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Chapter 9
Gross Domestic Product
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter Objectives
•
•
•
•
What is GDP?
How is GDP measured?
What are the national income accounts?
What is the difference between GDP and
real GDP?
• How does our GDP compare to those of
other nations?
• How is per capita GDP calculated?
• What are the shortcomings of GDP as a
measure of national economic well-being?
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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What Is GDP?
• GDP is the nation’s expenditures on all
FINAL goods and services produced
during the year at market prices.
• An alternate definition of GDP is
– the value of all goods and services produced
within a nation’s boundaries during the year
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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•
Consumption
–
–
–
–
•
The Components of
GDP, 2002 (in $ billions)
Investment
–
–
–
–
•
Durable goods …………$ 872
Nondurable goods …….. 2,115
Services ……………….. 4,317
Total C …………………………….$7,304
Plant & Equipment …….$ 1,117
Residential Housing …… 472
Inventory change ……….
4
Total I ……………………………….1,593
Government Purchases
– Federal ………………….$ 694
– State and Local …………. .1,279
– Total G ……………………………..$1,973
•
Net Exports (Xn)
– Exports ………………….$ 1,015
– Imports …………………..- 1,439
– Xn …………………………………$ - 424
•
GDP …… …………………………$1,446
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•
Consumption
–
–
–
–
•
Investment
–
–
–
–
•
Durable goods …………$ 872
Nondurable goods …….. 2,115
Services ……………….. 4,317
Total C …………………………….$7,304
The Components of
GDP, 2002 (in $ billions)
GDP = C +
I + G + Xn
Plant & Equipment …….$ 1,117
GDP =7,304+1,593+1,973+(-424)
Residential Housing …… 472
Inventory change ……….
4
GDP = 10,446
Total I ……………………………….1,593
Government Purchases
– Federal ………………….$ 694
– State and Local …………. .1,279
– Total G ……………………………..$1,973
•
Net Exports (Xn)
– Exports ………………….$ 1,015
– Imports …………………..- 1,439
– Xn …………………………………$ - 424
•
GDP …… …………………………$10,446
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How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Firms
Households
Expenditures by Consumers, Investors, Government, and Net Exports
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How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Firms
Same As
Households
Expenditures by Consumers, Investors, Government, and Net Exports
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How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Value of what is
produced
Firms
Same As
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
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How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Flow of Income
Approach
Firms
Expenditures
Approach
Value of what is
produced
Same As
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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How GDP Is Measured?
Income (wages, salary, rent, interest, profits)
Flow of Income
Approach
Value of what is
produced
Same As
Firms
Expenditures
Approach
Households
Value of what is
spent
Expenditures by Consumers, Investors, Government, and Net Exports
(GDP = C + I + G + Xn )
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The Flow of Income Approach
(Most Complex)
Consumption
+
Investment
+
Government Spending
+
Net Exports
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
Why is NDP better than GDP
Country
GDP
- Depreciation
NDP
North Atlantis
South Atlantis
500
500
50
100
450
400
North Atlantis is better off because it had a higher NDP! South Atlantis had a lower
NDP because it had to devote more of its resources to replacing worn out and obsolete
equipment. These resources could not go toward additional plant and equipment nor
could they even be used for more consumer goods.
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
Indirect business taxes and
subsidies are mainly
general sales taxes on
specific items such as
gasoline, liquor and
cigarettes, and subsidies
(such as government
payments to farmers).
