2 Chapter 7 Objectives Define gross domestic product. Calculate gross domestic product.Differentiate between GDP and GNPDifferentiate between real GDP and nominal GDP.
3 GDPGross Domestic Product – The market value of final goods and services produced within a country during a specific time period.Performance measureAnnounced quarterly, at annual rate
4 GDP Do include final goods and services Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.Do include final goods and servicesDon’t include intermediate goodsIntermediate goods – goods purchased for resale or for use in producing another good or serviceFinal goods and services – items purchased by their ultimate end-user
5 GDP Do include services rendered and sales commissions Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.Do include services rendered and sales commissionsDon’t include income transfers, financial transactions, welfare, Social Security
6 GDPGross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.Do include production by individuals of any citizenship within U.S.Don’t include count production by U.S. citizens working outside the U.S.Citizenship doesn’t matterLocation does!
7 GDPGross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.Do include value of services provided by realtor, car dealer, clothing reseller, etcDon’t include value of the used goods
8 Dollars are the Common Denominator for GDP +++Each good/service counted increases GDP by its market price22oz of Bud Light at pro baseball game: $722oz of Bud Light from the gas station: $2
9 GDP Measures Output and Income 1) Add up all expenditures on goods and services produced during the yearOR2) Add up all the income payments to the resource suppliers of the things used to produce the goods and servicesDollar flow of expenditures on final goods =Dollar flow of income (and indirect cost) from final goods
10 Two Ways of Measuring GDP Expenditure ApproachPersonal consumption expenditures+Gross private domestic investment+Government consumptionand gross investment+Net exports of goods and services= GDP
11 GDP Expenditure Approach Personal consumption expenditures –Household spending on consumer goods and services71% of GDPPrivate investmentProduction of capital goods that provide a flow of future services14% of GDP
12 GDP Expenditure Approach Government consumption and gross investmentExpenditures on goods, services consumedPurchases of capital goods20% of GDPNet Exports – exports minus importsExports – goods and services produced domestically and sold to foreignersImports – goods and services produced abroad but purchased by domestic consumers, businesses, and governments-4% of GDP
13 Expenditure Approach, 2013 data (billions)Personal Consumption$11,484Durable Goods$1,249Non Durable Goods$2,601Services$7,633Gross Private Investment$2,648Fixed Investment$2,574Inventories$74Government Consumption and Gross Investment$3,144Federal$1,232State and Local$1,912Net Exports-$508Gross Domestic Product$16,768
14 Two Ways of Measuring GDP Resource Cost-Income ApproachAggregate income:Employee CompensationIncome of self-employedRentsProfitsInterest+Non-income cost items:Indirect business taxesdepreciationNet income of foreigners+= GDP
15 GDP Resource Cost-Income Approach Indirect business taxesTaxes that increase a business firm’s cost of productionExamples: sales, excise, property taxesDepreciationEstimated based on expected life of the assetCapital consumption
16 Resource Cost-Income Approach, 2013 data (billions)Employee Compensation$8,606Proprietors’ Income$1,260Rents$533Corporate Profits$2,023Interest Income$492Indirect Business Taxes$1,074Depreciation (Capital Consumption)$2,627Net Income of Foreigners-$224Gross Domestic Product$16,768
17 GNP Gross National Product – Total market value of all final goods and services produced by the citizens of a countryEqual to GDP minus the net income of foreigners
18 Adjusting for Price Changes Nominal GDP may rise because(1) More goods/services(2) Higher pricesNominal values (money values)Expressed in current (Now) dollarsNot adjusted for inflationReal valuesExpressed in constant dollars (base year)Adjusted for inflation
19 Adjusting for Price Changes Imagine a country that only produces kibbles and Frisbees. In 201310 bags of kibble, $5 each3 Frisbees, $4 eachNominal GDP = $62Scenario 1: in 201410 bags of kibble cost $6 each,3 Frisbees, $5 eachNominal GDP = $75Real GDP (base year 2013) = $62
20 Adjusting for Price Changes Imagine a country that only produces kibbles and Frisbees. In 201310 bags of kibble, $5 each3 Frisbees, $4 eachNominal GDP = $62Scenario 2: in 201411 bags of kibble cost $6 each,5 Frisbees, $5 eachNominal GDP = $91Real GDP (base year 2013) = $75
21 Real GDP If real GDP increases If real GDP decreases output is increasingIncomes are risingEconomy is growing If real GDP decreasesoutput is decreasingIncomes are fallingTwo quarters falling real GDP recession
22 Adjusting for Price Changes Inflation – increase in the general level of prices over timePurchasing power of money is fallingIf unexpected, borrowers win, savers loseDeflation – decrease in the general level of prices over timePurchasing power of money is risingIf unexpected, savers win, borrowers lose
23 Adjusting for Price Changes Consumer price index (CPI) – measures the impact of price changes on the cost of the typical bundle of goods purchased by households, =100GDP deflator – measures the change in the average price of the market basket of goods included in GDP, 2009 = 100Both help us measure inflation!
24 Adjusting for Price Changes Example: The CPI in 2012 was The CPI in 2013 was Calculate the inflation rate.Answer: 1.5%
25 Adjusting for Price Changes Example: I earned $5.15 per hour in The CPI in 1997 was The CPI in was Find the wage rate in dollarsAnswer: $7.48
26 Adjusting for Price Changes Percent change in real GDP equals the percent change in nominal GDP minus the inflation rate %∆Real GDP = %∆Nominal GDP – inflation
27 Nobody’s Perfect, Not Even GDP GDP does not include or take into accountNonmarket or household productionUnderground or black market economyLeisure and human costsQuality variation, introduction of new goodsHarmful side effects, economic “bads”
28 Chapter 7 Objectives Define gross domestic product. Calculate gross domestic product.Differentiate between GDP and GNPDifferentiate between real GDP and nominal GDP.