Macroeconomics: Sixth Edition, Global Edition

Macroeconomics
Sixth Edition, Global Edition
Chapter 2
Measurement
Copyright © 2018 Pearson Education, Ltd. All rights reserved.

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Learning Objectives, Part I
2.1 Construct measures of gross domestic product using the product
approach, the expenditure approach, and the income approach.
2.2 State the importance of each expenditure component of GDP, and the
issues associated with measuring each.
Learning Objectives, Part II
2.3 Construct real and nominal GDP, and price indices,
from data on quantities and prices in different years.
2.4 State the key difficulties in measuring GDP and the
price level.
Learning Objectives, Part III
2.5 State the accounting relationships among savings and

income in the private and public sectors, and explain
the importance of these relationships for wealth
accumulation.
2.6 Construct the key labour market measures from the
household survey data.
Measuring GDP: The National Income and Product
Accounts (NIPA)
Measuring GDP: The National Income and Product
Accounts (NIPA)
• GDP Measured Using:
(1) the product approach;
() the expenditure approach;
() the income approach.
• Show how this is done using an example.
National Income Accounting Example
• Fictional Island Economy
• Coconut Producer, Restaurant, Consumers,
Government
Table 2.1 Coconut Producer
Table 2.2 Restaurant
Table 2.3 After-Tax Profits
after-tax profits from

the producers in this
economy
Table 2.4 Government
Table 2.5 Consumers
Table 2.6 GDP Using the Product Approach
Table 2.7 GDP Using the Expenditure Approach
Table 2.8 GDP Using the Income Approach
Table 2.9 Gross Domestic Product for 2015
Problems in Measuring GDP
• Economic activity in the underground economy cannot be measured
directly – this activity might be measured indirectly by accounting for the
use of currency.
• Government production is difficult to measure, as the output (for example
defense services) is typically not sold in the market.
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Nominal and Real GDP and Price Indices
• Price Index: Weighted average of a set of observed prices that gives a
measure of the price level.
• Price indices allow us to measure the inflation rate – the rate of change in
the price level.
• A measure of the inflation rate allows us to determine how much of an
increase in GDP is nominal and how much is real.
Table 2.10 Data for Real GDP Example
Figure 2.1 Nominal GDP and Chain-Weighted Real GDP
Table 2.11 Implicit GDP Price Deflators, Example
Blank cell Year 1 Year 2 % Increase

Year 1 = base year 100 165.9 65.9
Year 2 = base year 58.4 100 71.2
Chain-weighting 100 168.5 68.5
Figure 2.2 Inflation Rate Calculated from the CPI
and from the Implicit GDP Price Deflator
Figure 2.3 The Price Level as Measured by the CPI
and the Implicit GDP Price Deflator
Problems in Measuring Real GDP and the Price
Level
• 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.
Savings, Wealth, and Capital: Part I
• Private Disposable Income:

Savings, Wealth, and Capital: Part II
• Private Sector Saving:

Savings, Wealth, and Capital: Part III
• Government Saving = - Government Deficit:

Savings, Wealth, and Capital: Part IV
• National Saving = Private Saving + Government Saving:

Savings, Wealth, and Capital: Part V
• National savings is reflected in investment (new capital stock) plus the

current account surplus (acquisition of claims on foreigners):
S = I + NX + NFP = I + CA
Labour Market Measurement
• The Bureau of Labor Statistics monthly household survey divides the
working-age population into three groups:
− Employed
− Unemployed
− Not in the Labour Force
• Labour force = employed + unemployed
SA: Labour Market Measurement
Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Labour market statistics
labour force
participation rate=
population of the working age
unemployed Definition
unemployment rate=
labour force broad or
narrow
employed Difference?
employment rate=
population of the working age Discouraged
work-seekers
Three Key Labour Market Measures
Unemployment Rate =
Participation Rate =
Emp − Pop Ratio =

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Macroeconomics

Sixth Edition, Global Edition

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

2.5 State the accounting relationships among savings and

after-tax profits from

Blank cell Year 1 Year 2 % Increase

• Private Disposable Income:

• Private Sector Saving:

• Government Saving = - Government Deficit:

• National Saving = Private Saving + Government Saving:

• National savings is reflected in investment (new capital stock) plus the

Copyright © 2018 Pearson Education, Ltd. All rights reserved.

Emp − Pop Ratio =

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