Value Added in Bread Production

Transcription

1 San Francisco Sae Universiy Naional Income and Produc Accouns (NIPA) 1 Michael Bar Our firs oal is o come up wih a noion of he economy s oupu or producive capaciy of he economy. The U.S. produces a variey of oods and services, and we canno jus add up quaniies of apples, cars, haircus The soluion is o add he moneary value (in dollars) of oods and services. The mos imporan measure of areae oupu is he GDP. Gross Domesic Produc (GDP) he marke value of he final oods and services produced by labor and propery locaed in he Unied Saes durin a year. Le s discuss his definiion. Firs, GDP measures he value of oods and services raded in leal markes. Economic aciviy ha does no ake place in he markes is no couned in he GDP. For example, if you make a cup of coffee a your home and drink i, his producion will no be couned in he GDP. If, on he oher hand, Sarbucks produces and sells a cup of coffee, hen he value of ha cup of coffee will be couned as par of GDP. Final oods are oods ha sold o heir end users, as opposed o inermediae oods, which are used as inpus in order o produce oher oods. For example, when a consumer buys suar from a supermarke for his own use, hen his purchase is considered a final ood ha will be couned in he GDP. When a bakery buys suar and uses i as an inpu in he producion of cakes, hen suar is an inermediae ood and is no couned in he GDP. The nex example illusraes his idea. Suppose ha he producion of bread consiss of 4 saes: (1) farmin he whea, (2) rindin he whea o rain, (3) bakin he bread, and (4) sellin he bread. The nex able shows he ransacions and he value added a each sae. Value Added in Bread Producion Sell Farmer $0.80 $0.80 $0.80 Miller $0.80 $1.00 $1.80 $1.00 Baker $0.80 $1.00 $0.70 $2.50 $0.70 Value Added Reailer $0.80 $1.00 $0.70 $0.25 $2.75 $0.25 In he firs sae he farmer rows he whea and sells i o he Miller for he price of $0.80. We say ha he value added by he farmer is $0.80. The value added is defined as Value added = sales purchases from oher firms + chane in invenories In he second sae of producion, he miller rinds he whea ino flour and sells he flour o he baker for $1.80. We say ha he value added by he baker is $1. In he hird sae 1 The main source for definiions and mehodoloies is Bureau of Economic Analysis. This is a overnmen aency responsible for collecin daa for he Naional Income and Produc Accouns. Visi hp:// for A Guide o he NIPA S. 1

2 he baker bakes he bread and sells i o he reailer for $2.50. We say ha he value added by he bakery is $0.70. In he las sae he reailer sells he bread o he consumer for $2.75, so he value added by he reailer is $0.25. Noice ha alhouh he reailer did no do anyhin o he produc, i provided reail services o he consumer. The reail services include convenience of buyin everyhin a one place, sorae, ec. If we added he value of all he ransacions ha ook place, he conribuion of one loaf of bread o he GDP would have been $7.85 This would have been a biased value because he value added by he farmer would be included 4 imes, he value added by he miller is included 3 imes, and he value added by he bakery is included wice. We wan he GDP o properly reflec he value of oods and services produced wihin he economy, wihou muliple counin of he same producion. Finally noice ha he GDP couns oods and services ha were produced durin iven ime period. For example, he GDP of 2014 will coun he value of oods and services produced in he year Goods ha were produced before he year 2014 are no couned in he GDP of A relaed measure o GDP is GNP, which measures he areae oupu of he counry s residens. Gross Naional Produc (GNP) he marke value of he (final) oods and services produced by labor and propery supplied by U.S residens durin a year. (1) GNP = GDP + NFP NFP Ne Facor Paymens from abroad o domesic residens, i.e. NFP = (paymens o domesic residens from abroad) (paymens o forein facors in he U.S.). The GNP measures wha he U.S. residens produced, wheher wihin he U.S. or abroad, while he GDP measures wha was produced wihin he U.S., eiher by residens or foreiners. In he U.S. he difference beween GDP and GNP is small (i.e. NFP is small). For he purpose of his course we will inore his difference. Measurin Nominal GDP We now show wo ways of measurin he nominal GDP. By nominal we mean ha he value of all he oods and services is compued usin he curren prices. I. Expendiure approach (2) GDP = C + I + G + NX Personal Consumpion Expendiures (C) Goods and services purchased by persons residen in he Unied Saes, excep new housin. Gross Invesmen (I) Privae and Governmen invesmen. Privae invesmen is he spendin of firms on plan, equipmen and invenories, and he spendin of households on new houses. Governmen invesmen is ne purchases of fixed asses by he eneral overnmen. Governmen Consumpion Expendiures (G) ne purchases of oods, services, from business and from he res of he world by eneral overnmen; paymens by eneral overnmen o households in he form of compensaion of employees; he 2

