Unit 2: GDP

February 12, 2018

GDP 

• Gross Domestic Product (GDP): It is the total market value of all final goods and services produced within a country's borders within a given year.
• Gross National Product (GNP): It is the sum of all total goods and services produced by residents of a country during a given year.
• Using foreigners to complete the work
• Intermediate Goods: Goods that require further processing before they are ready for final use.
• Example: steering wheel - a part needed to complete the final product which is a car
• What's not included in GDP?
1. Used goods/ secondhand goods
• try to avoid double or multiple counting
2. Gifts or transfer payments (can be public or private)
• Transfer payments: transferring funds for one institution or individual to another
• Private: scholarship
• Public: welfare, social security
• Produce no output
3. Stocks and Bonds - purely financial transactions
4. Unreported business activity ("Tips")
5. Illegal activity (drugs... etc...)
6. Intermediate goods
7. Non-market activities (volunteer and family work)

Formula for GDP:

GDP = C + Ig + G + Xn

•  C: Personal consumption expenditures
• 67% of economy
• Ig: Gross, private, domestic investment
1. New factory equipment
2. Factory equipment maintenance
3. Construction of housing
4. Unsold inventory of products built in a year
• G: Government spending
• Xn: Net Exports = Exports - Imports

Income Approach = Expenditure Approach

• Expenditure Approach: Asks all the producers the value of final goods and services that they produced and then add them up.
• C + Ig + G + Xn
• Income Approach: Add up all the income that resulted from selling all final goods and services produced in a given year.

W - wages (compensation of employees, salary, salary supplement)

R - rents (rental income - owed to landlords)

I - interests (interest income - based on capital)

P - profits ( corporate profits)

+

Statistical Adjustment

Formulas

• Trade 
• Exports - Imports
• negative (-) = deficit
• positive (+) = surplus
• Budget
• Government spends in 2 ways:
1. Government spending/ Government purchases goods and services
2. Government transfer fees/ payments
• Budget deficit: Total amount of money that the government borrows in a year. (Because total government spends exceeds tax and free revenue)
• Government purchases of goods and services + Government transfer payments -Government tax and fee collection
• positive (+) = deficit
• negative (-) = surplus

• National Income
• Option 1: Compensation of employees + Rental Income + Proprietors Income + Corporate Profit + Interest Income
• Option 2: GDP - Indirect business taxes - Depreciation ( Consumption of Fixed Capital) - net foreign factor payment
• Disposable Income (DPI)
• National Income - Household taxes + Government transfer payments
• Net Domestic Product (NDP)
• GDP - Depreciation (Consumption of Fixed Capital)
• Net National Product (NNP)
• GNP - Depreciation (Consumption of Fixed Capital)
• GNP
• GDP + Net foreign factor payment
• Gross Private Domestic Investment


Net Private Domestic Investment + Depreciation (Consumption of Fixed Capital

• Real GDP
• It is the value of output produced in "constant" base year prices that is adjusted for inflation.
• P x Q
• Can increase from year to year only if output increases (quantity only changes)
• Nominal GDP
• It is the value of output produced in "current prices". 
• P x Q
• Can increase from year to year if either output or price increases. (quantity and price changes)

For base year: Real GDP = Nominal GDP

• In the base year, the current price is going to be equal to the base year price.
• In years after the base year, nominal GDP exceeds real GDP.
• In years before the base year, real GDP exceeds nominal GDP.

• GDP Deflator: A price index that is used to adjust from nominal to real GDP.
• Formula:

(Nominal GDP/Real GDP) x 100

• In the base year, the GDP deflator will equal to 100.
• After the base year, the GDP will be greater than 100.
• Before the base year, the GDP will be less than 100.

• Inflation: It is a general rise in the price level
• Inflation Rate Formula:

(new-old)/old x 100

Consumer Price Index (CPI): It measures inflation by tracking the yearly price of a fixed basket of consumer goods and services. Changes in the price level and the cost of living.