Gdp 2

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Gross Domestic Product

Module-2

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Gross Domestic Product

GDP is the total market value of all final goods andservices produced annually within a countrys borders.

Expenditure Approach: compute GDP by adding themoney 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 wagesand all profits.

Value-Added Approach: compute GDP by adding thevalues added to a product at all stages of production.

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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 finalgoods produced by citizens

whether physically in that

country or not. GNP = GDP

minus foreign investment

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What GDP Omits

Certain Nonmarket Goodsand services

Underground Activities,

both legal and illegal Sale of Used Goods

Financial Transactions

Government Transfer

Payments. Leisure

Not adjusted for bads

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Total Market Value

Total Market Value is

the monetary value of

goods and services attodays prices.

Only final goods are

counted to protect

against the error ofover-counting.

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GDP or Per Capita GDP

Per Capita GDP is the GDP divided by the

population.

GDP figures are useful for obtaining anestimate of the productive capabilities of an

economy but they do not necessarily

measure happiness or well being.

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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 youranswer.

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Expenditures in a Real-World

EconomyExpenditures:

Consumption includesspending on durable goods,

spending on non-durablegoods, and spending onservices.

Investment is the sum ofpurchases of newly producedcapital goods, changes in

business inventories, andpurchase of new residentialhousing.

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Expenditures in a Real-World

Economy Government purchases

include federal, state, and

local government

purchases of goods andservices and gross

investment in highways,

bridges, and so on.

Net Exports is the totalnumber of exports minus

the number of imports.

i i h

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Computing GDP using the

Expenditure Approach

Anything that is not sold is bought by the firm thatproduces it.

GDP=Consumption + Investment + Government Purchases

+ Net Exports

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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 matterwhere they are located.

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Computing National Income

Compensation of Employees: Wages, salaries, SocialSecurity benefits, and employee benefit plans plus themonetary value of fringe benefits, tips, and paidvacations

Proprietors Income is all forms of income earned byself-employed individuals and the owners ofunincorporated business, including unincorporatedfarmers.

Corporate Profits include all income earned by thestockholders of corporations.

Rental Income of Persons is the income received byindividuals for the use of their non-monetary assets.

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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 + NetInterest

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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 consumptionallowance + Statistical

discrepancy

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National GDP Making Some

Adjustments Remember that the National income excludes

foreign nationals and includes citizens abroad, butthe GDP has to adjust for both of these incomes.

Indirect Business Taxes usually comprise excisetaxes, sales taxes, and property taxes.

Capital Consumption Allowance or depreciation is

the cost to replace capital goods that break or weardown

Statistical discrepancies or pure computationalerrors often occur

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Other National Income

Accounting Measurements Net Domestic Product = GDPCapital

consumption allowance

Personal Income = National incomeUndistributed Corporate ProfitsSocial SecurityTaxesCorporate Profits Taxes + TransferPayments

Disposable Income = Personal IncomePersonalTaxes

Per Capita Macroeconomic Measurements Dividesthese factors by the population.

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Q & A

Describe the expenditure approach to computingGDP in a real-world economy.

Will GDP be smaller than the sum ofconsumption, investment, and governmentpurchases if net exports are negative? Explainyour answer.

If GDP is $400 billion, and the countryspopulation is 100 million, does it follow that eachindividual in the country has $40,000 worth ofgoods and services?

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Real GDP

Real GDP is GDP adjusted for pricechanges.

Real GDP is equal to the change in Baseyear prices multiplied by current yearquantities.

Annual economic growth has occurred ifthe Real GDP in one year is higher than theprevious year.

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If You Know the Price Index and

GDP For A Year, Can You ComputeReal GDP?

Real GDP =

GDP x 100

Chain Weighted Price Index

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What Does It Mean If Real GDP

Is Higher In One Year Than In

Another Year? GDP can rise from one

year to the next if:

Prices rise and outputremains constant;

Output rises and prices

remain constant;

Or prices and outputrise.

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Real GDP, Economic Growth,

and Business CyclesEconomic Growth has

occurred if Real GDP

in one year is higherthan Real GDP in the

previous year.

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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 fallsfor two consecutive quarters, it is said to be in arecession.

Trough: The Low Point of the GDP, just before it

begins to turn up. Recovery: When the GDP is rising from thetrough.

Expansion: when the real GDP expands beyond

the recovery

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The Business Cycle

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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.

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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 businesscycles and still have its Real GDP grow over

time? Explain your answer.