2 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.
3 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 countryGDP 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.
4 What GDP Omits Certain Nonmarket Goods and services Underground Activities, both legal and illegalSale of Used GoodsFinancial TransactionsGovernment Transfer Payments.LeisureNot adjusted for “bads”
5 Total Market ValueTotal 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.
6 GDP or Per Capita GDPPer 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.
7 Q & AGive 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.
8 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.
9 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.
10 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
11 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.
12 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 vacationsProprietors’ 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.
13 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
14 National Income to GDPGDP=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
15 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 downStatistical discrepancies or pure computational errors often occur
16 Other National Income Accounting Measurements Net Domestic Product = GDP – Capital consumption allowancePersonal Income = National income – Undistributed Corporate Profits – Social Security Taxes – Corporate Profits Taxes + Transfer PaymentsDisposable Income = Personal Income – Personal TaxesPer Capita Macroeconomic Measurements Divides these factors by the population.
17 Q & ADescribe 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?
18 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.
19 If You Know the Price Index and GDP For A Year, Can You Compute Real GDP? GDP x 100Chain Weighted Price Index
20 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.
21 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.
22 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
24 RecessionThe 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”.
25 Q & ASuppose 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.