Measuring Macroeconomic Performance

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ECO 202 - WEEK 2

MEASURING MACROECONOMIC PERFORMANCE

LECTURER: PHEH PIK TENG

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE What is Gross Domestic Product (GDP)?

• It is a measurement to determine the economic health of a country. • Economists take measurements of the economy to find out how the economy is doing. • GDP is the value of the aggregate production of goods and services in a country during a given time period. • It is the total market value of all final goods and services produced in the country during the period.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE What is Gross Domestic Product (GDP)? • The GDP is also known as national output or national income. • It is calculated by valuing everything that is produced and adding all the values together. • For example, in 2007, people living and working in the United States produced $13.84 trillion worth of goods and services.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The table shows countries ranked by GDP levels.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE Nominal GDP and Real GDP • There are two categories of GDP: nominal GDP and real GDP. • Nominal GDP is the GDP evaluated at current market prices. • Real GDP is GDP evaluated at the market prices of some base year.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE Nominal GDP and Real GDP

• For example, in 2011, the US produced $8 billion worth of goods and services based on 2011 prices. • If 2011 is used as the base year, nominal GDP is equal to real GDP = $8 billion. • Suppose in 2012, the US produced $10 billion worth of goods and services. • Nominal GDP = $10 billion • Real GDP? Take all good and services produced in 2012 and multiply them by 2011 prices.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE Nominal GDP and Real GDP • Real GDP is calculated to determine whether a country is achieving high and sustained economic growth. • Economists study two major macroeconomic topics that have to do with Real GDP: economic growth and business cycles. • Real GDP is calculated to compare growth in an economy between different years.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE Real GDP

• To gauge the health of the economy, economists want to know the reason for an increase in GDP. • Because an increase in GDP can be due in part to an increase in price, a more meaningful measure is real GDP. Real GDP is GDP adjusted for price changes. • Real GDP rises only if output rises. • Annual economic growth has occurred if Real GDP in one year is higher than Real GDP in the previous year.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE

• Measures the change in prices of goods produced in a country over a given time period. • It is used in economics to account for inflation. • When the deflator is used, it allows GDP to be compared to other time periods. • The GDP deflator can be viewed as a conversion factor that transforms real GDP into nominal GDP.

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE Ways to measure the GDP • Expenditure approach • Income approach • Value-added approach

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The Expenditure Approach • The expenditure approach measures GDP as the sum of consumption expenditure (C), investment (I), government expenditure (G) and net exports of goods and services (X - M). • GDP = C + I + G + ( X - M )

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The Expenditure Approach

• Personal consumption (C)  the expenditure by households on goods and services produced by firms • Investment (I)  expenditures on capital equipment by firms (buildings, plants & machineries) and expenditure by households on properties (houses)

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The Expenditure Approach • Government expenditure (G)  the purchase of goods and services and expenditures on capital goods by the government  items include national defense and garbage collection

• Net exports (X – M)  the difference between the value of exports...
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