Chapter 2.

Measurement

Jun Hee Kwak

Sogang University
Macroeconomics 1

Sep 6, 2024

Sogang University Macroeconomics 1 Sep 6, 2024 1 / 21

Key Questions

How can we construct measures of gross domestic product?

Explain the importance of each expenditure component of GDP.

Can you construct real and nominal GDP using price indices?

What are difficulties in measuring GDP and the price level?

Can you explain relationships among savings and income in the private
and public sectors?

Can you construct main labor market measures?

Sogang University Macroeconomics 1 Sep 6, 2024 2 / 21

Measuring GDP: The National Income and Product
Accounts

Gross Domestic Product (GDP): the dollar value of final output

produced during a given period of time within the borders of a country

▶ The Korean GDP can be found from the Bank of Korea Economic
Statistics System (ECOS, https://ecos.bok.or.kr/), see National
Accounts
▶ The US GDP can be found from the Bureau of Economic Analysis or
the FRED database, see National Income and Product Accounts
(NIPA)

Sogang University Macroeconomics 1 Sep 6, 2024 3 / 21

Measuring GDP: Accounting by Agents
Table 1: Coconut Producer Table 2: Restaurant
Total Revenue $20 million Total Revenue $30 million
Wages $5 million Cost of Coconuts $12 million
Interest on Loan $0.5 million Wages $4 million
Taxes $1.5 million Taxes $3 million

Table 3: After-Tax Profits Table 4: Government

Coconut Producer $13 million Tax Revenue $5.5 million
Restaurant $11 million Wages $5.5 million

Table 5: Consumers
Wage Income $14.5 million
Interest Income $0.5 million
Taxes $1 million
Profits Distributed from Producers $24 million
Sogang University Macroeconomics 1 Sep 6, 2024 4 / 21
Measuring GDP: Three Approaches
Product approach: we add the value of all goods and services produced
in the economy and then substract the value of all intermediate
goods used in production to obtain total value added (VA).

Table 7: Expenditure Approach

Table 6: Product Approach
Consumption $38 mil
VA - coconuts $20 mil
Investment $0 mil
VA - restaurant $18 mil
Gov’t Expenditures $5.5 mil
VA - government $5.5 mil
Net Exports $0 mil
GDP $43.5 million
GDP $43.5 million
Table 8: Income Approach
Wage Income $14.5 mil
After-Tax Profits $24 mil
Interest Income $0.5 mil
Taxes $4.5 million
GDP $43.5 million
Sogang University Macroeconomics 1 Sep 6, 2024 5 / 21
Measuring GDP: Three Approaches
We have the income-expenditure identity as follows:

Y = C + I + G + NX (1)

Table 10: Expenditure Approach

Table 9: Product Approach
Consumption $38 mil
VA - coconuts $20 mil
Investment $0 mil
VA - restaurant $18 mil
Gov’t Expenditures $5.5 mil
VA - government $5.5 mil
Net Exports $0 mil
GDP $43.5 million
GDP $43.5 million
Table 11: Income Approach
Wage Income $14.5 mil
After-Tax Profits $24 mil
Interest Income $0.5 mil
Taxes $4.5 million
GDP $43.5 million
Sogang University Macroeconomics 1 Sep 6, 2024 6 / 21
Measuring GDP: Inventory and International Trade

What happens if coconut producer produces the extra 3 million

coconuts at the market price of $2 per coconut?
▶ Note the the inventory investment is counted as expenditure and
profits (income) of the coconut producer.

What happens if the restaurant imports 2 million coconuts from other

islands at $2 each?
▶ Assume that total revenue of the restaurant is $30 million as before,
and the value of intermediate inputs (coconut) increases to $16 million.
▶ See how numbers change in each of the product, expenditure, and
income approach.

Sogang University Macroeconomics 1 Sep 6, 2024 7 / 21

Gross National Product

Gross National Product (GNP) measures the value of output

produced by domestic factors of production, whether or not the
production takes place inside borders.

▶ If a Nike plant in Southeast Asia is owned and managed by American

residents, the the incomes accruing to U.S. factors of production
include the managerial income and profits of this plant, and this is
included in U.S. GNP.

GNP = GDP + NFP (2)

|{z} |{z} |{z}
Gross National Product Gross Domestic Product Net Factor Payments

Sogang University Macroeconomics 1 Sep 6, 2024 8 / 21

What Does GDP Leave Out?

Aggregate GDP does not take into account how income is distributed
across the individuals in the population.

GDP leaves out all nonmarket activity, with work in the home being an
example.

Economic activities in the underground economy are, by definition, not

counted in GDP.
▶ Examples: trade in illegal drugs, the exchange of baby-sitting services
for cash

Most of what the government produces is not sold at market prices, so

national accounts value government expenditures at cost.
▶ This could either overvalue or undervalue what is produced.

Sogang University Macroeconomics 1 Sep 6, 2024 9 / 21

The Components of Aggregate Expenditure
Consumption: expenditure on consumer goods and services during
the current period.
▶ The components of consumption are durable goods (new automobiles,
appliances, and furniture), nondurable goods (food, clothing), and
services (haircuts, hotel stays).

Investment: expenditure on goods that are produced during the

current period, but are not consumed during the current period.
▶ Fixed investment: production of capital (plant, equipment, housing)
▶ Inventory investment: goods that are essentially put into storage

Net Exports: Exports minus imports

Government Expenditures: expenditures on final goods and services

by the government
▶ Transfers are not counted, as they are simply money transfers from
one group of people to another.