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
Distribution of Domestic Income (2002)
Wages, salaries & fringes ……….71.6%
Net Interest ……………………… 8.2%
Proprietor’s Income …………….. 9.1%
Corporate Profits ……………….. 9.4%
Rent …………………………….. 1.7%
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
-
+
Earnings not received are
Earnings not received almost all Social Security
taxes and corporate profits
Receipts not earned that were not paid out as
dividends
PI (Personal Income)
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
-
+
Receipts not earned are
Earnings not received mainly Social Security
benefits and other
Receipts not earned government transfer
payments, and interest
PI (Personal Income)
income
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
-
Earnings not received
+
Receipts not earned
PI (Personal Income)
-
Personal taxes are chiefly
personal income taxes
Personal taxes
DPI (Disposable Personal Income)
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
-
Earnings not received
+
Receipts not earned
PI (Personal Income)
-
Disposable Personal Income is
ours to dispose of, to spend and
save as we see fit
Personal taxes
DPI (Disposable Personal Income)
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Flow of Income Approach
GDP (Gross Domestic Product)
-
Depreciation
NDP (Net Domestic Product)
-
Indirect business taxes and subsidies
DI (Domestic Income)
-
Earnings not received
+
Receipts not earned
The “red” indicates the three
main parts of the “Flow of
Income” approach to GDP
PI (Personal Income)
-
Personal taxes
DPI (Disposable Personal Income)
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Flow of Income Approach
GDP (Gross Domestic Product)
(+) -
Depreciation
NDP (Net Domestic Product)
(+) -
Indirect business taxes and subsidies
DI (Domestic Income)
(+) -
Earnings not received
(-) +
Receipts not earned
PI (Personal Income)
(+) -
If we start with “DPI” and
work up - the signs have to
be changed!
Personal taxes
DPI (Disposable Personal Income)
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Two Things to Avoid When
Compiling GDP
• Multiple counting
– Only expenditures on final products – what
consumers, businesses, and government units buy
for their own use belong in GDP
• Intermediate goods are not counted
• Used goods are not counted
• Transfer payments
– Transfer payments are not payments for currently
produced goods and services
• When they are spent for final goods and services they will
go into GDP as consumer spending
• Financial transactions do not go into GDP
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
9-22
The Value-added Approach to
Measuring GDP
Production
Farmer
harvest wheat
Miller
Baker
Generated
Added
$100
$100
makes into flour
200
100
makes into bread
300
100
$600
$300
GDP counts only the $ value of the This is the same as the “value-added.”
final good
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GDP versus Real GDP (RGDP)
$8
$9
1998
1999
$10
$11
2000
GDP is the Price
2001
RGDP is the pie
GDP is measured in current dollars. Therefore it appears as if GDP
was larger in 2001 than in previous years. To make year-to-year
GDP comparisons, we have to get rid of inflation
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Deflating GDP to Get RGDP
GDP DEFLATORby
RGDPcy = GDPcy X -------------------------GDP DEFLATORcy
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Deflating GDP to Get RGDP
GDP DEFLATORby
RGDPcy = GDPcy X -------------------------GDP DEFLATORcy
100
RGDP 86 = 4422.2 X -----------------------------------80.6
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Deflating GDP to Get RGDP
GDP DEFLATORby
RGDPcy = GDPcy X -------------------------GDP DEFLATORcy
100
RGDP 86 = 4422.2 X -----------------------------------80.6
RGDP 86 = 4422.2 X 1.2406948
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Deflating GDP to Get RGDP
GDP DEFLATORby
RGDPcy = GDPcy X -------------------------GDP DEFLATORcy
100
RGDP 86 = 4422.2 X -----------------------------------80.6
RGDP 86 = 4422.2 X 1.2406948
RGDP 86 = 5486.6
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Deflating GDP to Get RGDP
GDP DEFLATOR by
RGDP97 = GDP97 X -------------------------GDP DEFLATOR 97
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Deflating GDP to Get RGDP
GDP DEFLATOR by
RGDP97 = GDP97 X -------------------------GDP DEFLATOR 97
RGDP 97
100
= 8083.4 X ---------------------------------------115.2
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9-30
Deflating GDP to Get RGDP
GDP DEFLATOR by
RGDP97 = GDP97 X -------------------------GDP DEFLATOR 97
RGDP 97
100
= 8083.4 X ---------------------------------------115.2
RGDP 97 = 8083.4 X .8680556
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Deflating GDP to Get RGDP
GDP DEFLATOR by
