Download Gross Domestic Product

General plan: check to see where Slavin
introduces GDP segment
Slides about nominal vs. real GDP
Expand discussion of GDP vs. GPI
Reading on same?
Separate set of slides for C, I, G, X
Separate section on syllabus for Inflation etc.
Gross Domestic Product
Chapter 9
Gross Domestic Product
• What is it?
– It is the monetary measure of the total annual
output of all goods and services.
Gross Domestic Product
• Defined as:
– THE MARKET VALUE OF ALL FINAL
GOODS AND SERVICES PRODUCED IN A
YEAR WITHIN A COUNTRY.
Gross Domestic Product
• MARKET VALUE:
– The market value is the market price.
• FINAL GOODS AND SERVICES:
– What is purchased by a consumer.
Gross Domestic Product
• PRODUCED IN A YEAR:
– The year of production, not the year of sale.
• WITHIN A COUNTRY:
– Within the boundaries of the US, regardless of
who owns the business.
The Components of GDP
Gross Domestic Product
• GDP equation:
• GDP = C + I + G + X
GDP Components
C = HOUSEHOLD CONSUMPTION
I = BUSINESS INVESTMENT
G = GOVERNMENT SPENDING
X = NET EXPORTS
Net Domestic Product
• NDP equation:
• NDP = GDP - Depreciation
Net Domestic Product
• Depreciation: the wearing out of
equipment, machinery, buildings, roads
and infrastructure.
• NDP measures economic growth after
replacement of worn out capital.
Nominal GDP vs. Real GDP
Nominal vs. Real GDP
Problem: GDP statistics are based on the
purchase price of everything bought
by consumers.
If prices go up, so does the GDP.
Nominal GDP vs. Real GDP
How much of the growth of the GDP is
due to inflation (price increases), and
how much is due to the growth of the
economy?
Nominal vs. Real GDP
Nominal GDP = output in terms of the
current dollar value
Real GDP = output in terms of constant
price
Calculating Percentage Change
% Change = Change
Original Number
Calculating Percentage Change
Real GDP = Current GDP – Original GDP
Original Real GDP
This allows us to compute the percentage
change in Real GDP
Calculating Percentage Change
Real GDP = Nominal GDP * 100
GDP deflator
This allows us to compute the percentage
change in the GDP, adjusting for
inflation.
What is Excluded from the GDP
What is Excluded from the
GDP?
• The GDP is our best estimate of the size of
the economy of a country.
• However, many products are not counted in
the GDP.
What is Excluded from the
GDP?
• Financial Transactions
• Nonmarket Production
• The Underground Economy
Financial Transactions
1. Stock market transactions
–
–
The purchase and sale of all stocks and bonds
is excluded because it is merely a transfer of
ownership.
Brokers’ services are counted because each
time a stock is sold, a new service has been
performed.
Financial Transactions
2. Public transfer payments
– Such as Social Security, veteran’s
payments, welfare
– They are not counted because they are
not payments for current production
Financial Transactions
3. Private transfer payments
– Such as private pension plans or family
gifts
– They are not counted because they are
not payments for current production
Financial Transactions
•
All of these activities are perfectly legal,
thoroughly recorded, and frequently taxed.
•
We have very good numbers for them.
Nonmarket Production
1. Any work that you do yourself
- Such as painting your own house
2. All of the necessary household tasks
performed by homemakers.
– Such as food preparation, cooking,
cleaning
Nonmarket Production
1. These activities are legal, but not done in
the marketplace.
2. Therefore we can only estimate that
amount of nonmarket production.
3. Studies suggest that this activity is
extremely large, somewhere between 10%
and 20% of the size of the recorded GDP
The Underground Economy
1. Second hand sales
-
Already counted
2. Legal but not reported
- working under the table
3. Illegal and not reported
Other Problems with
Current GDP
Quality changes aren’t well tracked.
Pollution not correctly counted.
Leisure time is not accounted for.
Certain costs to humans not correctly
counted.
5. Volunteer work not counted.
1.
2.
3.
4.
Quality Changes
1. Price increases reflect product improvement as
well as inflation, and it is difficult to separate the
two out.
2. Example: cars today are much more expensive
than they were 10, 20 years ago.
3. Part of this price increase is due to increase in
quality (standard features that were optional or
didn’t even exist previously).
Pollution Not Correctly
Counted
1. The damage to the environment is not
counted.
2. The money spent cleaning up pollution is
counted as part of the GDP.
So the more we spend cleaning up pollution,
the more the GDP grows.
Leisure is not counted
1. We don’t track leisure time in our GDP statistic.
Stress is Miscounted
1. The increase in stress due to more work and less
leisure doesn’t show up in the GDP.
2. What shows up is the increase in aspirin, alcohol
and legal drug consumption.
So the increase in work hours is “good” because
more stuff is produced and we buy more pain
relievers.
Volunteer work is not counted
1. We don’t track volunteer work in our GDP
statistic.
2. How would Little League, Girl Scouts, churches,
function without volunteers?
3. Chad Pegrake’s work isn’t counted.
Results of Flawed GDP
Techniques
1. Housework is not counted.
2. The underground economy is not counted.
3. True environmental costs not counted.
4. Decreased leisure and increased stress not
counted.