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Gross Domestic Product (GDP)
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A measure of the market value of all final goods and services produced within a countries borders in a year
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6 issues in calculating GDP
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1) Market Value
2) Final Goods and Services
3) Non-Market transactions are excluded
4) Non-productive transactions are excluded
5) Second hand goods are excluded
6) Goods produced but not sold are included in inventory
2) Final Goods and Services
3) Non-Market transactions are excluded
4) Non-productive transactions are excluded
5) Second hand goods are excluded
6) Goods produced but not sold are included in inventory
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Market Value (Issue for Calculating GDP)
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measure the value of goods and services market prices, common unit of measurement, if no market price exists, we value the good or service at cost
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Final Goods and Services (Issue for Calculating GDP)
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- Excludes intermediate goods which are goods produced by one firm and used as an input by another firm
- Avoids double counting OR value added approach
- Avoids double counting OR value added approach
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Non-market Transactions are excluded (Issue for Calculating GDP)
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- goods and services produced inside the home for use inside the home
- underground economies
- illegal markets
- underground economies
- illegal markets
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Non-productive Transactions are excluded (Issue for Calculating GDP)
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- gov't transfer payments
- gifts
- sale and purchase for securities
- gifts
- sale and purchase for securities
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Ways of measuring GDP
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Circular Flow Model
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Circular Flow Model
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assumes the only 2 sectors of the economy are households and firms
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4 ways GDP can be measured as
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- Value of final output
- Aggregate Expenditures
- Source of Income
- Uses of Income
- Aggregate Expenditures
- Source of Income
- Uses of Income
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Value of final output formula
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GDP = ΣPiQi
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Aggregate Expenditures Formula
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GDP = C + I + G + (X - M)
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Source of Income Formula
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GDP = w + i + R + profits - NFIA + CCA + SD
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Uses of Income Formula
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GDP = DC + S + T + M
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C
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consumption spending
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I
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investment spending
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G
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Government (private sector)
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X
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exports
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M
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inports
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W
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wages
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i
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interest
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R
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rent
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NFIA
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net factor income from abroad
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CCA
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capital consumption allowance
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SD
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statistical discrepancy
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DC
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domestic consumption
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S
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savings
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T
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taxes
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Measuring GDP as expenditures is equivalent to...
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Measuring GDP as income
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for all firms producing final goods and services
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Gross Profit = Gross Sales - Gross Costs
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Simon Kuznets
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- National Income Methodology
- national income fell by 25% from 1929-1932
- national income fell by 25% from 1929-1932
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Expenditure Approach Formula
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GDP = C + I + G + (X-M)
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GNP formula
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GDP + NFIA
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Net National Product (NNP)
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GDP - CCA
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National Income (NI) (earned by producers in the economy)
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NI = NNP - SD
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Personal Income (earned by households in the economy)
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NI + incomes received by households (not earned like dividends, gov't payments, personal interest) - income earned but not yet received (Net interest, corporate profits, social insurance contributions, indirect business contributions)
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Disposable Income (DPI) Formula
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PI - personal taxes
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Nominal GDP
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measures output using current prices
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Real GDP
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measures output using constant (base year) prices, currently the BEA uses 2012 as a base year
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Nominal GDP year 1
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The Sum of Q1 x P1
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Nominal GDP year 2
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The Sum of Q2 x P2
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Real GDP 1 = ?
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Nominal GDP 1
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Real GDP 2 formula
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The Sum of Q2 x P1
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% change in GDP
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[(Year 2 - Year 1)/Year 1] * 100
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to measure inflation use the...
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GDP price deflator (GDPPD)
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GDP Price Deflator Equation
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Nominal GDPx/Real GDPx x 100
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in the base year, a price index always is
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100
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inflation rate =
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change in GDPPD
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2 Problems with using a simple base year approach
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1) Every 5 years when a new base year is chosen the entire series of real GDP statistics would have to be revised
2) It puts too much weight on those goods and services whose prices increases the least
--> underestimates inflation
--> overestimates Real GDP
2) It puts too much weight on those goods and services whose prices increases the least
--> underestimates inflation
--> overestimates Real GDP
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chain-type GDP growth rate
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g =the square root Q2xP1/ Q1xP1 x Q1xP2/Q2xP1
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chain-type real GDP2
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Real GDP1 x g
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Chain type GDPPD
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nominal GDPx/Chain type real GDPx
x 100
x 100
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Why GDP is a bad measure of quality of life (9)
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- defensive expenditures (health care costs, environmental costs, public safety costs)
- value of leisure is ignored
- population differences, per capital GDP = GDP/population
- the distribution of income is ignored
- cultural differences
- marital status
- quality of products may change
- prices + exchange rats
- wars & natural disasters
- value of leisure is ignored
- population differences, per capital GDP = GDP/population
- the distribution of income is ignored
- cultural differences
- marital status
- quality of products may change
- prices + exchange rats
- wars & natural disasters
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