Download GDP Equation - Nominal and Real

GDP: Real & Nominal
AP Macroeconomics
A little deeper…
 For the most part, households spend most of their income
received from factors of production on goods and services
 However, not all of it is spent on goods & services – some of it
must necessarily go to the government in the form of taxes
(income, and sales) What is the NC sales tax?
 Another portion of that money is set aside in the form of savings (in
financial markets and private savings)
 And the government makes payments to some households
without expecting payment in return. Can we think of an
example?
What’s left?
 Wow. So after paying taxes
and receiving government
transfers (i.e. payments from
the government), we can all
whatever it is that is leftover
“disposable income”
The government giveth and taketh
away
 While the government takes from households in the
form of taxes, it also gives it back (as previously
mentioned) in the form of government transfers
 The government also partakes in purchases of goods
and services (think military, supplies at A.C. Reynolds
HS, and that sidewalk that you [would never] spit on
outside your house)
The rest of the world in eins, zwei,
und drei…
 The rest of the world also participates in the US
economy, and it does so in three ways:
 1) Exports – flow of funds into the US
 2) Imports – flow of funds out of the US
 3) Participation in US financial markets by
foreigners
GROSS DOMESTIC PRODUCT
…aka GDP…
What is GDP?
GDP is the total value of all final goods
and services produced in an economy
during a given period, usually one year.
Calculating GDP in eins, zwei, und
drei
There are three ways to calculate GDP:
1) Survey firms and add up the total value of their
production of final goods and services (add up the
value of all goods & services produced in the
economy, excluding intermediate goods & services)
Method zwei
2) Add up aggregate spending
on domestically produced
final goods & services in
the economy (GDP
measured by flow of funds
into firms. This method
avoids double-counting,
that is we wouldn’t count
both the consumer’s
spending on a burger and
the butcher’s spending on
the cow)
GDP = C+I+G+X-IM
C= Consumer spending
I= Investment spending
G= government purchases
of goods & services
X=sales to foreigners
(exports)
IM=spending on imports
X-IM = (difference between
the value of exports and
the value of imports in aka
net exports
Method drei (not as emphasized
as the first two)
3) Sum the total factor income earned by households
from firms in the economy (add up all the income
earned by factors of production [Note: the wages
earned by labor; the interest earned by those who
lend their savings to firms & the government; the
rent earned by those who lease their land or
structures to firms; and the profit earned by
shareholders}
What’s Included in GDP?
• Domestically produced final goods & services
•This includes the following:
•Capital goods (objects used in the production of
other goods & commodities. Examples include
factories, tools, machinery, & equipment)
•New construction of structures
•Changes to inventories (stocks of goods and raw
materials that firms hold to facilitate their operations)
What’s excluded from GDP?
 Intermediate goods & services
 Inputs
 Used goods
 Financial assets such as stocks [i.e. shares in
ownership of a company] and bonds [i.e. loans
to firms in the form of an IOU that pays
interest]
 Foreign-produced goods & services
Real GDP (total value of goods & services
produced in the economy during a year)
 When we look at Real GDP, it is the trend over the
LONG-RUN that matters the most!
 What matters over time is the constant or chained
dollars, also known as Real GDP
 By comparing Real GDP relative to a base year, we get
a good idea of what is going on year to year
 Real GDP is adjusted for inflation
How is it calculated in a given
year?
Real GDP in Year 1 = (nominal GDP x 100)/ price index
Output growth = (real GDP in Year 2 – real GDP in Year 1) x 100
real GDP in Year 1
Real GDP per capita = Year 1 real GDP
population in Year 1
*Note: CPI (Consumer Price Index) is relative to a base year
Nominal GDP (total value of all the final
goods and services produced in the
economy during a given year, calculated
with the prices current in the year in which
the output is produced)
 Nominal GDP is not adjusted for inflation!
 In economics, another name for current dollars is
nominal dollars
And Now…
1. Watch video on Real & Nominal GDP from
econedlink.org
2.
http://www.reffonomics.com/TRB/chapter21/GDP/r
ealgdp4.swf (in class, if time, move through the
Business Cycle portion)
(outside of class, feel free to explore this online
simulation)
Summary (FYI)
 Macroeconomics looks at the measurement of aggregate output.
In other words, the total of all markets put together.
 Real GDP is the aggregate of all goods and services produced
inside a country in a specified period of time.
 GDP is the market value of all goods and services produced
inside a country in a specified period of time.
 Market value = dollar amount.
 GDP is expressed as a dollar amount, not just as the total of goods
and services produced.
 Produced does not mean sold. It is when a final product is
produced, not sold, that it is included in GDP.
 All products produced inside of the US are part of our GDP.
 When GDP is stated at a specific period in time, then
it is considered a “stock” concept
 This can be likened to the value of the current GDP
 As GDP changes over time, it is considered a “flow”
concept
 This can be likened to the value of GDP as it changes
 When you see the terminology “rate change” this is
referring to flow
How do we measure this?
 In order to exclude change in price, measure output
produced this year for a good at last year’s prices.
 For example, if Nike tennis shoes last year cost
$20/per pair, and this year Nike produced 2 million
pairs of Nike tennis shoes at $25/per pair, we still
multiply 2 million x $20, not 25. To find the percent
change, however, compare last year’s output at last
year’s price.
Works Cited
 Krugman, Paul, and Robin Wells. Krugman’s
Economics for AP. New York, Worth Publishers.
 Reffonomics. www.reffonomics.com.