Eco 202 Week 2 Measuring Economic Performance

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
• 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
Also includes unemployment insurance. Rental income (R): Income received from property owned by households. Also includes royalties from patents, copyrights and assets. Interest income (i): Income received by households through the lending of their money to corporations and business firms. Profits (PR): The amount firms have left after paying their rent, interest on debt, and employee compensation.

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WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The Value-added Approach • Value-added is the value of a firm’s final goods minus the value of intermediate goods bought from other firms • Only expenditures on final products – what consumers, businesses, and government units buy for their own use belong in the calculation for GDP • Counting the sale of final goods and intermediate products would result in double and triple counting

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The Value-added Approach • For example, the tires that come with a car (when you buy the car) are not counted as a final good • However, if you get a flat tire and buy the same tire (to replace your flat), it is counted as a final good

WEEK 2 – MEASURING MACROECONOMIC PERFORMANCE The Value-added