Download Econ 103-Discussion Section Week 3 ZHENG ZHANG

Econ 103-Discussion Section
Week 3
ZHENG ZHANG
Gross Domestic Product
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Def: GDP is the total value , measured in
current market prices, of all final goods and
services produced in the economy in a given
year
Key words: Current market prices, final goods
and services, In the economy, in a given year.
What goods and services should be included
in GDP
Gross National Product
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Def:Gross National Product (GNP) is the
market value of all goods, services, and
structures produced in a given time period
with labor and property supplied by U.S.
nationals, regardless of where the resources
are located (in the U.S. or abroad).
What is the difference between GNP and
GDP?
GNP = GDP
Adjusting for prices
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Real GDP: GDP adjusted for changes in price
level (the choice of base year)
Price index: Consumer price index and GDP
deflator
Price index
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Consumer price index: A measure comparing
the prices of consumer goods and services
that a house hold typically purchases (a typical
consumer basket) to the prices of those goods
and services purchases in a base year
GDP deflator: A measure comparing the prices
of all goods and services produced in the
economy during a given year to the prices of
those goods and services purchased in a base
year.
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The difference between CPI and
GDP deflator
Compared to GDP, CPI includes a different range of
goods and services (e.g it doesn’t include investment
goods or exported goods BUT includes imported
consumption goods).
Compared to GDP, CPI is based on a fixed basket of
goods and services while the "basket" for GDP
deflator is allowed to change with people’s
consumption and investment patterns. This would
lead to CPI overestimating inflation by ignoring
"substitution effect".
Therefore, substituting for relatively low priced item
Calculation
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GDP Deflator=(Nominal GDP/Real GDP)*100
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Real GDP=(Nominal GDP/ GDP deflator)*100
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See two examples !!
Example 1
Suppose there is a coutry that produces three goods A B and C. The information
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Real GDP: measured in base year(subject to
choice) prices.
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Nominal GDP: measured in curent prices
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Base Year Y1 N.GDP Y1 R.GDP Y2 N.GDP Y2 R.GDP
Year 1
(5)12.1 (5) 12.1 (8) 19.2 (6) 15.1
Year 2
(5)12.1 (7) 18.4 (8) 19.2 (8) 19.2
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So Nominal GDP is always the same, but
Real GDP varies depending upon the choice
of base year.
Nominal and Real GDPs are always the same
for the base year.
Growth Rate of GDP
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The rate of change in Nominal GDP:
(19.2−12.1)/12.1*100% = 58:68%
The rate of change in Real GDP using Y1 as
base year: (15.1−12.1)/12.1*100% = 24:79%
The rate of change in Real GDP using Y2 as
base year : (19.2−18.4)/12.1*100% = 4:42%
National accounting
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Two approaches: The income approach, The
expenditure approach
Income approach: Adding factor incomes plus
indirect business tax and depreciation. E.g.
wages,rents,interests,profits.
Expenditure approach: A method of calculating
GDP that adds all expenditures made for final
goods and services by households, firms, and
government.
Four Expenditure Categories of
GDP
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Consumption demands by household (C )
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Investment demands by firms( I)
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Demands by government( G)
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Exports minus imports( X-M)
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GDP= C+ I+G+(X-M)
Questions
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What is the relationshipe between two
approaches
Is GDP a perfect measure of social well-being
of a country? Why or why not?