Measurement

Question 1

When and where is GDP published

Answer 1

On a quarterly basis in the National Income and Product Accounts (NIPA)

Question 2

Approaches to measure GDP

Answer 2

• Product approach
• Expenditure approach
• Income approach

Question 3

Product approach

Answer 3

• a.k.a. value-added approach

- GDP calculated as the sum of value added to goods and services across all productive units in the economy

Question 4

Expenditure approach

Answer 4

• GDP is calculated as total spending on all final goods and services production in the economy
• TE = C + I + G + NX

Question 5

Income approach

Answer 5

• To calculate GDP we add up all income received by economic agents contributing to production

GDP = Wage income + after-tax profits + Interest income + taxes

Question 6

Inventory Investment

Answer 6

Inventories of finished goods, goods in process and raw materials

• Added at market value

Question 7

Gross National Product

Answer 7

The value of output produced by domestic factors of production, whether or not the production takes place within the given country’s borders

GNP = GDP + NFP (Net factor payments)

Question 8

Problems in measuring GDP

Answer 8

• Economic activity in the underground economy cannot be measured directly – this activity might be measured indirectly by accounting for the use of currency. Includes illegal activity and activity that goes unreported because people want to avoid paying taxes
• Government production is difficult to measure, as the output (for example defense services) is typically not sold at market prices, which could overvalue or undervalue the prices

Question 9

Consumption

Answer 9

• Expenditure on consumer goods and services during the current period

Question 10

Components of consumption

Answer 10

• Durable goods
• Nondurable goods
• Services

Question 11

Investment

Answer 11

Expenditure on goods and services that are produced during the current period, but are not consumed during the current period

Question 12

Types of investment

Answer 12

Fixed investment (Production of capital such as plant, equipment and housing) - Consists of residential and nonresidential investment

• Inventory investment (goods that are essentially put into storage)

Question 13

Government expenditures

Answer 13

Consists of expenditures by federal, state and local governments on final goods and services

Question 14

Components of government expenditures

Answer 14

• Federal defence spending
• Federal non defence spending
• State spending
• Local spending

Question 15

Price index

Answer 15

• A weighted average of the prices of a set of goods and services produced in the economy over a period of time
• Allow us to measure the inflation rate
• A measure of the inflation rate allows us to determine how much of an increase in GDP in nominal and how much is real

Question 16

Chain-weighting approach

Answer 16

gc = sqrt( g1 * g2 )

where g1 uses year 1 as base year and g2 uses year 2 as base year

With the chain weighted approach a “Fisher index” is used

Question 17

Measure of the price level

Answer 17

• Implicit GDP deflator

- Consumer price index (CPI)

Question 18

Implicit GDP deflator

Answer 18

Nom GDP / Real GDP * 100

Question 19

Current year CPI

Answer 19

Cost of base year quantities at current prices / Cost of base year quantities at base year prices * 100

Tends to be more volatile than the change in the GDP deflator.

The GDP-deflator is a better measure of the price level as CPI inflation tends to be biased upward and the effect accumulated over time, but the CPI is available monthly and the date is released sooner

Question 20

Problems in Measuring Real GDP and the Price Level

Answer 20

• The relative prices of goods change over time – a problem for CPI measurement.
• The quality of goods and services changes over time.
• New goods and services are introduced, and some goods and services become obsolete.

Question 21

Flow

Answer 21

Rate per unit time

Question 22

Stock

Answer 22

Quantity in existance of some object at a point in time

Question 23

Private disposable income

Answer 23

Y^d = Y + NFP + TR + INT - T

Disposable income is defined as total GDP plus net factor payments from abroad, plus transfers from the government, plus interest paid on the government debt to domestic residents, minus taxes paid to the government. This is what is available for consumers to spend.

Question 24

Private Sector Saving

Answer 24

S^p = Y^d - C

Private sector saving is the income that is available to spend, minus what is actually spent

Question 25

Government saving

Answer 25

S^g = T - TR - INT - G

Government saving, or the government surplus, or minus the government deficit, is equal to taxes, minus transfers to the private sector, minus interest on the government debt, minus government expenditures on goods and services.

Question 26

National Saving

Answer 26

S = S^p + S^g

S = Y + NFP - C - G

S = I + NX + NFP = I + CA

For the nation as a whole, we obtain national saving by adding private sector saving and government saving to get GDP plus net factor payments from abroad, minus consumption, minus government expenditures.

National savings is reflected in investment (new capital stock [plants, equipment, housing and inventories] ) plus the current account surplus (acquisition of claims on foreigners)

Question 27

The Bureau of Labor Statistics monthly household survey divides the working-age population into three groups:

Answer 27

• Employed (Those who worked in part/full time during the past week)
• Unemployed (Those who were not employed during the past week, but who actively searched for work during the past 4 weeks)
• Not in the Labor Force - Neither employed nor unemployed

Question 28

Labour force

Answer 28

Employed + Unemployed

Question 29

Unemployment Rate

Answer 29

Number employed / Labor force

The unemployment rate gives us a measure of labor market tightness, which captures the degree of difficulty firms face in hiring workers, and the ease with which would-be workers can find a job

Labour tightness falls as unemployment rises, as a higher unemployment rate makes it easier for firms to recruit workers, and reflect greater difficulty for would-be workers to find work

Unemployment can also be used as an indirect measure of economic welfare, as it gives an indication of the distribution of income across the population

Question 30

Participation rate

Answer 30

Labor force / Working age population

Question 31

Employment / Population ratio

Answer 31

Employment / Working age population

Question 32

Marginally attached

Answer 32

Would-be workers who are not actively searching but would accept a job if offered one