3 consumpion of eneral overnmen fixed capial; invenory chane of overnmen enerprises. Ne Expors of oods and services (NX) expors less impors of oods and services (NX = X IM). Receips and paymens of facor income and ransfer paymens o he res of he world (ne) are excluded. II. Income Approach (3) NDI W In ren π π Ti p B Ne Domesic Income ( NDI ) he oal paymen o he facors of producion. Compensaion of employees (W) waes, salaries and frine benefis earned by workers. Ne ineres ( In ) ineres paid by domesic businesses plus ineres earned form he res of he world. Renal income (ren) income ha landlords receive from renin, includin he impued ren ha homeowners pay hemselves, less expenses on he house such as depreciaion. Proprieors income ( p ) income of non-corporae business, such as small farms and law parnerships. Corporae profis ( B ) income of corporaions afer paymens o heir workers and crediors. Indirec business ax ne of subsidies (Ti ). These are ax liabiliies ha are chareable o business expense in he calculaion of profi-ype incomes and sales axes. (4) B TB Div SB Profis ax liabiliy ( T B ) he sum of Federal, Sae and local income subjec o axes. Dividends (Div). Undisribued profis ( S B ) business savin. Formula (3) ives he Naional Income. We now show how he Naional Income is relaed o he GDP. (5) GDI NDI Dep Gross Domesic Income ( GDI ), or he GDP calculaed usin he income approach. Consumpion of fixed capial or Depreciaion (Dep) a chare for usin up of privae and overnmen fixed capial locaed in he Unied Saes. Remark: Since he spendin and income sides are esimaed independenly and usin imperfec daa, we usually have GDI GDP. The differences beween he wo esimaes is called saisical discrepancy (SD), and is repored as he number ha needs o be added o GDI in order o e he GDP : (6) GDI S D GDP 3

4 Review quesion. To make sure ha you undersand he above definiions, answer he followin quesion. 1. How will he followin ransacions be recorded in he NIPA of he curren year: a. A person buys a new car made in he U.S. b. A person buys a new forein made car c. A person buys an old car d. A person buys a new house e. A person buys an old house f. A firm buys a new machine Wha he GDP Does No Capure We needed a measure of he producive capaciy in he economy, and he mos imporan measure is he GDP. However, here are cerain producion aciviies ha are no capured by he GDP. Recall ha he GDP records only ransacions ha ake place in leal markes. Thus, he GDP does no record illeal aciviies (sales of forbidden drus for example), and home producion. In he home producion he household combines his ime and purchased oods in order o produce oher oods. For example, you combine your ime wih eabas and suar o make a cup of ea. This producion is no recorded in he economy. The problem is no severe if in all he counries he size of he home secor is he same as a fracion of he oal oupu. In his case comparisons across counries will no be biased. The problem is ha in some underdeveloped counries he home secor is quie lare, and hus he GDP of hese counries underesimaes he level of overall producion in hose counries. Measurin Real GDP and Inflaion Our nex oal is o decompose he chane in he nominal GDP ino: (1) chane in prices, and (2) chane in oupu. In oher words, we wan o be able o express he nominal GDP as follows: GDP P is called he real oupu or real GDP and P is called he price level or GDP deflaor. The reason why economiss wan o decompose he nominal GDP ino real GDP and price level is for comparisons of GDP across ime. Suppose ha he nominal GDP increased by 5% in he las year. Is his an increase in producion or simply an increase in prices? Noice ha if he economy does no chane he producion of any ood, and he prices of all oods o up by 5%, hen he nominal GDP will increase by 5%. In his case he increase in nominal GDP does no reflec an increase in he producive capaciy of he economy, bu simply a resul of increasin prices. I is of crucial imporance o be able o ell how much of he chane in he nominal GDP is due o chanes in prices and how much is due o chanes in producion. The rowh rae of he price level is called inflaion. 4

