held constant at some base year.¾ Prices serve as relative weights.¾ Price changes will NOT change real GDP.• Comparisons over time are relevant.12Real GDP• Calculating Real GDPMarket Percent PercentQuantity, Price, Real Change, Change,Q X P = GDP Q GDP100 $10 $1,000100 $10 $1,000 0% 0%200 $10 $2,000 100% 100%313Measuring Real GDP:The Expenditure Side• Y = C + I + G + ( X - M ) = E¾ The distinction between C, I, G, X, and M is based on the type of buyers, NOTon the type of product being bought.• The exception of housing.14Components of Real GDPFirst Quarter 2003 Year-on-Billions of Share of Year 1996 $s GDP % Chg.GDP 9,562.9 100.0 2.1 Consumer Spending 6,671.6 69.8 2.4 Gross Domestic Private Invesment 1,609.0 16.8 3.5 Net Exports -506.9 -5.3 Exports 1,057.9 11.1 2.6 Imports 1,564.8 16.4 5.9 Government Purchases 1,736.2 18.2 2.315Components of ConsumptionFirst Quarter 2003 Share of Year-on-Billions of Consumer Year 1996 $s Spending % Chg.Consumer Spending 6,671.6 100.0 2.4 Durable Goods 1,006.0 15.1 3.1 Nondurable Goods 1,980.3 29.7 3.1 Services3,713.8 55.7 2.016Components of InvestmentFirst Quarter 2003 Year-on-Billions of Share of Year 1996 $s Investment % Chg.Gross Domestic Private Investment 1,609.0 100.0 3.5 Fixed Investment 1,587.7 98.7 0.7 Nonresidential 1,170.8 72.8 -1.5 Structures 212.7 13.2 -12.5 Equipment & Software 976.0 60.7 2.3 Residential 406.4 25.3 5.9Inventory Investment 13.2 0.8 17Components of Net ExportsFirst Quarter 2003 Share of Year-on-Billions of Exports, Year 1996 $s Imports % Chg.Net Exports of Goods & Services -506.9 100.0 Exports 1,057.9 100.0 2.6 Goods 750.5 70.9 1.7 Services 306.4 29.0 4.9Imports 1,564.8 100.0 5.9 Goods 1,335.1 85.3 6.8 Services229.5 14.7 1.818Components of Government PurchasesFirst Quarter 2003 Year-on-Billions of Share of Year 1996 $s Government % Chg.Government Purchases1,736.2 100.0 2.3 Federal 632.8 36.4 5.9 National Defense 409.6 23.6 5.4 Nondefense223.2 12.9 6.6 State and Local 1,103.8 63.6 0.4419A Closer Look at Investment• Start with the expenditure equation:¾ Y = C + I + G + ( X – M )• Now, solve for I:¾ I = Y –C –G –( X –M )• Add and subtract T to the right hand side:¾ I = Y –C –G –( X –M ) + T –T• Re-arrange terms:¾ I = ( Y – C – T ) + ( T – G ) – ( X – M )20A Closer Look at Investment• I = ( Y – C – T ) + ( T – G ) – ( X – M ) = Sp+ Sg+ Sf• This implies that all investment MUST be financed by either:¾ Private domestic saving, Sp,¾ Government savings (budget balances), Sg, or¾ Foreign Savings (net foreign borrowing), Sf.21A Closer Look at Investment• This also implies that any increase in investment MUST be accompanied by:¾ An increase in Sp (an increase in Y – C – T ), and/or¾ An increase in Sg (an increase in T – G ), and/or¾ An increase in Sf (a decrease in X – M ). • Alternatively,¾ ∆I = ∆(Sp + Sg + Sf) or = ∆Sp + ∆Sg + ∆Sf22A Closer Look at Investment• I = ( Y – C – T ) + ( T – G ) – ( X – M ) = Sp+ Sg+ Sf• If ( X – M ) declines, then I increases.¾ This is generally “good.”• If ( X – M ) declines but is offset by a (identical) decline in Sp or Sg, then there is no change in I.¾ This is generally “bad.”23Measuring Real GDP:The Income Side• GDP includes some payments that are not payments to the factors of production.¾ Capital Consumption Allowances, CCA• Also called Depreciation¾ Indirect Business Taxes, IBT• National Income is the most comprehensive concept of income and measures factor payments.24GDP to National IncomeFirst Quarter 2003Billions of Share ofDollars GDPGDP 10,704.2 100.0Plus: Net foreign factor income -10.9 -0.1 Equals: GNP 10,693.3 99.9Less: Depreciation1,424.3 13.3 Equals: NNP 9,269.0 86.6Less: Indirect business taxes 821.0 7.7Statistical discrepancy -84.4 -0.8Equals: National Income 8,532.4 79.7525National IncomeFirst Quarter 2003Billions Share ofof Dollars NINational Income8,532.4 100.0Labor Income6,118.1 71.7Capital Income2,414.3 28.3 Rental income127.6 1.5 Net interest696.9 8.2 Proprietors' income785.8 9.2 Corporate profits804.0 9.426Shares of National IncomeLabor and Capital Shares of Income0102030405060708090100Q1-1960 Q1-1965 Q1-1970 Q1-1975 Q1-1980 Q1-1985 Q1-1990 Q1-1995 Q1-2000Share of Total IncomeLabor Income Capital Income27National to


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Berkeley ECON 100B - Lecture Notes

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