四、 Investment Tools: Economics: Macroeconomic Analysis
1.A: Preliminary Reading: Taking the Nation's Economic Pulse
a: Explain the two approaches to measuring gross domestic product (GDP) and calculate GDP using each approach.
The expenditure approach is a demand-based concept measured by summing personal consumption, gross private investment, government consumption and gross investment, and net exports of goods and services.
Resource cost/income approach:The resource cost/income approach is a supply or production oriented approach and measures GDP by summing the following components employee compensation, proprietors' income, rents, corporate profits, interest income, indirect business taxes, depreciation, and net income of foreigners.
b: Distinguish between GDP and gross national product (GNP).
GNP is the total market value of all final goods and services produced by the citizens of a country no matter where they are residing. Prior to 1991 GNP was used to measure US production.
GNP and GDP are closely related concepts. GDP is a measure of the output that is produced domestically, while GNP is a measure of the output produced by the nationals of a country regardless of where they live. GNP is GDP PLUS income earned by citizens from their work and investments abroad, LESS the income earned by foreigners from their work and investments within the country.
GDP measures output within the borders of a country regardless of the citizenship of the producer. GNP measures the output of the country’s nationals regardless of where they live.
c: Explain the difference between real and nominal GDP.
An important use of GDP is to compare the level of production over time. However, when nominal GDP (GDP measured in terms of current prices) changes from one period to the next, it reflects both changes in production and price changes. Therefore, economists attempt to filter out the impact of GDP by calculating GDP measured in terms of prices from some base year. This measure is called real GDP. Changes in real GDP correspond to real or actual changes in production.
Since nominal GDP is measured with current prices and real GDP is measured relative to the price level in some base year, we need a price index to indicate the relative price change between periods.
d: Distinguish between the GDP deflator and the consumer price index.
The GDP Deflator is a general price index that corresponds to the price change exhibited by a very large market basket - all final goods and services produced. An important point to note is that the market basket of goods changes every year depending on current production. In other words, the market basket is not fixed. The GDP Deflator is useful for measuring economy-wide inflation. The current base year is 1992.