Download GDP

Taking the Nation’s Pulse
GDP
– Measuring Total Production and Income
Chapter 8
• Gross Domestic Product (GDP):
The market value of final goods and services
produced within a country during a specific time
period, usually a year.
GDP vs GNP??
• GDP: production within a country’s borders
(domestic)
• GNP: production by people of a country
(national)
Only final goods and services count
• What Does Not Count Toward GDP?
• Sales at intermediate stages of production. Their
value is already counted in the final-user good.
Including them would result in double counting.
Stage of production
Sales Receipts
Value added to the product
(at each stage of production)
(equals income created)
Stage 1: farmer’s wheat
by farmer
$.30
$.30
Stage 2: miller’s flour
by miller
$.65
$.35
Stage 3: baker’s bread
(wholesale)
by baker
$.90
$.25
Stage 4: grocer’s bread
(retail)
by grocer
$1
Total consumer expenditure = $1
$.10
Total value added = $1
• What Else?
• Financial transactions and income transfers.
They do not reflect production.
Stocks
• Production outside the geographic
borders of the country is not counted.
• Goods not produced during the 1955 Chevy
current period are not counted.
Which are included in this year's GDP? :
•
•
•
•
•
•
•
•
•
1.
2.
3.
4.
5.
6.
7.
8.
9.
Interest on an AT&T bond YES
NO
Social Security payments to retirees Services of a painter in painting a house - YES
Income of a dentist YES
NO
Money received from the sale of a 1990 model carMonthly allowance of a college student - NO
Rent for a 2 bedroom apartment YES
Money received for selling this year's model carYES
Interest on a government bond NO
Which?
•
•
•
•
•
•
•
•
10. A two hour decline in the work week - NO
11. Purchase of the AT&T bond NO
12. A $ 2 billion increase in business investmentsYES
13. Purchasing 100 shares of GM common stock NO
14. Purchase of an insurance policy - YES
15. Wages paid to your butler YES
16. Market value of a homemaker's services - NO
17. Purchase of the Mona Lisa NO
• GDP is measured in dollars
• Each good produced increases output by
the amount the purchaser pays for the
good.
GDP is the sum of total spending on all
goods and services produced during the
year.
Three
Two Ways of
Measuring GDP
Expenditures
I ncomes
O utput (Value Added)
Measuring GDP
Dollar flow of
expenditures
on final goods
= GDP =
• 1. Expenditure Approach:
Dollar flow of
income (and indirect
cost) of final goods
• GDP is the sum of expenditures on final user
goods and services purchased by households,
investors, governments, and foreigners.
• There are four components of GDP:
• personal consumption purchases C
• gross private investment
Ig
(including inventories)
• government purchases
G
(consumption and investment)
• net exports ( exports minus imports ) Xn
Figure 8.2
Components of
GDP in 2010
Consumption accounts for 70.5 percent of GDP, far more than any of the other
components.
In recent years, net exports typically have been negative, which reduces GDP.
.
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10 of 37
Will U.S. Consumers Be Spending Less?
Consumption is a larger fraction
of GDP in the United States
than in most other high-income
countries or in rapidly growing
countries such as China and
India.
Over time, consumption in the
United States has increased as a
fraction of GDP.
Although it can be good news
for the economy in the long
run, the determination of U.S.
households to cut back on
spending and increase saving
in 2011 may partly explain the
slow recovery from the 2007–
2009 recession.
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• 2. Resource Cost - Income Approach
• GDP is the sum of costs incurred and income
(including profits) generated by production of
goods and services during the period.
a. The direct cost income components of GDP:
• employee compensation Labor
• self-employment income labor/entrepreneur
• rents
land
• Interest
capital
• corporate profit
entrepreneur
Sum of these = national income
• 2. Resource Cost - Income Approach:
(cont.)
Not covered
• When derived by Resource Cost Income Approach, GDP is equal to:
+ national income
(employee compensation, self-employment
income, rents, interest, corporate profit)
+ indirect business taxes
+ depreciation
+ net income of foreigners
• 3. Output – by Industry (Value Added)
• Add up output by each industrial sector
• Chemicals + Agriculture + …
Stage of production
Sales Receipts
Value added to the product
(at each stage of production)
(equals income created)
Stage 1: farmer’s wheat
by farmer
$.30
$.30
Stage 2: miller’s flour
by miller
$.65
$.35
Stage 3: baker’s bread
(wholesale)
by baker
$.90
$.25
Stage 4: grocer’s bread
(retail)
by grocer
$1
Total consumer expenditure = $1
$.10
Total value added = $1
Measuring GDP Using the Value-Added Method
Value added The market value a firm adds to a product.
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
Shirt company
Value of cotton fabric made
into a shirt = $15
Value added by shirt
manufacturer = ($15 − $3)
=
12
L.L.Bean
Value of shirt for sale on
L.L.Bean’s Web site = $35
Value added by L.L.Bean
= ($35 − $15)
=
20
Total Value Added
= $35
The price of the shirt on L.L.Bean’s Web site is exactly equal to the sum of the value
added by each firm involved in the production of the shirt.
