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GDP
MACROECONOMICS
Gross Domestic Product
 GDP – The market value of all final goods and
services produced within a country during a given
period of time.
 Breaking down the definition:



1. Market Value – production is measured in dollar terms.
2. Final G&S – a product purchased by a final user. Excludes
intermediate goods to avoid double counting.
3. Current Production – only production that occurs during a
specified time period is included (i.e. mo, quarter, year).
 It is a measurement of national output.
What Is Not Counted
 Pure financial transactions
 Public transfer payments
 Underreported legal activities
 Illegal activities
 Household production
GDP and National Income
 GDP is an approximate measurement of National
Income, since production turns into income.


For 2010, GDP was $14,527 trillion and National Income was
$12,840 trillion.
NI = GDP - Capital Consumption Adjustment - Indirect
Business Taxes- Business Transfer Payments + Net Foreign
Factor Income + Government Subsidies less Current Surplus
of Government Enterprises - Statistical Discrepancy
 Lets assume that GDP = Y,
therefore GDP/capita = income per person.
Why Are We Interested in GDP?
 Typically as GDP grows, especially GDP/capita, the
well being of humans also increases.
 There is a strong connection between economic
growth and happiness, health, longevity, infant
mortality, education, and opportunity.

http://www.gapminder.org/
GDP/Capita
 As of the second quarter in 2013, GDP/capita = $53,082
in current prices.


This included average income of infants and retired people.
GDP/worker = $107,199

$115,613, excluding the unemployed
 As of July 2013, median household income was $52,113
and the mean household income for second quarter of
2013 is $114,938.

http://advisorperspectives.com/dshort/updates/Median-Household-Income-Update.php
 Additional information on income distribution



http://www.mybudget360.com/america-with-no-middle-class-top-job-growth-fields-collegegraduate-wages-top-jobs-low-wages/
http://www.mybudget360.com/how-much-do-americans-earn-what-is-the-average-us-income/
http://visualizingeconomics.com/viewincomeguide
Shortcomings as a Measure of Well-Being
 The value of leisure is not included.
 Pollution and other negative effects of production are
not adjusted for.
 Crime and other social ills are not adjusted for.
 GDP measures the size of the pie, but is silent on
how it is divided.
Does Growth Equal Progress?
 While GDP, especially GDP/capita is a basic
measurement of progress, it is not without criticism.

It says nothing about equality, hours worked, personal debt,
pension coverage, poverty rates, incarceration rates,
environmental impact, CO2 emission, etc.

http://www.demos.org/publication/does-growth-equal-progressmyth-gdp
How to Calculate GDP
 Three methods used to calculate GDP
 Expenditure Approach


Value Added or Production Approach


Adds up the market value of all domestic expenditures made on
final goods and services.
Add up the value of goods at each stage of production in the
economy.
Income Approach

Adds up all the income in the economy; labor, capital, land, and
entrepreneurs.
 We will focus on the expenditure approach, but
all three empirical estimations yield similar results.
Components of GDP: Expenditure Approach
 (C) Consumption: expenditure by HHs on final
goods and services.
 (I) Investment: expenditure by firms on new capital
along with new housing.
 (G) Government purchases: expenditure by
governments on final goods and services.
 (Nx) Net exports: (exports – imports)
Components of GDP
 In 2012, real GDP was $15,470.7*.
 Household expenditures were $10,517.6 (68%) with
$6,982.7 on services.
 Investment spending was 2,436.0 (15.7%).
 Government expenditures on goods and services
totaled $2,963.1 ( 19.2%) with $1,742.8 coming from
state and local governments.
 Net exports accounted for -430.8 (-2.7%)


*Numbers are in billions
Source: bea.gov
Components of GDP: Expenditure Approach
 In theory, the spending on final goods and services
should equal the value of what is produced.
 GDP = C + I + G + Nx
 Example:


C = $2,000, I = $500, G = $600, and Nx = -$100
GDP = ?
Real GDP
Consumer Oriented Economy
 Real personal expenditures as a percent of real GDP
Investment as a Percentage of GDP
Gov’t Spending as a Percentage of GDP.
Total Gov’t Spending as a Percentage of GDP
Other Measurements of Total Production
 GNP – Gross National Product
 A measurement of total production by all national residents.
 National Income
 GDP that takes into consideration depreciation and other
factors.
 Personal Income
 HH income minus corporate profits plus transfer payments.
 Disposable income
 Personal income minus taxes
Other Measurements of National Well-Being
 HDI – Human development index, which takes into
consideration life expectancy, adult literacy rates, and
income per person.

As of 2012, Norway had the highest HDI while the USA came in
third.

http://hdr.undp.org/en/statistics/
 GPI – includes things like the value of volunteer and
household production minus the cost of pollution and
crime.

No new data since 2006.
 World Happiness Report – measures life satisfaction and
emotional happiness.

As of 2013, Denmark ranked first while the USA came in at 17th.

http://unsdsn.org/files/2013/09/WorldHappinessReport2013_online.pdf
Real v Nominal
 Since GPD uses market values to measure total
production, we must be careful about interpretations
over time due to inflation.
 Nominal GDP – The value of final goods and services
evaluated at current prices.
 Real GDP – The value of final goods and services
evaluated at a base-year price.
Real vs. Nominal GDP
 Assume a two good economy; pizza and cars
Year 1
Year 2
P
Q
Pizza
10
100
Car
1,000
10
P
Q
Pizza
20
100
Car
2,000
10
 Calculate the Real and Nominal GDP for Year 2,
using Year 1 as the base year.
Growth Rate
 Calculating (straight line) growth rate
GR =
𝑋𝑛𝑒𝑤 −𝑋𝑜𝑙𝑑
𝑋𝑜𝑙𝑑
* 100
 From the previous example, the nominal growth
rate would equal
22,000 −11,000
11,000
* 100 = 100; The economy doubled!
 The real growth rate would equal
11,000−11,000
11,000
* 100 = 0; In real terms, the economy did
not grow.
GDP Implicit Price Deflator
 GDP deflator – A measurement of the price level (i.e.
inflation), calculated by:

GDP Deflator =
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
*
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
100
 Real GDP uses prices for an arbitrary base year.
 The arbitrary base year is 2009 = 100.
 E.g. If the GDP deflator is 106.3 for April 2013, then prices
increased by 6.3% since 2009.

On average, the 2009 dollar could buy (6.3/100) or 6.3% more than the
April 2013 dollar.
 The GDP deflator in 1960 was 17.5
 On average, the 1960 dollar could buy (100/17.5) or 5.7 times as many
goods as the 2009 dollar.
GDP Implicit Price Deflator
2011
2012
Nominal GDP
15,534 billion
16,245 billion
Real GDP
15,052 billion
15,471 billion
 GDP deflator
 GDP deflator
15,534
2011 =
* 100 = 103
15,052
16,245
2012 =
* 100 = 105
15,471
 Inflation rate between the years of 2011 – 2012
105 −103

103
* 100 = 1.9%
GDP Deflator
GDP Deflator Percentage Change from Year Ago
BEA Press Release
 Real gross domestic product -- the output of goods and
services produced by labor and property located in the United
States -- increased at an annual rate of 2.5 percent in the
second quarter of 2013 (that is, from the first quarter to the
second quarter), according to the "second" estimate released
by the
 The increase in real GDP in the second quarter primarily
reflected positive contributions from personal consumption
expenditures (PCE), exports, private inventory investment,
nonresidential fixed investment, and residential fixed
investment that were partly offset by a negative contribution
from federal government spending. Imports, which are a
subtraction in the calculation of GDP, increased.

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm