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Chapter 7: GDP: Measuring Total Production and Income
GDP: Measuring
Total Production
and Income
Prepared by:
Fernando Quijano
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GDP: Measuring Total Production and Income
Chapter 7: GDP: Measuring Total Production and Income
Microeconomics The study of how
households and firms make choices, how
they interact in markets, and how the
government attempts to influence their
choices.
Macroeconomics The study of the
economy as a whole, including topics such
as inflation, unemployment, and economic
growth.
Business cycle Alternating periods of
economic expansion and economic
recession.
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GDP: Measuring Total Production and Income
Chapter 7: GDP: Measuring Total Production and Income
Expansion The period of a business cycle
during which total production and total
employment are increasing.
Recession The period of a business cycle
during which total production and total
employment are decreasing.
Economic growth The ability of an
economy to produce increasing quantities of
goods and services.
Inflation rate The percentage increase in
the price level from one year to the next.
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Measuring Total Production: Gross Domestic Product
Gross domestic product (GDP):
Chapter 7: GDP: Measuring Total Production and Income
The market value
of all final goods and services
newly produced
within a country
during a specified period of
time, typically one year.
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Measuring Total Production: Gross Domestic Product
GDP Includes the Market Value of all Final Goods
Chapter 7: GDP: Measuring Total Production and Income
Final good or service A good or
service purchased by a final user.
Intermediate good or service A
good or service that is an input into
another good or service, such as a
tire on a truck.
GDP Includes Only Newly Produced Items
GDP includes only production that
takes place during the indicated
time period.
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7.1 LEARNING OBJECTIVE
Solved Problem
7-1
Explain how total production is
measured.
Calculating GDP
PRODUCTION AND PRICE STATISTICS FOR 2013
(1)
PRODUCT
(2)
QUANTITY
(3)
PRICE PER UNIT
100
$50.00
Pizzas
80
10.00
Textbooks
20
100.00
2,000
0.10
Chapter 7: GDP: Measuring Total Production and Income
Eye examinations
Paper
(1)
QUANTITY
(2)
PRICE PER UNIT
100
$50
$5,000
Pizzas
80
10
800
Textbooks
20
100
2,000
PRODUCT
Eye examinations
(3)
VALUE
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Production, Income, and the Circular-Flow Diagram
FIGURE 7-1
Chapter 7: GDP: Measuring Total Production and Income
The Circular Flow and the
Measurement of GDP
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Chapter 7: GDP: Measuring Total Production and Income
Production, Income, and the Circular-Flow Diagram
Transfer payments (TR)
Payments by the government to
individuals for which the
government does not receive a
new good or service in return.
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Components of GDP
Consumption Expenditure or Consumption (C)
Chapter 7: GDP: Measuring Total Production and Income
Consumption Spending by
households on goods and services,
not including spending on new houses.
Private Domestic Investment or Investment (I)
Investment Spending by firms on new
factories, office buildings, machinery, and
additions to inventories, and spending by
households and firms on new houses.
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Components of GDP
Chapter 7: GDP: Measuring Total Production and Income
Gov’t [Consumption plus Investment] or Government Purchases (G)
Government purchases
Spending by federal, state,
and local governments on
goods and services.
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Components of GDP
Net Exports of Goods and Services or Net Exports (NX)
Chapter 7: GDP: Measuring Total Production and Income
Net exports Exports
minus imports.
An Equation for GDP and Some Actual Values
Y  C  I  G  NX
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Chapter 7: GDP: Measuring Total Production and Income
An Equation for GDP and Some Actual Values
Components of GDP in 2012
Consumption is the largest component of GDP; within that,
services are the largest component—almost half of GDP.
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Pearson©Education,
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Copyright
2010 Pearson
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
An Equation for GDP and Some Actual Values
• Consumer spending on services is greater than the sum
of spending on durable and nondurable goods.
Chapter 7: GDP: Measuring Total Production and Income
• Business fixed investment is the largest component of
investment.
• Purchases made by state and local governments are
greater than purchases made by the federal government.
• Imports are greater than exports, so net exports are
negative.
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Making
Will U.S. Consumers
Connection Be Spending Less?
Explain how total production is
measured.
Chapter 7: GDP: Measuring Total Production and Income
the
7.1 LEARNING OBJECTIVE
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Gross Domestic Product
Measures Total Production
7.1 LEARNING OBJECTIVE
Explain how total production is
measured.
Measuring GDP by the Value-Added Method
Value-Added The market value
a firm adds to a product.
Table 7-1
Chapter 7: GDP: Measuring Total Production and Income
Calculating Value Added
FIRM
VALUE OF
PRODUCT
VALUE ADDED
Cotton farmer
Value of raw cotton = $1
Value added by cotton farmer
=1
Textile mill
Value of raw cotton
woven into cotton fabric
= $3
Value added by cotton textile
mill = ($3 – $1)
=2
Value of cotton fabric
made into a shirt = $15
Value added by shirt
manufacturer = ($15 –$3)
= 12
Value of shirt for sale on
L.L. Bean’s Web site =
$35
Value added by L.L. Bean
= ($35 – $15)
= 20
Shirt company
L.L. Bean
Total Value Added
= $35
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Does GDP Measure What
We Want It to Measure?
7.2 LEARNING OBJECTIVE
Discuss whether GDP is a good
measure of well-being.
Why is GDP not a perfect measure of production?
Excludes Household Production
Chapter 7: GDP: Measuring Total Production and Income
Household production refers to goods and
services people produce for themselves.
Excludes the Underground Economy
Underground economy Buying and
selling of goods and services that is
concealed from the government to avoid
taxes or regulations or because the
goods and services are illegal.
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Does GDP Measure What
We Want It to Measure?
7.2 LEARNING OBJECTIVE
Discuss whether GDP is a good
measure of well-being.
Other problems with using GDP as a measure of well-being
The value of leisure is not included in GDP
Chapter 7: GDP: Measuring Total Production and Income
GDP is not adjusted for pollution or other
negative effects
GDP is not adjusted for changes in crime and
other social problems
GDP measures the “size of the pie” but not
how the pie is “divided up”
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7.3 LEARNING OBJECTIVE
Real GDP versus Nominal GDP
Discuss the difference between
real GDP and nominal GDP.
Calculating Real GDP
Chapter 7: GDP: Measuring Total Production and Income
Nominal GDP The value of final
goods and services evaluated
at current-year prices.
Real GDP (Y) The value of final
goods and services evaluated at
base-year prices.
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Solved Problem
7.3 LEARNING OBJECTIVE
7-3
Discuss the difference between
real GDP and nominal GDP.
Calculating Real GDP
2009
Chapter 7: GDP: Measuring Total Production and Income
PRODUCT
2015
QUANTITY
PRICE
QUANTITY
PRICE
Eye examinations
80
$40
100
$50
Pizzas
90
11
80
10
Textbooks
15
90
20
100
2015
QUANTITY
2009
PRICE
100
$40
$4,000
Pizzas
80
11
880
Textbooks
20
90
1,800
PRODUCT
Eye examinations
VALUE
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Comparing Real GDP and Nominal GDP
Chapter 7: GDP: Measuring Total Production and Income
The current base year
for calculating prices is
2009, so real and
nominal GDP are equal
in 2009.
Growth figures reported
in the media are the
growth in real GDP.
Since prices have
generally increased
since 2009, real GDP is
less than nominal GDP,
and the opposite is true
before 2009.
Nominal GDP and real GDP: 1990-2012
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Copyright
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7.3 LEARNING OBJECTIVE
Real GDP versus Nominal GDP
Discuss the difference between
real GDP and nominal GDP.
The GDP deflator
Chapter 7: GDP: Measuring Total Production and Income
Price level (P) A measure of the
average prices of goods and services in
the economy.
GDP deflator (P) A measure of the price
level, calculated by dividing nominal GDP
by real GDP and multiplying by 100.
Nominal GDP
GDP deflator 
 100
Real GDP
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7.3 LEARNING OBJECTIVE
Real GDP versus Nominal GDP
Discuss the difference between
real GDP and nominal GDP.
Chapter 7: GDP: Measuring Total Production and Income
The GDP Deflator
2011
2012
NOMINAL GDP
$15,534 billion
$16,245 billion
REAL GDP
$15,052 billion
$15,471 billion
FORMULA
GDP
Deflator
APPLIED TO 2011