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• Shortcomings of GDP:
•
•
•
•
It does not count non-market production.
It does not count the underground economy.
It makes no adjustment for leisure.
It probably understates output increases
because of the problem of estimating
improvements in the quality of products.
• It does not adjust for harmful side effects.
• It does not consider standard of living – GDP
per person
• Great contribution of GDP:
• In spite of its shortcomings, real GDP is a
reasonably accurate measure of short-term
fluctuations in output.
• The term "real" means adjusted for inflation.
• Price indexes are use to adjust data for
inflation.
• A price index measures the cost of purchasing a
good (or goods) at a point in time relative to the
cost of purchasing the identical good during an
earlier (or base) period.
Creating a price index
Year
1
$ Spending
170
Index
_____
2
180
Current year spending
3 Base
Base year
year spending
200
_____
x 100
_____
4
200
_____
5
224
_____
6
250
_____
7
280
_____
• measures the impact of price changes on the
cost of a typical bundle of goods and services
purchased by households.
• designed to measure the change in the
average price of the market basket of goods
included in GDP (a broader price index than
the CPI).
1. PPI
2. WPI
3. MPI
• The formula for converting the nominal GDP
into real GDP is:
GDP Deflator1
Real GDP2 = Nominal GDP2 *
GDP Deflator2
• Data on both money GDP and price changes are
essential for meaningful comparisons of output
between two time periods.
Converting Earlier Figures to Current Dollars
• For comparisons across time periods, we must use
current dollars.
• Done by “inflating” the earlier data for the
increase in the price level.
• The formula:
Figurecurrent $ = Figureearlier $ *
price indexcurrent year
price indexearlier year
• This will “inflate” the data for earlier years into
line with the current purchasing power of the $.
Gross Domestic Product
Complete the following table assuming that Year 1 is the base year.
Year
Output
Price
1
100
$4.00
2
120
4.40
3
110
5.00
4
110
5.20
5
135
5.20
6
140
5.60
Money
GDP
GDP
Index
Real GDP
Gross Domestic Product
Complete the following table assuming that Year 1 is the base year.
Year
Output
Price
Money
GDP
GDP
Index
Real
GDP
1
100
$4.00
$400
100
$400
2
120
4.40
528
110
480
3
110
5.00
550
125
440
4
110
5.20
572
130
440
5
135
5.20
702
130
540
6
140
5.60
784
140
560
• Gross National Product (GNP):
Output by the “nationals” – citizens
of the country, regardless of whether that output is
produced domestically or abroad.
• National income:
Income earned by the nationals (citizens) during a
period. It is the sum of employee compensation,
self-employment income, rents, interest, and
corporate profits. Minus depreciation and taxes
• Personal income:
Income received by domestic households and noncorporate businesses. It is available for
consumption, saving, and personal taxes. Includes
transfers.
• Disposable income:
Income available to individuals after personal
taxes. Can be spent on consumption or saved.
Deriving Real GDP
1996
2001
% increase
Nominal GDP
Price index
Real GDP
(billions of U.S. $)
(GDP deflator, 1996 = 100)
(billions of 1996 $)
$7,813
$10,208
30.7%
100.0
109.4
9.4%
$7,813
$9,331
19.4%
Source: U.S. Department of Commerce.
1998
2003
% increase
Nominal GDP
Price index
Real GDP
(billions of U.S. $)
(GDP deflator, 2000 = 100)
(billions of 1998 $)
$8,747
$11,004
25.8%
96.5
106.0
9.8%
$8,747
$10,018
14.5%
Nominal GDP
Price index
Real GDP
(billions of U.S. $)
(GDP deflator, 2000 = 100)
(billions of 2000 $)
$9,817
$13,247
34.9%
100.0
116.0
16.0%
Source: http://www.economagic.com.
2000
2006
% increase
Like “Deflating” the $
Source: http://www.economagic.com.
$9,817
$11,420
16.3%
Interesting Questions
1. The CPI was 177 in 2001 compared to 100 in 1983.
Suppose that the price of a ticket at a local movie
theater rose from $4 to $8 between 1983 and 2001.
Did the real ticket price increase or decrease?
Calculate the 1983 ticket price measured in 2001
dollars.
2. The CPI was 210 in 2007 compared to 100 in 1983. Suppose
that the price of a ticket at a local movie theater rose
from $4 to $8 between 1983 and 2007. Did the real ticket
price increase or decrease? Calculate the 1983 ticket price
measured in 2007 dollars.
GDP Comparisons
Across Time Periods
and Across Countries
1. Which of the following activities will affect GDP:
a. You pay $600 per month to lease an apartment.
b. You pay $8,000 to purchase a four-year-old car.
c. You have car trouble and have to pay a repair shop
$1,500 to fix the transmission of your car.
d. You pay $5,100 to purchase 100 shares of Microsoft
stock ($50 per share for the stock plus a $100 fee).
e. You sell your 100 shares of Microsoft stock (purchased
for $5,000) for $6,000 minus a $100 brokerage fee.
f. Your aunt sends you $500 to help with your expenses.
g. You earn $500 providing computer services for a
faculty member.
h. You win $500 playing cards with classmates.