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Gross Domestic Product

Module-2

Gross Domestic Product


GDP is the total market value of all final goods and services produced annually within a countrys borders. Expenditure Approach: compute GDP by adding the money spent by buyers on final goods and services. What are final goods? What are intermediate goods? Whats the difference? Income Approach: compute GDP by adding all wages and all profits. Value-Added Approach: compute GDP by adding the values added to a product at all stages of production.

GDP? GNP? Whats different?


Gross National Product is the total market value of all final goods and services provided annually by the citizens of a country GDP measures all final goods produced in a country, whether by citizens or not. GNP measures all final goods produced by citizens whether physically in that country or not. GNP = GDP minus foreign investment

What GDP Omits


Certain Nonmarket Goods and services Underground Activities, both legal and illegal Sale of Used Goods Financial Transactions Government Transfer Payments. Leisure Not adjusted for bads

Total Market Value


Total Market Value is the monetary value of goods and services at todays prices. Only final goods are counted to protect against the error of over-counting.

GDP or Per Capita GDP


Per Capita GDP is the GDP divided by the population. GDP figures are useful for obtaining an estimate of the productive capabilities of an economy but they do not necessarily measure happiness or well being.

Q&A
Give an example that illustrates the difference between the Indian GDP and GNP. Suppose the GDP for a country is Rs 0. Does this mean that there was no productive activity in the country? Explain your answer.

Expenditures in a Real-World Economy


Expenditures: Consumption includes spending on durable goods, spending on non-durable goods, and spending on services. Investment is the sum of purchases of newly produced capital goods, changes in business inventories, and purchase of new residential housing.

Expenditures in a Real-World Economy


Government purchases include federal, state, and local government purchases of goods and services and gross investment in highways, bridges, and so on. Net Exports is the total number of exports minus the number of imports.

Computing GDP using the Expenditure Approach


Anything that is not sold is bought by the firm that produces it. GDP=Consumption + Investment + Government Purchases + Net Exports

The Income Approach to Computing GDP For A Real World Economy


Domestic Income is the total income earned by the people and businesses within a countrys borders. National Income is the total income earned by Indian citizens and businesses, no matter where they are located.

Computing National Income


Compensation of Employees: Wages, salaries, Social Security benefits, and employee benefit plans plus the monetary value of fringe benefits, tips, and paid vacations Proprietors Income is all forms of income earned by self-employed individuals and the owners of unincorporated business, including unincorporated farmers. Corporate Profits include all income earned by the stockholders of corporations. Rental Income of Persons is the income received by individuals for the use of their non-monetary assets.

Computing National Income Part 2


Net Interest: the interest income received by U.S. households and government minus the interest they paid out. National Income = Compensation of employees + Proprietors Income + Corporate Profits + Rental Income + Net Interest

National Income to GDP


GDP=National Income Income earned from the rest of the world +Income earned by the rest of the world + Indirect business taxes + Capital consumption allowance + Statistical discrepancy

National GDP Making Some Adjustments


Remember that the National income excludes foreign nationals and includes citizens abroad, but the GDP has to adjust for both of these incomes. Indirect Business Taxes usually comprise excise taxes, sales taxes, and property taxes. Capital Consumption Allowance or depreciation is the cost to replace capital goods that break or wear down Statistical discrepancies or pure computational errors often occur

Other National Income Accounting Measurements


Net Domestic Product = GDP Capital consumption allowance Personal Income = National income Undistributed Corporate Profits Social Security Taxes Corporate Profits Taxes + Transfer Payments Disposable Income = Personal Income Personal Taxes Per Capita Macroeconomic Measurements Divides these factors by the population.

Q&A
Describe the expenditure approach to computing GDP in a real-world economy. Will GDP be smaller than the sum of consumption, investment, and government purchases if net exports are negative? Explain your answer. If GDP is $400 billion, and the countrys population is 100 million, does it follow that each individual in the country has $40,000 worth of goods and services?

Real GDP
Real GDP is GDP adjusted for price changes. Real GDP is equal to the change in Base year prices multiplied by current year quantities. Annual economic growth has occurred if the Real GDP in one year is higher than the previous year.

If You Know the Price Index and GDP For A Year, Can You Compute Real GDP?
Real GDP =

GDP x 100 Chain Weighted Price Index

GDP can rise from one year to the next if:


Prices rise and output remains constant; Output rises and prices remain constant; Or prices and output rise.

What Does It Mean If Real GDP Is Higher In One Year Than In Another Year?

Real GDP, Economic Growth, and Business Cycles


Economic Growth has occurred if Real GDP in one year is higher than Real GDP in the previous year.

Ups and downs of the Business Cycle


Peak: at the peak of the business cycle, Real GDP is at a temporary high. Contraction: A decline in the real GDP. If it falls for two consecutive quarters, it is said to be in a recession. Trough: The Low Point of the GDP, just before it begins to turn up. Recovery: When the GDP is rising from the trough. Expansion: when the real GDP expands beyond the recovery

The Business Cycle

Recession
The NBER definition of a recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.

Q&A
Suppose GDP is $6,039 billion in year 1 and $6,245 billion in year 2. What has caused the rise in GDP? Suppose Real GDP is $5,233 billion in year 1 and $5,267 billion in year 2. What has caused a rise in the Real GDP? Can an economy be faced with endless business cycles and still have its Real GDP grow over time? Explain your answer.