Measurements Part II GDP And Real GDP 1

Measurements, Part II: GDP And Real GDP 1

GDP (Gross Domestic Product) GDP: the total market value of all the final goods and services produced annually within a country’s borders. Final good: a good in the hands of its final user 2

GDP (Gross Domestic Product) (continued) Three ways to compute GDP: 1. The expenditure approach. 2. The income approach. 3. The value added approach. 3

GDP (Gross Domestic Product) (continued) Expenditure approach: add the amount of money spent by buyers on final goods and services. Income approach: simply find the sum of all wages and profits. Value added approach: find the sum of the values added at all the stages of production. 4

What GDP Omits Some exchanges that take place in an economy are not included in GDP. Such as: - Certain nonmarket goods and services. - Underground activities, both legal and illegal. - Sales of used goods. - Financial transactions. - Government transfer payments. - Leisure 5

Per Capita GDP If we divide a country’s GDP by the population in the country, we get per capita GDP. Example: If a country has a GDP of $ 5 trillion and its population is 200 million, GDP per capita is $ 25000 6

The Expenditure Approach Computing GDP For A Real Word Economy Expenditure in a real word economy: - Often talk four sectors of the economy, such as: -- household sector. -- business sector. -- government sector. -- foreign sector. 7

The Expenditure Approach Computing GDP For A Real Word Economy (continued) The expenditures of the sectors are called, respectively: 1. Consumption (C). 2. Gross private domestic investment, or investment (I). 3. Government consumption expenditures and gross investment, or simply government purchases (G). 4. Net export (NX). 8

The Expenditure Approach Computing GDP For A Real Word Economy (continued) Consumption (C) includes: 1. Spending on durable goods. 2. Spending on nondurable goods. 3. Spending on services 9

The Expenditure Approach Computing GDP For A Real Word Economy (continued) Investment (I): is the sum of (1) the purchase of newly produced capital goods, (2) changes in business inventories (inventory investment), and (3) the purchases of new residential housing. Investment = fixed investment + inventory investment 10

The Expenditure Approach Computing GDP For A Real Word Economy (continued) Government purchases (G): include federal, state, and local government purchases of goods and gross investment such as in highways, bridges, and so on. Net export (NX) NX = EX – IM EX: exports IM: imports 11

The Expenditure Approach Computing GDP For A Real Word Economy (continued) GDP = C + I + G + (EX – IM) 12

The Income Approach To Computing GDP For A Real World Economy Computing national income: - National income, is the sum of five components: 1. Compensation of employees. 2. Proprietors’ income. 3. Corporate profits. 4. Rental income of persons. 5. Net interest 13

The Income Approach To Computing GDP For A Real World Economy (continued) National Income = Compensation of employees + Proprietors’ income + Corporate profits + Rental income + Net interest 14

The Income Approach To Computing GDP For A Real World Economy (continued) From National Income To GDP: Making Some Adjustment GDP = National Income – Income earned from the rest of the world + Income earned by the rest of the world + Indirect business taxes + Capital consumption allowance + Statistical discrepancy 15

Other National Income Accounting Measurements They are: 1. Net Domestic Product (NDP). NDP = GDP – Capital Consumption Allowance: the estimated amount of capital goods used up in production through natural wear, obsolescence, and accidental destruction. 16

Other National Income Accounting Measurements (continued) They are: 2. Personal Income = National Income – Undistributed Corporate Profits – Social Insurance Taxes – Corporate Profits Taxes + Transfer Payments 17