1. Gross Domestic Product
Measuring production

2. Definition
GDP – the total value of all final goods and services produced for the market place during a given year within a nation’s border
Attempts to measure what has been produced.

3. Definition
GDP – the total value of all final goods and services produced for the market place during a given year within a nation’s border

4. the total value Advantages Disadvantages
Common unit of measurement (GDP allows you to compare “apples to oranges.” Because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods)
Allows items that use more resources / higher valued goods to be counted as more
If prices rise, GDP rises, but society isn’t any better-off (that is to say society doesn’t have more goods and services to consume)

5. final goods and services
Only goods that are sold to the “final consumer” are counted
Does not count intermediate goods
Counting the value of intermediate goods constitutes “double counting”
An important exception to this principle arises when an intermediate good is produced and, rather than being used, is added to a firm’s inventory of goods for use or sale at a later date. In this case, the intermediate good is taken to be “final” for the moment, and its value as inventory investment in included as part of GDP. Thus additions to inventory add to GDP, and when the goods in inventory are later used or sold, the reductions in inventory subtract from GDP.

6. produced
Does not include every transaction – only those that involve new production.
Excludes items like selling stocks and bonds, used cars, winning the lottery, etc…

7. for the market place
Does not include non market production (because it is not reported).
House cleaning
Child Care
“Black Market” activity

8. during a given period Usually discussed as yearly or quarterly
Typically reported as an annual number
Measured with quarterly data though

9. within a nation’s borders
Inside the borders – regardless of ownership

10. How to Calculate GDP Three Approaches
Expenditure Approach
Income Approach (Factor Payment Approach)
Value Added Approach
(Theory) All three methods yield the same value
(Reality) The income numbers are considered more reliable

11. Expenditure Approach GDP = C + I + G + NX
C – consumption (Household spending)
I – investment (Spending on capital)
G – Government (Government Spending)
NX – Net Exports (Exports minus Imports)

12. Goods & Services Market
Extended Circular Flow Model
(Open Economy)
Sprivate
Households
Government T Y C G
Spublic
Factor Market
Goods & Services Market
Loanable Funds
Market I X
GDP
NCO Y M
Firms
Rest of the World
Iplanned

13. Extended Circular Flow Model (Open Economy)
Red Arrows Represent GDP
Sprivate
Households
Government T Y C G
Spublic
Factor Market
Goods & Services Market
Loanable Funds
Market I X
GDP
NCO Y M
Firms
Rest of the World
Iplanned

14. Goods & Services Market
Extended Circular Flow Model
(Closed Economy)
Sprivate
Households
Government T Y C G
Spublic
Factor Market
Goods & Services Market
Loanable Funds
Market I
GDP Y
Firms
Iplanned

15. Goods & Services Market
Supply:
Factor Market
Demand:
Supply:
Goods & Services Market
Demand:
Supply:
Loanable Funds
Market
Demand:

16. Goods & Services Market
Supply: Households
Factor Market
Demand: Firms
Supply: Firms
Goods & Services Market
Demand: Households + Firms + Government + Rest of the World
Supply: Households + Government
Loanable Funds
Market
Demand: Firms + Rest of the World

17. Expenditure Approach GDP = C + I + G + NX
Note: For the economy as a whole, income must equal expenditure. Therefore GDP also equals income!
So,
GDP = Y = C + I + G + NX

18. C – consumption (Household spending)
Includes
Excludes
Value of food produced on farms that is consumed by farmers
Total value of housing services provided by owner-occupied homes
Used goods
Stocks, bonds, land
New home construction

19. I - Investment Investment is capital formation
Capital formation is the change in the capital stock
The capital stock is the sum of the value of all capital goods

20. I - Investment
Includes
Excludes
Business purchases of factories, equipment and software.
New-home construction
Changes in inventories (changes in unsold goods)
Government investment
Consumer durables
Human capital
Depreciation (ignores all depreciation)

21. G - Government
Spending by the local, state & federal levels on goods and services
Includes Gov’t Consumption and Gov’t Investment
Excludes transfer payments – such as social security

22. NX – net exports
NX = Exports - Imports

23. Income Approach (Factor Payment Approach)
The sum of all rents, wages, interests and profits (or dividends).
We are summing the payments of all factors of production used to produce all goods and services

24. Value Added Approach
Measures the value added to a good or service at each stage of production
Value-added – revenues received for a given good or service minus the costs of all intermediate goods used to produce it

25. Problems with GDP Quality changes Underground Economy
Nonmarket Production
Depends largely on goods and services (what about leisure?)
Ignores economic “bads” (like war, disease, crime, etc…)
Ignores inflation (see Nominal GDP vs. Real GDP)

26. Real GDP vs Nominal GDP Nominal GDP – GDP at current prices
Real GDP – Adjusts for inflation with constant prices from a base year.
GDP Deflator – A measure of the price level using the ratio of Nominal GDP to Real GDP times 100.

27. Nominal GDP in the US

28. Real GDP in the US

29. Real GDP (RGDP) vs Nominal GDP (NGDP)
Country:
Venezuela
Increases in Nominal GDP do not represent growth – only increases in Real GDP represent growth – also see Zimbabwe… they had the fastest NGDP growth in the world a few years back, and was deep in recession.

30. Real GDP vs Nominal GDP
We can use GDP Deflator as one way to track the price level (that is to say we can track inflation).
Inflation is viewed to be an increase in the overall price level.
Deflation is viewed to be a decrease in the overall price level.
The inflation rate is the percent change in the price level from one time period to another.

31. Calculating GDP Deflation and the Inflation Rate
Charlotte, NC produces two goods: Panther’s footballs and Hornet’s basketballs. Below is a table showing prices and quantities of output for three years:
Year
Price of Footballs
Quantity of Footballs
Price of Basketballs
Quantity of Basketballs
Year 1
$10
120
$12
200
Year 2
$15
300
Year 3
$14
180
$18
275
Calculate Nominal GDP in each year.
Calculate Real GDP in each year (using Year 1 as the base year)
Calculate the GDP Deflator for each year.
Calculate the Inflation Rate from Year 1 to Year 2.
Calculate the Inflation Rate from Year 2 to Year 3.

32. Calculating GDP Deflation and the Inflation Rate
Year
Price of Footballs
Quantity of Footballs
Price of Basketballs
Quantity of Basketballs
Year 1
$10
120
$12
200
Year 2
$15
300
Year 3
$14
180
$18
275
Nominal GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600
Nominal GDP in Year 2 = ($12 × 200) + ($15 × 300) = $6,900
Nominal GDP in Year 3 = ($14 × 180) + ($18 × 275) = $7,470
Real GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600
Real GDP in Year 2 = ($10 × 200) + ($12 × 300) = $5,600
Real GDP in Year 3 = ($10 × 180) + ($12 × 275) = $5,100
GDP deflator for Year 1 = ($3,600/$3,600) × 100 = 1 × 100 = 100
GDP deflator for Year 2 = ($6,900/$5,600) × 100 = × 100 =
GDP deflator for Year 3 = ($7,470/$5,100) × 100 = × 100 =

33. Calculating GDP Deflation and the Inflation Rate
Year
Price of Footballs
Quantity of Footballs
Price of Basketballs
Quantity of Basketballs
Year 1
$10
120
$12
200
Year 2
$15
300
Year 3
$14
180
$18
275
Inflation from Y1 to Y2 = ((123.21–100)/100)*100 = 23.21%
Inflation from Y2 to Y3 = (( )/123.21)*100 = 18.49%

34. Real GDP Deflator in the US