Sogang University Macroeconomics 1 Sep 6, 2024 10 / 21

 Figure 1: Gross Domestic Product for 2015 in the US

Sogang University Macroeconomics 1 Sep 6, 2024 11 / 21

Nominal and Real GDP and Price Indices

(Pt+1 - Pt)/Pt
Price index: a weighted average of the prices of a set of the goods
and services produced in the economy over a period of time.

Inflation rate: the rate of change in the price level from one period of
time to another.

A nominal change in GDP is a change in GDP that occured only

because the price level changed, whereas a real change in GDP is an
increase in the actual quantity of goods and services.

Sogang University Macroeconomics 1 Sep 6, 2024 12 / 21

Nominal and Real GDP and Price Indices
Calculate the percentage increase in nominal GDP from year 1 to year
2.
Calculate the percentage increase in real GDP from year 1 to year 2,
using year 1 as the base year.
Calculate the chain-weighted growth rates, using the following formula:
√
gc = g1 × g2 (3)
where g1 and g2 denote the growth rates using year 1 and 2 as a base year,
respectively.
Nominal GDP Year
1=1*50+100*0.8=130
Nominal GDP Year
2=80*1.25+120*1.6=292
Table 12: Data for Real GDP Example
(292-130)/130=1.25%

Real GDP Year

Apples Oranges
2=80+120*0.8=176
(176-130)/130
Quantity in Year 1 Q1a = 50 Q1o = 100
=0.35=35%
Price in Year 1 P1a = $1.00 P1o = $0.80
Quantity in Year 2 Q2a = 80 Q2o = 120
Price in Year 2 P2a = $1.25 P2o = $1.60
Sogang University Macroeconomics 1 Sep 6, 2024 13 / 21
Measures of the Price Level

Implicit GDP price deflator includes the prices of investment goods,

exports, and goods and services sold to the government.

Nominal GDP
Implicit GDP price deflator = × 100 (4)
Real GDP

Consumer Price Index (CPI) includes only goods and services that
are purchased by consumers.

Cost of base year quantities at current prices

Current year CPI = × 100
Cost of base year quantities at base year prices
(5)
=P2Q1/P1Q1

Sogang University Macroeconomics 1 Sep 6, 2024 14 / 21

Problems with Measuring Real GDP and the Price Level

Relative prices change over time.

▶ In computing the CPI, implicit assumption is that consumers do not
change their buying habits when relative price changes occur, which
leads to the upward bias in the CPI.

The quality of goods changes over time.

▶ the 1950 car and the 2015 car are different product, which means that
growth in real GDP is biased downward and inflation is biased upward.

GDP might not take account of new goods.

▶ Smartphones were not included in the GDP in the 1980s, which means
that growth in real GDP is biased downward and inflation is biased
upward.

Sogang University Macroeconomics 1 Sep 6, 2024 15 / 21

Flow vs. Stock

Flow: a rate per unit time

▶ ≈ the quantity of water coming out of the faucet per minute
▶ ex) GDP, consumption, investment, government spending, net exports

Stock: the quantity in existence of some object at a point in time

▶ ≈ the quantity of water in the bathtub at any point in time
▶ ex) the quantity of housing, wealth

Stock at t = flow1+flow2+flow3+......

Wealth = Income1+Income2+Income3+......

Sogang University Macroeconomics 1 Sep 6, 2024 16 / 21

Savings, Wealth, and Capital
We can get savings by sector as follows.
Private disposable income:

Yd = Y + NFP + TR + INT − T
|{z} |{z} |{z} |{z} |{z}
GDP net factor payments transfers interest on gov’t debt taxes
(6)
Private sector saving:

S p = Y d − C = Y + NFP + TR + INT − T − C (7)

Government sector saving:

S g = T − TR − INT − G (8)
|{z}
gov’t expenditures

Sogang University Macroeconomics 1 Sep 6, 2024 17 / 21

Savings, Wealth, and Capital
Then, we have national saving:

S = Sp + Sg = Y + NFP − C − G
|{z} |{z} |{z} |{z}
GDP net factor payments consumption gov’t expenditures
(9)
Recall the income-expenditure identity:

Y = C + I + G + NX (10)

We can substitute for Y :

S = I + NX + NFP = I + CA (11)
|{z}
current account

This shows that wealth is accumulated through investment (I ) and

current account surplus (CA).
Sogang University Macroeconomics 1 Sep 6, 2024 18 / 21
Labor Market Measurement
The employed: those who worked part-time or full-time during the
past week
The unemployed: those who were not employed during the past week
but actively searched for work at some time during the last four weeks
Labor force: the employed + the unemployed
▶ Not in the labor force: those how are neither employed or
unemployed.

Discouraged worker: working-age person who is neither employed

nor unemployed, but is available to work, looked for work sometime
during the previous 12 months, and has a job-market-related reason
for not searching for work.
The marginally attached: would-be workers who are not actively
searching, but who would accept a job if offered one (all discouraged
workers are marginally attached, but a person could be marginally
attached and not discouraged).
Sogang University Macroeconomics 1 Sep 6, 2024 19 / 21
Labor Market Measurement

Here are key labor market measures:

Number unemployed
Unemployment rate =
Labor force

Labor force
Participation rate =
Total working-age population

Total employment
Employment/Population ratio =
Total working-age population

Sogang University Macroeconomics 1 Sep 6, 2024 20 / 21

Labor Market Measurement

The unemployment rate is a useful economic measure.

▶ It helps determine the level 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.

▶ The unemployment rate can be used as an indirect measure of

economic welfare.

However, the unemployment rate may have some weakness.

▶ it does not adjust for how intensively the unemployed are searching for
work, so the unemployment rate may not capture labor tightness well.

▶ the standard measure of the unemployment rate does not include the
marginally attached.

Sogang University Macroeconomics 1 Sep 6, 2024 21 / 21