Download GDP

ECON203
Principles of Macroeconomics
Week 3
Topic: Measuring GDP
Dr. Mazharul Islam
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Lesson Objectives
To learn about
After studying these topics you should be able to:
• Explain and interpret the main macroeconomic
indicator GDP
Dr. Mazharul Islam
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NOMINAL GROSS DOMESTIC
PRODUCT (GDP)
Nominal GDP (or GDP) is the market value of all final
goods and services produced in a country in a given
time period by resources located in the that country,
regardless of who owns those resources.
It is money value of the output. It is measure to
assess the status of a economy.
 This definition has four parts:
 Market value
 Final goods and services
 Produced within a country
 In a given time period
Dr. Mazharul Islam
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NOMINAL GROSS DOMESTIC
PRODUCT (GDP)
Market value of a good or a service = the price at
which the item is traded in the market × its quantity.
A final good or a service is something produced for its
final user and not as a component of another good or
a service to avoid double counting.
Examples: Clothes, Television, Mobile set, etc.
An intermediate good or a service is something
produced to use to produce a final good or service.
Examples: Paint, Steel, wood etc.
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NOMINAL GROSS DOMESTIC
PRODUCT (GDP)
GDP does not count the value of everything that is
produced. It includes only items that are traded in
the market.
• It does not include the value of goods and services
that people produce for their own use (such as
Cleaning house by any family
members
but
not paid) and non-productive transactions (such
as sales of second-hand goods). It also does not
include the purchase of stocks and bonds.
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NOMINAL GROSS DOMESTIC
PRODUCT (GDP)
GDP
measures the value of production
during a given period of time. This period is
either a quarter or a year.
– if this period is a quarter, it is call the quarterly
GDP data . These data are used to track the shortrun evolution of the economy.
– if this period is a year, it is call the annual GDP
data. These data are used to examine the longterm trends.
Dr. Mazharul Islam
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NOMINAL GROSS DOMESTIC
PRODUCT (GDP)
There are two approaches are commonly using
to measure GDP. These are
The expenditure approach
The income Approach
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NOMINAL GROSS DOMESTIC
PRODUCT (GDP)
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GDP-EXPENDITURE
APPROACH
Total expenditure on final goods and services
equals the value of output of final goods and
services, which is GDP
Four groups buy the final goods and services
produced, these are:




Households (Expenditures-consumption expenditures)
Firms (Expenditures-Investment)
Government (Expenditures-Government expenditures)
The Rest of the world (Net export of goods and services)
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GDP-EXPENDITURE
APPROACH
Consumption
Expenditure (C)
Nondurable
Goods (The goods
that last short
amount of time cosmetics, food,
cleaning products,
fuel, etc.)
Durable Goods
(The goods that
last long timecars, appliances,
business
equipment,
electronic
equipment, etc.)
Services
(utilities bills,
road tax, etc.)
House &
Apartment
Rents (the
rental value
of owner –
occupied
housing)
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GDP-EXPENDITURE
APPROACH
Investment (I) is the purchase of new capital goods
(durable goods produced by one firm and bought by
another) by firms and government and addition to
inventory.
Government Expenditure on Goods and
Services (G) is the expenditure by all levels of
government such as Federal, State, and local spend on
public services provided to its citizens.
Example: Spending on defence, judicial and
education system. Yet, it excludes government
transfers like social security and unemployment
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GDP-EXPENDITURE
APPROACH
Net Exports of Goods and Services
(X-M) is the value of exports minus the value
of imports.
• Exports of Goods and Services are items that
the firms in the country produce and sell to
the rest of the world.
• Imports of Goods and Services are items that
households , firms ,and the government in the
country buy from the rest of the world.
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GDP-EXPENDITURE
APPROACH
So The Total Expenditure of four groups as
follows.
GDP = Total/Aggregate Expenditure
= C + I + G + (X-M)
= C + I + G + NX
NX refers to net exports that could be
either positive or negative
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GDP-EXPENDITURE
APPROACH
The expenditure approach measures GDP as the sum
of consumption expenditure, investment, government
expenditure on goods and services, and net exports.
GDP = C + I + G + (X  M)
Dr. Mazharul Islam
GDP measures by the
expenditure approach
for 2010 is follows:
GDP = $10,285 +
$1,842 + $2,991  $539
=
$14,579 billion
Dr. Mazharul Islam
GDP-EXPENDITURE
APPROACH
Which (if any) of the following transactions would be
included in Saudi Arabia’s measure of GDP?
1. Mohammed Abdullah spends SAR 2,000 buying shares
2. Talal Mohammed buys an old car at auction by SAR20,000
3. Khaled is a university student and receives an allowance of
SAR150 from his father each week
4. Khaled spends his SAR150 allowance on petrol and soft
drinks
5. Changes in stocks of furniture valued at SAR2 million
6. Lettuces grown in my vegetable garden but not selling
7. Timber purchased by the furniture manufacturer
8. Nizar purchase of a Saudi Airline ticket
Dr. Mazharul Islam
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GDP: INCOME APPROACH
GDP is the Sums or aggregates of all the
income earned by resource suppliers in the
economy.
So, Total Income Y is equal wages that labor
earns + interest that capital earns + rent that
land earns + profits that entrepreneurship
earns. We can also say that GDP is the sum of
total households income.
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GDP: INCOME APPROACH
–The National Income and Expenditure Accounts
divide incomes into two broad categories:
1. Compensation of employees
2. Net operating surplus
–Compensation of employees is the payments for
labor services. The sum of net wages plus taxes
withheld plus social security and pension fund
contributions.
–Net operating surplus is the sum of other factor
incomes. It includes net interest, rental income,
corporate profits, and proprietor’s income.
Dr. Mazharul Islam
GDP: INCOME APPROACH
The sum of all factor incomes is net domestic
income at factor cost.
Two adjustments must be made to get GDP:
1. Indirect taxes less subsidies are added to get
from factor cost to market prices
2. Depreciation is added to get from net
domestic income to gross domestic income.
Table 4.2 on the next slide shows the income
approach with data for 2010.
Dr. Mazharul Islam
Dr. Mazharul Islam
Limitation of GDP
Calculation
• Some production is not included in GDP
– With some minor exceptions, GDP includes
only those products that are sold in markets
– Ignores “do-it-yourself” household production
 an economy in which householders are
largely self-sufficient will understate GDP
– Ignores the underground economy
• All market activity that goes unreported because it’s illegal
or those involved want to evade taxes
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Now it’s over for
today. Do you have
any question?
Dr. Mazharul Islam
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