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Chapter 23
Measuring a Nation’s Income:
Gross Domestic Product (GDP)
Summary:
1) GDP is the market value of all final goods and services produced and sold through the market
in a given time period - usually a year.
2) GDP is a measure of both output and income.
3) Nominal GDP is measured at current prices; Real GDP is adjusted for price changes.
4) GDP is an indicator of economic well-being.
Details:
2) GDP = Output = Expenditure = Income
1) Circular Flow: Income = Expenditure
2) GDP = Expenditure = C + I + G + X
C = Consumption
I = Gross Private Domestic Investment
= New Structures and Equipment
+ Change in Inventories
G = Government Purchases
X = Net Exports
= Exports – Imports
Comparing China India USA
http://www.montana.edu/djyoung/317/Comparing%20USA%20CHN%20IND.pdf
3) GDP = Income =
Labor Income (Wages/Salaries/Benefits)
+
Capital Income (Dividends/Interest/Rent/Profits)
+
Self Employment Income(Labor & Capital)
+
Depreciation
+
Indirect Business Taxes + …
3) Nominal vs. Real GDP
Nominal: Current Year Prices
Real: (Constant) Base Year Prices
Apples
Oranges
Year
QA
PA ($/#)
QO
PO($/#)
0
2#
.50
3#
1.00
1
2#
1.00
3#
2.00
2
1#
3.00
3#
2.00
NGDP
U.S. GDP
($ trillions)
1990
1991
% Change
Nominal
5.74
5.92
3.1%
Real ($1992)
6.14
6.08
-1.0%
4) GDP as measure of happiness:
RGDP/capita is a good indicator of:

SR fluctuations (recession/boom)

material living standards over time and across countries
www.gapminder.org
But it is not perfect. Adjust for:

Include household production

Quality/New Goods

“Bads” (eg Pollution) subtracted

Adjust for leisure (work)
Hours/Day
Days/Week
Weeks/Year
Years/Lifetime
Sample Questions
____ 22. Which of the following statistics is the best single measure of an economy's well-being?
a. the unemployment rate
b. the inflation rate
c. GDP
d. the trade deficit
____ 23. The simple circular-flow diagram illustrates that
a. production generates income so that income and production are the same.
b. the economy's income exceeds its production.
c. the production of an economy exceeds its income.
d. None of the above are necessarily correct.
____ 24. To compute GDP we
a. simply sum the number of final goods and services.
b. sum the cost of producing final goods and services.
c. use weights determined by a survey regarding how much people value different sorts of
goods and services to compute GDP as a weighted average.
d. sum the market values of final goods and services.
____ 25. If Susan decides to change the oil in her car herself instead of having Speedy Lube change the
oil for her GDP
a. necessarily rises.
b. necessarily falls.
c. will be unaffected because the same service is produced in either case.
d. will be unaffected because car maintenance is not included in GDP.
____ 26. In computing GDP, investment is spending on
a. stocks, bonds, and other financial assets.
b. real estate and financial assets.
c. new capital equipment, inventories, and structures, including new housing.
d. capital equipment, inventories, and structures, excluding household purchases of new
housing.
____ 27. Which of these would NOT be included in the component(s) listed after them?
a. Mary buys a skateboard manufactured in Germany-U.S. consumption and U.S. imports.
b. Shelly adds DVDs produced in the United States to her inventory-U.S. investment.
c. Emily receives her Social Security check-U.S. government expenditures.
d. None of the above are correct.
____ 28. Suppose that the country of Samiam produces only eggs and ham. In 2002 it produced 100 units
of eggs at $3 each and 50 units of ham at $4 each. In 2001, the base year, eggs sold for $1.50 per unit and
ham for $5.
a. Nominal 2002 GDP is $500, real 2002 GDP is $400, and the GDP deflator is 80.
b. Nominal 2002 GDP is $500, real 2002 GDP is $400 and the GDP deflator is 125.
c. Nominal 2002 GDP is $400, real 2002 GDP is $400, and the GDP deflator is 100.
d. Nominal 2002 GDP is $400, real 2002 GDP is $500, and the GDP deflator is 125.
____ 29. Real GDP is the production of final goods and services valued at
a. current year prices.
b. constant prices.
c. future year prices.
d. the ratio of current year prices to constant year prices.