2. OBJECTIVES Definition of GDP Explain the three ways of
measuring GDP Real V Nominal GDP GDP deflator Explain how we use
real GDP to measure economic growth Limitations of our measures of
GDP
3. DEFINITIONS FOR GDP I. GDP is equal to the total
expenditures for all final goods and services produced within the
country in a stipulated period of time (usually a 365-day year).
II. III. GDP is equal to the sum of the value added at every stage
of production (the intermediate stages) by all the industries
within a country, plus taxes less subsidies on products, in the
period. IV. V. GDP is equal to the sum of the income generated by
production in the country in the period that is, compensation of
employees, taxes on production and imports less subsidies, and
gross operating surplus (or profits)
4. CALCULATING (GDP): EXPENDITURE APPROACH GDP = C + I + G +
(EX IM) where: C = Personal Consumption expenditures household
spending on consumer goods I = Gross Domestic Investment spending
by firms and households on new capital, plant, equipment, inventory
and new residential structures G = government consumption and
investment EX IM = net exports net spending by rest of the world or
exports minus imports
5. C = PERSONAL CONSUMER EXPENDITURES CATEGORIES 1. Durable
goods goods that last a relatively long time such as cars and
household appliances 2. 3. Nondurable goods goods that are used up
fairly quickly such as food and clothing 4. 5. Services things we
buy that do not involve the production of physical things such as
legal and medical services and education
6. I = GROSS PRIVATE DOMESTIC INVESTMENT TYPES OF INVESTMENT 1.
Gross Private Investment total investment in capital, it is the
purchase of new housing, equipment and plants by private sector 2.
3. Nonresidential Investment expenditures by firms for machines,
tools, plants and so on 4. 5. Residential Investment expenditures
by firms and on new houses and buildings 6. 7. 8. Change in
Business Inventories amount by which firms inventories change
during a period, inventories are goods that firms produce now but
intend to sell later
7. GOVERNMENT CONSUMPTION AND INVESTMENT refers to federal,
state and local governments for final goods and services. NET
EXPORTS (EX IM) is the difference between exports and imports,
figure can be negative or positive Example: G + (EX IM)
8. CALCULATING (GDP): INCOME APPROACH GDP = National Income +
Depreciation + (indirect taxes Subsidies) + Net factor payments to
the rest of the world 1. NATIONAL INCOME - is the total income
earned by the factors of production owned by countrys citizen a)
Compensation of employees includes wages, salaries and various
supplements b) Proprietors income income of unincorporated
businesses c) Corporate profits income of corporate businesses d)
Net interest interest paid by business e) Rental income income
received by property owners in from of rent
9. 2. DEPRECIATION is the amount by which assets value falls in
a given period 3. 4. INDIRECT TAXES are taxes like sales tax,
customs duties and license fee 5. 6. SUBSIDIES are payments made by
the government for which it receives no goods or services in return
7. 8. NET FACTOR PAYMENTS TO THE REST OF THE WORLD payments of
factor income to the rest of the world minus receipt of factor
income from the rest of the world Example: CALCULATING (GDP):
INCOME APPROACH
10. CALCULATING (GDP): THE PRODUCTION APPROACH Value Added: VA
= total revenue the value of intermediate goods Total GDP is the
sum of gross value added by institutional units that are resident
in the economy (in different economic activities) plus taxes on
products and import (VAT, excise tax and customs duties) less
subsidies on products. Calculation scheme is as follows: Total
output (goods and services) by types of activities in market prices
- intermediary consumption for generating goods and services = GDP
at market prices + taxes on products and import - subsidies on
products = Total GDP at market prices Example:
11. Real V Nominal GDP Real GDP is the value of final goods and
services produced in a given year when valued at constant prices.
Calculating Real GDP The first step in calculating real GDP is to
calculate nominal GDP, which is the value of goods and services
produced during a given year valued at the prices that prevailed in
that same year.
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12. GDP DEFLATORS
13. USE REAL GDP TO MEASURE ECONOMIC GROWTH We use real GDP to
calculate the economic growth rate. The economic growth rate is the
percentage change in the quantity of goods and services produced
from one year to the next. 1. We measure economic growth so we can
make: Economic welfare comparisons Economic welfare measures the
nations overall state of economic well-being. Real GDP is not a
perfect measure of economic welfare for seven reasons: a. Quality
improvements tend to be neglected in calculating real GDP so the
inflation rate is overstated and real GDP understated. b. Real GDP
does not include household production, that is, productive
activities done in and
14. USE REAL GDP TO MEASURE ECONOMIC GROWTH International
welfare comparisons Real GDP is used to compare economic welfare in
one country with that in another. Two special problems arise in
making these comparisons. 1. Real GDP of one country must be
converted into the same currency units as the real GDP of the other
country, so an exchange rate must be used. 2. The same prices
should be used to value the goods and services in the countries
being compared, but often are not. Business cycle forecasts Real
GDP is used to measure business cycle fluctuations. These
fluctuations are probably accurately timed but the changes in real
GDP probably overstate the changes in total production and peoples
welfare caused by business cycles.
15. Limits of GDP Measure 1. Leisure time 2. 3. Nonmarket
economic activities 4. 5. Environmental quality and resource
depletion 6. 7. Quality of life 8. 9. Poverty and economic
inequality 10. 11. International GDP comparisons based on exchange
rates, which can introduce bias