Download Chapters 6-11-12

ECO 1003
Handouts for
Chapters 6-11-12
Measuring GDP
• gross domestic product (GDP) The total
market value of all final goods and services
produced within a given period by factors of
production located within a country
• GDP is the total market value of a
country’s output
Measuring GDP
• final goods and services Goods and services
produced for final use
• intermediate goods Goods that are produced
by one firm for use in further processing by
another firm
• value added The difference between the value
of goods as they leave a stage of production and
the cost of the goods as they entered that stage
Measuring GDP
• In calculating GDP
• We can either sum up the value added at each
stage of production
OR
• We can take the value of final sales
• We do not use the value of total sales in an
economy to measure how much output has been
produced
Measuring GDP
EXCLUSION OF USED GOODS AND TRANSACTIONS
• GDP is concerned only with new, or current, production
• GDP ignores all transactions in which money or goods
change hands but in which no new goods and services
are produced
EXCLUSION OF OUTPUT PRODUCED ABROAD BY
DOMESTICALLY OWNED FACTORS OF PRODUCTION
• GDP is the value of output produced by factors of
production located within a country
Measuring GDP
• gross national product (GNP) The
total market value of all final goods
and services produced within a given
period by factors of production owned
by a country’s citizens, regardless of
where the output is produced
Measuring GDP
• expenditure approach A method of
computing GDP that measures the
amount spent on all final goods during a
given period
• income approach A method of
computing GDP that measures the
income—wages, rents, interest, and
profits—received by all factors of
production in producing final goods
Measuring GDP
THE EXPENDITURE APPROACH
• Expenditure Categories:
• Personal consumption expenditures (C): household
spending on consumer goods
• Gross private domestic investment (I): spending by
firms and households on new capital, i.e., plant,
equipment, inventory, and new residential
structures
• Government consumption and gross investment
(G)
• Net exports (EX - IM): net spending by the rest of
the world, or exports (EX) minus imports (IM)
GDP = C + I + G + (EX - IM)
Measuring GDP
Personal Consumption Expenditures (C)
• personal consumption expenditures (C) A major
component of GDP: expenditures by consumers on goods
and services
• There are three main categories of consumer
expenditures: durable goods, nondurable goods, and
services
• durable goods Goods that last a relatively long time,
such as cars and household appliances
• nondurable goods Goods that are used up fairly
quickly, such as food and clothing
• services The things we buy that do not involve the
production of physical things, such as legal and medical
services and education
Measuring GDP
Gross Private Domestic Investment (I)
• gross private domestic investment (I) Total
investment in capital—that is, the purchase of
new housing, plants, equipment, and inventory by
the private (or non-government) sector
• nonresidential investment Expenditures by
firms for machines, tools, plants, and so on
• residential investment Expenditures by
households and firms on new houses and
apartment buildings
Measuring GDP
• change in business inventories The amount by
which firms’ inventories change during a period
• Inventories are the goods that firms produce
now but intend to sell later
• GDP is not the market value of total final sales
during a period—it is the market value of total
production
GDP = final sales + change in business
inventories
Measuring GDP
Gross Investment versus Net Investment
• depreciation The amount by which an asset’s
value falls in a given period
• gross investment The total value of all newly
produced capital goods (plant, equipment,
housing, and inventory) produced in a given
period
• net investment Gross investment minus
depreciation
capitalend of period = capitalbeginning of period + net
investment
Measuring GDP
Government Consumption and Gross Investment
(G)
• government consumption and gross investment
(G) Expenditures by governments for final goods and
services (school buildings, military salaries)
Net Exports (EX - IM)
• net exports (EX - IM) The difference between
exports (sales to foreigners of domestically- produced
goods and services) and imports (domestic
purchases of goods and services from abroad)
• The figure can be positive or negative
Measuring GDP
THE INCOME APPROACH
• Calculate GDP in terms of who receives it as
income rather than as who purchases it
• national income The total income earned by the
factors of production owned by a country’s
citizens
Measuring GDP
• compensation of employees Includes wages,
salaries, and various supplements—employer
contributions to social insurance and pension
funds, for example—paid to households by firms
and by the government
• proprietors’ income The income of
unincorporated businesses
• rental income The income received by property
owners in the form of rent
• corporate profits The income of corporate
businesses
Measuring GDP
• net interest The interest paid by business
• indirect taxes minus subsidies Taxes such as
sales taxes, customs duties, and license fees,
less subsidies that the government pays for which
it receives no goods or services in return
• net business transfer payments Net transfer
payments by businesses to others
• surplus of government enterprises Income of
government enterprises
Relation between GDP and National
Income
GDP
Plus: Receipts of factor income from the rest of the world
Less: Payments of factor income to the rest of the world
(National income is income of the country’s citizens not the income of the
residents of the country and we need to first move from GDP to GNP)
Equals: GNP
Less: Depreciation
(When we calculate GDP using expenditure approach, depreciation is not
subtracted, whereas in national income we have corporate profits with
deduction of depreciation)
Equals: Net national product (NNP)
Less: Statistical discrepancy
(Data collection procedure not accrued, measurement error)
Equals: National income
Net national product (NNP) Gross national product minus depreciation; a
nation’s total product minus what is required to maintain the value of its
capital stock
Measuring GDP
• personal income The total income of
households before paying personal income taxes
• disposable personal income or after-tax
income Personal income minus personal income
taxes (The amount that households have to
spend or save)
• personal saving The amount of disposable
income that is left after total personal spending in
a given period
Relation between National Income and
Personal Income
National income
Less: Amount of national income not going to households
Equals: Personal income
(The difference between national income and personal income is the profits of
corporations not paid to households in the forms of dividends, called the
retained earnings of corporations, this income that goes to corporations rather
than to households is part of national income but not personal income)
Less: Personal income taxes
Equals: Disposable personal income
(Disposable income=personal income minus taxes)
Personal consumption expenditures
Personal interest payments
Transfer payments made by households
(All add up to total personal spending, disposable income less total
spending=saving)
Equals: Personal saving
NOMINAL VERSUS REAL GDP
• nominal GDP Gross domestic product
measured in current prices
• If we use nominal GDP to measure growth,
we can be misled into thinking production
has grown when all that has really
happened is a rise in the price level
NOMINAL VERSUS REAL GDP
The (Implicit) GDP Deflator
• Comparing what has happened to nominal
and to real GDP over the same period
implies the existence of a price index
measuring the change in prices over that
period
GDP Deflator =[GDPcurrent/GDPbase]*100
Economic growth
• output growth The growth rate of the
output of the entire economy
• per-capita output growth The growth rate
of output per person in the economy
• productivity growth The growth rate of
output per worker
Economic growth
• recession Roughly, a period in which real
GDP declines for at least two consecutive
quarters
• Marked by falling output and rising
unemployment
• depression A prolonged and deep
recession
• The precise definitions of prolonged and
deep are debatable
DEFINING INFLATION
• inflation An increase in the overall price
level
• deflation A decrease in the overall price
level
• sustained inflation An increase in the
overall price level that continues over a
significant period
PRICE INDEXES
• consumer price index (CPI) A price index
computed each month by TUIK using a bundle
that is meant to represent the “market basket”
purchased monthly by the typical urban
consumer
CPI=[(basket price)current / (basket
price)base]*100
Inflation =(CPIcurrent- CPIbase)/ CPIbase