Lecture 2:Measuring GDP
What is the circular flow of income and expenditure?
How are GDP, real GDP, and the average price level measured?
Your Weekend
Parkin Chapter 6 and 7 Lecture Slides, Homework when there is nothing else to do!!!!!!!
Economic Barometers
The Pakistani Bureau of Statistics publishes GDP every quarter (three months). These statistics are a barometer of the economy, telling us:
how fast it has grown the rate of inflation
Companies use this data to forecast future demand for their products.
Gross Domestic Product
Gross domestic product (GDP) is the dollar value of total production of goods and services in a country during a calendar year.
the easiest way to understand GDP is to use a circular flow diagram.
The Circular Flow of Income and Expenditure
Sectors of the Economy
The economy has four sectors:
households firms governments the rest of the world
Markets of the Economy
The economy has three aggregate markets:
Resource or factor markets
goods and services markets (heart) financial markets
Gross Domestic Product
Gross domestic product is the value of aggregate production in a country during a year. GDP can be valued one of two ways:
By what buyers pay for it By the Aggregate Income of Factor of Production.
These two ways of adding up GDP always give the same answer.
Aggregate Expenditure
The total amount that buyers pay for the goods produced is aggregate expenditure. Aggregate expenditure includes:
Consumption (C) Investment (I) Government purchases (G) Net exports (NX)
Gross Domestic Product
Expenditure Equals Income
Y = C + I + G + NX
Expenditure Approach
Uses data on consumption expenditure, investment, government purchases, and net exports
Gross Domestic Product
Expenditure Approach
Personal consumption expenditures are the expenditures by households on goods and services produced in Pakistan and the rest of the world Consumption Function : C = a ( Y T) a = Marginal Propensity to consume
Gross Domestic Product
Expenditure Approach
Gross domestic investment is expenditure on capital equipment and buildings by firms. Also, it includes the change in inventories. Investment Function : I = I ( assumed exogenous) - Investment is inversely related to interest rate.
Gross Domestic Product
Expenditure Approach
Government purchases of goods and services are the purchases of goods and services by all levels of government.
Does not include transfer payments Government Exp. Function : G = G (exogenous)
Gross Domestic Product
Expenditure Approach
Net exports of goods and services are the value of exports minus the value of imports. Net Export Function : Nx = Ex - Im
GDP in 1997
Item Consumption (C) Investment (I) Government (G) Net exports (NX) GDP (Y) Amount % of (billion $) GDP 5,628 68.7 1,133 1,275 -98 15.3 17.4 -1.4
7,938 100.0
Using the circular flow Diagram below answer the following questions:
The figure above shows the flows of expenditure and income for a typical economy. During the current fiscal year, A was 20 million, B was 60 million, C was 24 million, D was 30 million and E was 6 million. Calculate: Aggregate Expenditure Aggregate Income GDP Government budget Deficit Government Saving National Saving Borrowing from the rest of the world. Y = C+I+G+(X-M) Y-C-T=S (Private Savings = Income consumption taxes) T-G = S (Public Savings = Taxes Government exp.)
What is nominal and real GDP. Calculate Real and Nominal G.D.P.
Products Quantity Prices Year
Balls Bats Balls Bats
100 20 50 30
1 5 2 6
2008
2009
Elements of the Keynesian Cross
consumption function: govt policy variables: for now, planned investment is exogenous: planned expenditure: equilibrium condition: actual expenditure = planned expenditure
Y=E C = a(Y-T)
G=G , T=T
I=I E = a(Y-T) + I + G
SAMPLE QUESTION General equilibrium: Solution procedure Start with the equation in general form: Y = a ( Y - T) + Ip + G + NX
Given that Marginal Propensity to consume = 0.8 , Taxes = 1000 , Investment = 1500, Govt. Exp. = 1200 & Net Exports = 500 Calculate Aggregate Income.
SAMPLE QUESTION Keynesian equilbrium: Solution procedure Start with the equation in general form: Y = a ( Y - T) + Ip + G + NX Substitute in the given numbers: Y = 0.8 ( Y - 1000) + 1500 + 1200 + 500 Collect all the constant terms: Y = 3200 + 0.8Y - 800 Y = 2400 + 0.8Y Subtract 0.8 Y from both sides of the equation: 0.2 Y = 2400 Finally, multiply both sides by 1 / 0.2 = 5 Y = 5 (2400) = 12,000
