Download Ch.4: Measuring GDP and economic growth

Chapter 4: Measuring GDP
and Economic Growth
Objectives:
1.
Define GDP
2.
Income and expenditure approach
3.
4.
5.
Measurement of GDP and its major components.
GDP as a measure of economic growth.
Shortcomings of GDP as a measure of economic
growth or the standard of living.
Definition of GDP
• GDP (Gross Domestic Product) is the market value of all
final goods and services produced in a country in a given
time period.
– Market value
• goods & services are valued at their market prices.
• GDP rises if prices rise (more on this later)
– Final goods and services
• Bought by final user
• Intermediate goods are produced by one firm, bought by
another, and used as a component of a final good or service.
• Exlude intermediate goods to avoid double counting.
Definition of GDP
• Produced within a country
– Any domestic production, regardless of who owns the
resources
• In a given time period
– Production during a specific year (sales of used items
excluded, except value of service in sale)
– Inventory adjustments account for goods produced in
one year but sold in another
• if inventories rise by $10 million during 2010, $10 million is
added to sales of final goods & services
• If inventories fall by $10 million during 2010, $10 million is
subtracted from sales of final goods & services
Expenditure Components of GDP
• Consumption (C)
– total payment for consumer goods and services
• Investment (I)
– purchase of new plant, equipment, and buildings
– additions to inventories
– Purchases of new housing
• Government spending (G):
– government purchases of goods and services from firms
– excludes “transfer payments” such as Social Security,
Unemployment Insurance
• Net exports (X-M)
– (exports-imports)
– Imports subtracted because counted as part of C,I,G and are not
part of domestic production.
GDP: Income & Expenditure Approach
• GDP can be measured by income or
expenditure side
• Circular flow demonstrates that
Y = C + I + G + (X-M)
GDP and Circular Flow
• Households sell factors of production to firms
in factor markets
– Factors of production: land, labor, capital
•
•
•
•
Wages for labor
Interest for loans used to purchase capital
Rent for the use of land
Profit to owners of capital
• Total income paid to households=Y
Y=total income; C=consumption; I=investment; G=government
purchases; X-M=exports-imports=net exports
Gross vs Net Domestic Product
• GDP is before subtracting depreciation (capital
consumption allowance)
• NDP =GDP- CCA
– NDP is “net of” depreciation.
• Capital in t = Capital in (t-1) + Gross Investment –CCA
= Capital in (t-1) + Net Investment
where Net investment = Gross investment – CCA
GDP: The Income Side
• Income includes
1. Compensation of employees
2. Rental income
3. Net interest
4. Corporate profits
5. Proprietors’ income
• Two adjustments to income required:
1.Indirect taxes minus subsidies are added to get from
factor cost to market prices.
2. Depreciation (or capital consumption) is added to get
from net domestic product to gross domestic product
GDP: Adjusting for changes in prices
Nominal GDP
• the value of goods and services produced during a given
year valued at the prices that prevailed in that same year.
• Nominal GDP is a more precise name for GDP.
Real GDP
• the value of final goods and services produced in a given
year when valued at the prices of a reference base year.
2000
Product
2010
Quantity
Price
Quantity
Price
computers
100
$500
120
$600
refrigerators
50
$1000
100
$1500
Nominal GDP
Real GDP (2000 base year)
Real GDP (2010 base year)
GDP-deflator (2000 base year)
GDP-deflator (2010 base year)
GDP Deflator
• GDP deflator
– Provides a comparison of current and base year
prices
Nominal GDP t
GDP - deflator t 
x 100
Real GDP t
Real GDP and the Price Level
• 2002 NGDP ________
• 2003 NGDP ________
• Base year of 2002
• 2002 RDGP ________
• 2003 RGDP ________
Item
Quant.
Price
2002
Balls
100
$1.00
Bats
20
$5.00
Balls
160
$1.00
Bats
22
$10.00
2003
• For your answers to the next several slides,
give your estimates of GDP to the nearest
dollar, do not include decimals, and do not
include $ signs.
Lucas Wedge
• dollar value of the accumulated gap between what real
GDP per person would have been if the 1960s growth rate
had persisted and what real GDP per person turned out to
be.
Temporary fluctuations in GDP:
The Business Cycle
• 4 stages to a
business
cycle
– Peak
– Recession
– Trough
– Expansion
Comparing Standard of Living Across
Countries
• Use per capita real GDP
• Must make two adjustments
– Convert into common currency
– Goods and services must be valued at same prices
• Using the exchange rate to convert can be problematic
because prices of some products may differ after conversion
• Purchasing Power Parity exchange rate is the exchange rate
that would make the prices of goods and services equal
across countries.
• Using actual exchange rate instead of PPP exchange rate
causes underestimate of standard of living in less developed
countries.
•With actual exchange rates, China RGDP per capita in 2010
is 7% of that in U.S.
•With PPP exchange rates, China RDDP per capita is 15% of
that in U.S.
Real GDP per capita across the world
Source: http://www.imf.org/external/datamapper/index.php
Limitations of GDP as
measure of standard of living
• Household production
• Underground economic activity
• Health and life expectancy
• Leisure time
• Environmental quality
• Political freedom and social justice