Principles of Macroeconomics ECON203, Lecture 2: A Measure of Production and Income (GDP) Instructor: Turki Abalala

Lessons Objectives  After taking the lessons of this topic you should be able to: Explain and interpret the main macroeconomic indicator GDP. Measure GDP using two approaches: Expenditure and Income. ECON nd Semester 20142

Class Outline Definition of GDP: Value Produced What produced Where Produced When Produced The Components of Expenditure. ECON nd Semester 20143

Gross Domestic Product (GDP)  GDP Defined Gross domestic product of GDP is the market value of all final goods and services produced within a country in a given time period.  GDP is measured to assess the state of an economy.  GDP definition has four parts: 1. Value Produced (Market value). 2. What produced (Final goods and services). 3. Where produced (Produced within a country). 4. When produced (In a given time period). ECON nd Semester 20144

Gross Domestic Product (GDP) 1.Value Produced (Market value of a good or a service) The price at which the item is traded in the market multiplied by its quantity. 2.What Produced (A final good or a service) Final good or service is a good or service that is produced for its final user and not as a component of another good or service. Intermediate good or service is a good or service that is produced by one firm, bought by another, and used as a component of a final good or service. (NOT part of GDP) GDP includes only those items that are traded in markets. ECON nd Semester 20145

6 Gross Domestic Product (GDP) GDP counts only the items that are traded in the market. (NOT the value of everything that is produced). GDP does not include the value of goods and services that people produce for their own use (such as Cleaning house by any family members nut not paid), non-productive transactions (such as sales of second-hand goods) and the purchase of stocks and bonds. ECON nd Semester 2014

7 Gross Domestic Product (GDP) 3. Where Produced ( within a country) GDP counts only the values of goods and services that are produced within a country. For example, a Kuwaiti businessman owns apartment buildings in Saudi, the rental income he earns is part of our (Saudi) GDP because it is earned in Saudi Arabia. ECON nd Semester 2014

8 Gross Domestic Product (GDP) 4. When Produced (a given period of time) GDP counts only the value of goods and services that are produced during a given period of time. If the time period is a quarter, it is called “the quarterly GDP data”. These data are used by central banks to track the short- run evolution of the economy. If the time period is a year, it is called “the annual GDP data”. These data are used by economists to examine the long- term trends. ECON nd Semester 2014

Gross Domestic Product (GDP)  Circular Flows in the U.S. Economy Consumption expenditure is the expenditure by households on consumption goods and services. Investment is the purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories. Government expenditure on goods and services is the expenditure by all levels of government on goods and services. ECON nd Semester 20149

Gross Domestic Product (GDP) Net exports of goods and services is the value of exports of goods and services minus the value of imports of goods and services. Exports of goods and services are the items that firms in in the United States produce and sell to the rest of the world. Imports of goods and services are the items that households, firms, and governments in the United States buy from the rest of the world. ECON nd Semester

Gross Domestic Product (GDP)  Total expenditure is the total amount received by producers of final goods and services. Consumption expenditure: C Investment: I Government expenditure on goods and services: Net exports: NX  Total expenditure = C + I + G + NX ECON nd Semester

Gross Domestic Product (GDP)  Income Labor earns wages. Capital earns interest. Land earns rent. Entrepreneurship earns profits. Households receive these incomes. ECON nd Semester

Gross Domestic Product (GDP)  Expenditure Equals Income Because firms pay out everything they receive as incomes to the factors of production, total expenditure equals total income. That is: Y = C + I + G + NX The value of production equals income equals expenditure. ECON nd Semester

Gross Domestic Product (GDP) ECON nd Semester

Gross Domestic Product (GDP) ECON nd Semester

Reference Chapter 5 of “Foundations of Macroeconomics” Pages ECON nd Semester

17 Now it’s over for today. Any question? ECON nd Semester 2014