# Ch 6: Macroeconomic Measurements, Part II GDP and Real GDP

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Ch 6: Macroeconomic Measurements, Part II GDP and Real GDP
Del Mar College John Daly ©2003 South-Western Publishing, A Division of Thomson Learning

Gross Domestic Product
GDP is the total market value of all final goods and services produced annually within a country’s 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? What’s 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? What’s 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.

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 today’s 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 U.S. GDP and the U.S. GNP. Suppose the GDP for a country is \$0. Does this mean that there was no productive activity in the country? Explain your answer.

Expenditures in a Real-World Economy
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 country’s borders. National Income is the total income earned by U.S. 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

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 country’s 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?
GDP x 100 Chain Weighted Price Index

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

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