5 I. Base Year Approach (used before 1996) Noaions: i P price of ood i in year i price of ood i in year Accordin o he base year approach we fix he prices of all oods a heir level in some base year, and use hose fixed prices o compue he real GDP in any oher year. The formula for real GDP a ime and base year b is iven by: b i i RGDP Pb. i Noice ha in he base year, he real GDP is equal o he nominal GDP. The price level (also called he GDP deflaor) is hen obained by dividin he nominal GDP by he real: GDP P b RGDP This accomplishes ha ask ha we se o ourselves, namely decomposin he nominal GDP ino real GDP and a price level: GDP P b RGDP P The level of he real GDP and he price level are of very lile ineres o economis. Wha is much more imporan is he rowh rae of real GDP and he rowh rae of he price level. The laer is called inflaion. The problem however is ha differen choices of he base year ive differen resuls abou he rowh rae of real GDP and inflaion. The nex example illusraes his poin. Suppose ha he economy produces wo oods, 1 and 2. The prices and quaniies for several years are iven in he able below. The able also shows he decomposiion of GDP ino real GDP and prices, usin he base year approach. The yellow par uses 2000 as he base year, while he blue par uses 2005 as he base year. Base year = 2000 Base year = 2005 Year P1 1 P2 2 GDP P P P P

6 Firs, le s make sure ha we know how he real GDP and price level were compued. For example, o compue he real GDP in 2003 usin 2000 as he base year we fix he prices a 2000 level and muliply hem by he quaniies in 2003: 2000 RGDP As anoher example, le s compue he real GDP in 2003 usin 2005 as he base year: 2005 RGDP Noice ha he real GDP in he base year is always equal o he nominal GDP in he base year. The GDP deflaor is he nominal GDP divided by he real GDP. For example, he price deflaor in 2003 when he base year is 2000, is: GDP RGDP P Noice ha in he base year, he GDP deflaor is always 1, since he real GDP is equal o he nominal GDP in he base year. P The columns labeled and show he rowh rae of real GDP and he rowh rae of he price level (inflaion). 2 Now ha we know how he enries were compued, observe he rowh raes of real GDP and price level beween he years 2004 and When he base year is 2000, he measured inflaion was 14% and when he base year is 2005 he measured inflaion is 18%. Similarly, when he base year is 2005 he measured rowh in real GDP is 3%, while wih 2000 as he base year he measured rowh rae of real GDP is 7% (more han wice as hih!). Thus, he choice of he base year, realy affecs he measured real rowh rae. Afer 1996 many counries swiched o an alernaive mehod, called he Chain-Weihin mehod, which does no use any fixed base year The able shows he ross rowh rae, defined as y / y 1 while he ne rowh rae is defined as y / y

7 II. Chain-Weihin Approach Accordin o his approach we le he rowh rae of he real GDP beween wo adjacen years ( 1 and ) be 3 1 c 1 Where is he rowh rae of real GDP beween ime 1 and usin 1 as he base, and is he rowh rae of real GDP beween ime 1 and usin as he base. In oher words, each year we compue wo differen real GDP s: one usin las year as he base and he oher uses curren year as he base. So here is no fixed year which serves as he base. For example, in 2005 we compue real GDP usin 2004 as he base and anoher real GDP usin 2005 as he base. Then we simply averae hem (eomerically). Similarly, we le he rowh rae of he prices be P P c 1 These rowh raes can be used o consruc real GDP series and he GDP deflaor. Choose any base year. In he base year he real GDP is se o be he same as he nominal. Then use he above rowh rae o consruc he series of he real GDP. Suppose ha he base year is 1. Then he real GDP in 1 is he same as he nominal GDP in 1. The real GDP in year is P c RGDP GDP 1. Suppose ha insead we choose he year o be he base year. Then real GDP in year is he same as he nominal GDP and 1 GDP c. RGDP / In boh cases, he rowh rae of he real GDP is he same (since we se i o be he same and = c ). The consrucion of he GDP deflaor is similar. In he base year GDP deflaor is 1. Then use he above rowh rae o consruc he GDP deflaor in oher years. The name chain comes from he fac ha we use he rowh raes o consruc he nex year s GDP by chainin i o he curren year. Answer o he review quesion. 2. How will he followin ransacions be recorded in he NIPA of he curren year: a. A person buys a new car made in he U.S. As par of C, he personal consumpion expendiures. b. A person buys a new forein made car As par of C, and IM, so ha he purchase does no affec he U.S. GDP. c. A person buys an old car 3 This is a eomeric averae of 1 and. The subscrip c indicaes he chain weihin approach. 7

8 I is no recorded in he NIPA. If he car was purchased from a car salesman, hen par of he paymen oes o he aency for is services. The income of he aency is a service ha was produced in he curren year, so i is recorded in C. d. A person buys a new house As par if I. Remember ha purchases of new houses by persons is par of invesmen and no consumpion. e. A person buys an old house This ransacion is no recorded in he NIPA, same as old car. Aain, if a real-esae aen was involved, hen his fee is recorded in C as consumpion of services. f. A firm buys a new machine As par of I if he machine is made in he U.S., and if i is impored, hen boh I and IM. 8