Nominal GDP
100
Real GDP
 $15,534 billion 

 100  103
 $15,052 billion 
APPLIED TO 2012
 $16,245 billion 

 100  105
 $15,471 billion 
From these values for the deflator, we can calculate that the price level
increased by 1.9 percent between 2011 and 2012:
 105  103 

 100  1.9%
 103 
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Other Measures of Total
Production and Total Income
7.4 LEARNING OBJECTIVE
Become familiar with other
measures of total production and
total income.
Gross National Product (GNP)
Gross national product (GNP) is the value of final goods and
services produced by residents of the United States, even if the
production takes place outside the United States.
Chapter 7: GDP: Measuring Total Production and Income
National Income
National income is calculated as GDP minus the consumption of
fixed capital, or depreciation.
Personal Income
Personal income is income received by households.
Disposable Personal Income (YD)
Disposable personal income is equal to personal income minus
personal tax payments (Y – T).
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Chapter 7: GDP: Measuring Total Production and Income
KEY TERMS
Business cycle
Macroeconomics
Consumption (C)
Microeconomics
Economic growth
Net exports (NX)
Expansion
Nominal GDP
Final good or service
Price level (P)
GDP deflator (P)
Real GDP (Y)
Government purchases (G)
Recession
Gross domestic product (GDP)
Transfer payments (TR)
Inflation rate
Underground economy
Intermediate good or service
Value added
Investment (I)
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