Download GDP - U of L Class Index

Measuring National Output and
National Income
z GDP is the market value of all final goods and
services produced within a given period by
factors of production located within a country.
Chapter 7
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Gross Domestic Product (GDP)
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Gross National Product (GNP)
Calculating GDP
z The total market value of all final goods and
services produced within a given period by
factors of production owned by a country’s
residents, regardless of where the output is
produced.
z The expenditure approach is a method of
computing GDP that measures the amount
spent on all final goods during a given period.
z The income approach is a method of
computing GDP that measures the income wages, rents and profits - received by all factors
of production in producing final goods.
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Expenditure Approach
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Consumption (C)
GDP = C + I + G + (EX - IM)
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z Consumption or personal consumption
expenditures is the largest component of GDP.
It is comprised of expenditures by consumers
on:
y Durable goods: goods that last a relatively long time
y Semidurable goods: goods like clothing that last
longer than nondurables but not as long as durables
y Nondurable goods: goods which are perishable
y Services: goods which do not involve the production
of physical things
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Gross Investment Versus Net
Investment
Investment (I)
z Investment or gross private investment is
comprised of private sector spending on new
capital.
z It has two components:
y Fixed capital formation which is the investment in
durable capital assets, such as machinery or housing.
y Change in business inventories which is simply the
amount by which firms’ inventories change during a
period. Inventories are goods produced now to sell
later.
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z Depreciation is the amount by which an asset’s
value falls in a given period.
z Gross investment is the total value of all newly
produced capital goods (plant, equipment,
housing and inventory) produced in a given
period.
z Net investment is simply gross investment
minus depreciation.
z Net domestic product is GDP minus depreciation
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Government Purchases (G)
Net Exports (EX-IM)
z Expenditures by federal, provincial and local
governments for final goods and services.
z Does not include transfer payments (such as
welfare payments or senior’s benefits) or
payment on the national debt, because they are
not payments for goods or services.
z Net exports are the difference between exports
(sales to foreigners of Canadian-produced goods
and services) and imports (Canadian purchases
of goods and services from abroad). The Figure
can be positive or negative.
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Income Approach
Net Domestic Income
z A method of computing GDP that measures the
incomes - wages, rents, interest, and profits received by all factors of production in
producing final goods.
z Consists of three components:
z Net domestic income is the total income earned
by the factors of production located in a
country. It is the sum of six items:
y Net domestic income
y Depreciation (capital consumption)
y Indirect taxes less subsidies
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y Labour income is the wages, salaries and fringe
benefits paid to households by firms or government.
y Corporate profits are the income of corporate
businesses (dividends and retained earnings)
y Interest income is the difference between interest
households receive and the interest they pay out.
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Net Domestic Income (Cont.)
y Farm income is the income earned by farms
y Unincorporated business income is income earned by
unincorporated businesses (also includes most rental
income).
y Inventory valuation adjustment is the increase in the
value of inventories during the year, subtracted in
the calculation of net domestic income because it is
included in profits, but does not correspond to new
production.
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Indirect Taxes Less Subsidies
Depreciation
z Depreciation is the decline in value of capital
assets as they wear out or become obsolete.
z Depreciation is added to the net domestic
income when we calculate GDP by the income
approach because income results in the
replacement of existing plants and equipment.
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Components of GDP by Income and
Expenditure Approach (Figure 7.1)
z Indirect Taxes: sales taxes, custom duties,
license fees, etc.
z Subsidies: payments made by the government
for which it receives no goods or services in
return.
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Net National Income
Personal Income (PI)
z Net domestic income plus investment income
from nonresidents minus investment income to
nonresidents.
z The total income of households, calculated as
net national income plus transfers to households
less retained earnings.
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Personal Savings and the Savings
Rate
Personal Disposable Income (PDI)
z Personal disposable income is simply personal
income minus personal taxes.
PDI = PI - personal income taxes
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z Personal saving is the amount of disposable
income that is left after total personal spending
in a given period.
z Personal saving rate is the percentage of
personal disposable income that is saved. If the
personal saving rate is low, households are
spending a large amount relative to their
incomes; if it is high households are spending
cautiously.
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Nominal GDP
Real GDP
z Nominal GDP is GDP measured in current dollars
z Current dollars: the current prices that one pays
for goods and services
z Real GDP is a measure of GDP that removes the
effects of price changes from changes in
nominal GDP. This allows us to measure real
output growth by isolating the effect of prices.
z A base year is the year which provides reference
values. For example in the calculation of real
GDP, the year which provides the prices that are
used to value the outputs of all other years.
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Calculating Real GDP - A Three-Good
Economy (from Table 7.4)
Pizza
GDP in
Year 1
Production
Price per Unit
in
Year 1
Prices
Year 1 Year 2 Year 1 Year 2 P1*Q1
Q1
Q2
P1
P2
10
15
$10
$20
$100
GDP in
Year 2
in
Year 2
Prices
P2*Q2
GDP in
Year 2
in
Year 1
Prices
P1*Q2
$300
$150
5
6
$50
$60
$250
$360
$300
T-Shirts
10
10
$15
$14
$150
$140
$150
$500
$800
$600
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GDP Deflator
Sunglasses
Total
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z The GDP deflator is the current dollar (nominal)
GDP divided by constant dollar (real) GDP,
converted to a percentage by multiplying by
100. Also called the GDP implicit price deflator
or the GDP price index.
z GDP deflator = Nominal GDP/Real GDP * 100
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Consumer Price Index (CPI)
Calculating CPI (Table 7.5)
z The CPI is a price index calculated every month
using the price of a standardized bundle of
goods meant to represent the consumption of
the average consumer.
z A fixed-weight price index is a price index
calculated by pricing the same bundle of goods
each period.
z CPI in Year 2 = $640/$500 * 100 = 128
z CPI in Year 1 = $500/$500 * 100 = 100
z Percentage change from Year 1 to Year 2 = (128-100)/100=28%
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Limitations of the GDP Concept
Review Terms & Concepts
z Social Welfare
z base year
z change in business
inventories
z consumer price
index(CPI)
z corporate profits
z current dollars
z depreciation
z durable goods
y Increases in crime, poverty etc. not reflected in GDP.
z Underground Economy
y The part of the economy in which transactions take
place and in which income is generated that is not
reported and therefore not counted in GDP.
z Per Capita GDP/GNP
y A country’s GDP or GNP divided by its population.
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Review Terms & Concepts (cont.)
z gross national product
(GNP)
z gross private investment
z income approach
z index
z indirect taxes
z interest income
z intermediate goods
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z inventory valuation
adjustment
z labour income
z national income and
expenditure accounts
z net exports
z net investment
z net National Income
z nominal GDP
z nondurable goods
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expenditure approach
farm income
final goods & services
fixed capital formation
fixed-weight price index
GDP deflator
government purchases
gross domestic product
(GDP)
z gross investment
z
z
z
z
z
z
z
z
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Review Terms & Concepts (cont.)
z per capita GDP or GNP
z personal consumption
expenditures
z personal disposable
income
z personal income
z personal saving
z personal saving rate
z real GDP
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semidurable goods
services
subsidies
underground economy
unincorporated business
income
z value added
z weight
z
z
z
z
z
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