RGDP97 = GDP97 X -------------------------GDP DEFLATOR 97
RGDP 97
100
= 8083.4 X ----------------------------------------`
115.2
RGDP 97 = 8083.4 X 8680556
RGDP 97 = 7016.8
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GDP and Real GDP(in 1992Dollars), 1960-2002
Survey of Current Business, May 2003
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1979 GDP = 2557.5
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1979 GDP = 2557.5
Change -----> 226.7
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1979 GDP = 2557.5
Change -----> 226.7
226.7
% change = -------------------2557.5
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1979 GDP = 2557.5
Change -----> 226.7
226.7
% change = -------------------2557.5
% change = .0886413 = 8.8%
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1980 RGDP = 4611.9
1979 GDP = 2557.5
1979 RGDP = 4624.0
Change -----> 226.7
226.7
% change = --------------------2557.5
% change = .0886413 = 8.8%
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Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1980 RGDP = 4611.9
1979 GDP = 2557.5
1979 RGDP = 4624.0
Change -----> 226.7
Change ------> 12.9
226.7
% change = --------------------2557.5
% change = .0886413 = 8.8%
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
9-40
Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1980 RGDP = 4611.9
1979 GDP = 2557.5
1979 RGDP = 4624.0
Change ------> 12.9
Change -----> 226.7
226.7
12.9
% change = --------------------- % change = ------------------------4624.0
2557.5
% change = .0886413 = 8.8%
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9-41
Calculating Percentage Changes
Change
% change = -----------------------------------Original Number
1980 GDP = 2784.2
1980 RGDP = 4611.9
1979 GDP = 2557.5
1979 RGDP = 4624.0
Change ------> 12.9
Change -----> 226.7
226.7
12.1
% change = --------------------- % change = ------------------------2557.5
4624.0
% change = .0886413 = 8.8% % change = .0026168 = .26 %
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Per Capita GDP
GDP
Per capita GDP = --------------------------------Population
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Per Capita GDP
GDP2000
Per capita GDP 20000= -------------------------------Population 2000
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Per Capita GDP
GDP2000
Per capita GDP 20000= -------------------------------Population 2000
Per capita GDP
$9,965,700,000,000
= -------------------------------281,000,000
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Per Capita GDP
GDP2000
Per capita GDP20000 = -------------------------------Population 2000
$9,965,700,000,000
Per capita GDP20000 = -------------------------------281,000,000
Per capita GDP20000 = $35,465
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Per Capita Real GDP
To compare per capita GDP in one year with that of another
year we have to correct for inflation. In other words, we really
need to revise our formula
Real GDP
Per capita real GDP = -------------------------------Population
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9-47
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9-48
International comparisons for per capita GDP are at least somewhat
suspect because of varying national income accounting systems as
well as fluctuations of foreign exchange rates
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Shortcomings of GDP as a Measure of
National Economic Well-being
• Production that is excluded
–
–
–
–
–
Household production
Illegal production
The underground economy
Bartering (exchange of services)
Pirated CDs and Videos
• Treatment of leisure time
– While the average workweek has declined, many more mothers
with young children work
– 1960 79 percent of all families with children had one stay-athome parent. Now this has fallen to just 28 percent
• Human cost and benefits
• GDP gives us a “ballpark” idea of how much we
produce, not necessarily how well off we are
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9-50
What Goes into GDP
• When a large part of our production goes
toward national defense, police protection,
pollution control devices, repair and
replacement of poorly made cars and
appliances, and cleanups of oil spills, a large
GDP is not a good indicator of how we’re doing
• In general, the problem with using GDP as a
measure of national economic well-being is that
GDP is just one number, and no single number
can possibly provide us with all of the
information we need
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The Last Word on GDP
• GDP includes some things that really
shouldn’t be counted
• GDP has excluded some things that
should be counted
• Nevertheless, if we can accept GDP while
acknowledging all of its limitations, it
serves us well
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