Download GDP Differentiations

GDP Differentiations
A. Nominal v. real
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GDP is a measure of the market or money value of all final goods and services
produced by the economy in a given year. We use money or nominal values as
a common denominator in order to sum that heterogeneous output into a
meaningful total.
Since market value is measured by money, it is hard to compare the market
values of GDP from year to year if the value of money itself changes in
response to inflation and deflation. To solve this problem, we deflate GDP
when prices rise and inflate GDP when prices fall according to a base year.
Nominal GDP (unadjusted for inflation): Refers to GDP based on the prices
of a product in the year it was produced. Not inflated or deflated.
Real GDP (Adjusted for inflation): Refers to a GDP that has been adjusted
for inflation or deflation to accurately show the increase or decrease in
production for comparison of economic growth from year to year. Measured in
relation to the price index of a given year.
GDP price index:
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A Price Index is a measure, or ratio, of the price of a specified collection of goods
and services (market basket) in a certain year as compared to the price of the same or
extremely similar "market basket" in a reference year (base year/ base period).
Market Basket: specified collection of goods and services.
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Price Index in a certain yr =(Price of market basket in specific yr/Price of same
market basket in base yr) x 100
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Price index= Nominal GDP / Real GDP. Multiply the base year's price to the output
of each year to get the total real GDP. Multiply each year's price to its corresponding
output and add them up to get total nominal GDP.
Dividing nominal GDP by price index
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Real GDP = nominal GDP / price index (in hundredths).
B. Domestic v. national
Gross National Product (GNP) includes the value of final goods and services
produced by factors owned by domestic households all over the world:
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GNP = GDP + Foreign investment income – investment income paid to
foreigners
For developing countries, GDP tends to exceed GNP: factor payments made
to foreigners exceed factor payments received from foreigners
For industrialized countries, GDP is smaller than GNP: factor payments received from
foreign countries are larger than what is paid to foreigners.
GDP
Definition:
Stands for:
Formula for
Calculation:
Layman Usage:
Uses:
Country with
Highest Nominal
Per Capita (US$):
Country with
Lowest Per Capita
(US$):
Country with
Highest
(Cumulative):
Application
(Context in which
these terms are
used):
GNP
An estimated sum of the
GDP (+) total capital gains
monetary value of the total worth
from overseas investment (-)
of a country’s production of
income earned by foreign
goods and services, calculated
nationals domestically
over the course of one year
Gross Domestic Product
Gross National Product
GDP = consumption +
GNP = GDP + NR (Net
investment + (government
income from assets abroad
spending) + (exports − imports) (Net Income Receipts))
Total value of Goods and
Total value of products &
Services produced by all
Services produced within the
nationals of a country
territorial boundary of a country (whether within or outside
the country)
Business, Economic
Business, Economic Forecasting
Forecasting
Luxembourg ($115,809)
Monaco ($183,150)
Somalia ($231)
Congo ($190)
USA ($15.07 Trillion in 2011)
USA (~ $14.648 Trillion in
2010)
To see how the nationals of
To see the strength of a country’s
a country are doing
local economy
economically
C. Gross and Net
Net Domestic Product (NDP) = GDP - depreciation. Because depreciation is an
estimate, most economists prefer to work with GDP.
o
Gross investment consists of:
 Net investment (new physical capital and stocks or inventories)
 Depreciation or capital consumption: repair and maintenance to existing
stocks of capital or replacement of worn out capital.
D. Total and Per Capita
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Per capita is Latin for “per head” or per person. This is merely an average and
does not give us a true picture of how the GDP is distributed.
Real Per Capita GDP = Real GDP/Population
This is an attempt to provide a crude measure of standard of living: if the
population has grown faster than real GDP, then output per person has actually
fallen. To measure real per capita GDP we deflate GDP to put it into real terms,
and then we divide it by the population.
Population increases: cause GDP to rise but not necessarily per person:
o To adjust for this problem we divide by the population:
Indonesia, 2005: $228.368 billion/220.6 million = $1,208