Gross Domestic Gross Domestic ProductProductMeasuring national productivity.Measuring national productivity.

What is GDP?What is GDP?

GDP measures how much a nation GDP measures how much a nation produces. produces.

It is used to track the growth of a national It is used to track the growth of a national economy.economy.

GDP is the dollar value (at market prices) GDP is the dollar value (at market prices) of all final goods and services produced of all final goods and services produced during a stated period of time (usually during a stated period of time (usually one year).one year).

What does “final goods” What does “final goods” mean?mean?

Final goods are purchased for use by the Final goods are purchased for use by the consumer that are not used for resale or in consumer that are not used for resale or in further production processes. further production processes.

If goods are purchased to be used in further If goods are purchased to be used in further production processes or for resale they are production processes or for resale they are called intermediate goods. called intermediate goods.

Measuring only final goods helps economists Measuring only final goods helps economists avoid counting the same goods more than avoid counting the same goods more than once.once.

Income Approach vs. Income Approach vs. Expenditure ApproachExpenditure Approach

Expenditure ApproachExpenditure Approach GDP=C+Ig+G+XnGDP=C+Ig+G+Xn

Personal ConsumptionPersonal Consumption Gross Private InvestmentGross Private Investment

Capital goods for Capital goods for businessbusiness

ConstructionConstruction Inventory changesInventory changes

Government PurchasesGovernment Purchases Net ExportsNet Exports

Exports minus importsExports minus imports Xn=X-MXn=X-M

Income ApproachIncome Approach NI + AdjustmentsNI + Adjustments

National Income (NI)National Income (NI) WagesWages RentsRents InterestInterest ProfitsProfits TaxesTaxes

Statistical AdjustmentsStatistical Adjustments Net foreign factor incomeNet foreign factor income Statistical discrepancyStatistical discrepancy Depreciation allowanceDepreciation allowance

Nominal GDP vs. Real Nominal GDP vs. Real GDPGDP

Nominal GDP Nominal GDP GDP that GDP that is notis not

adjusted for changes adjusted for changes in pricesin prices

Real GDPReal GDP GDP that GDP that isis adjusted adjusted

for changes in pricefor changes in price Real GDP = Real GDP =

(Nominal GDP (Nominal GDP x100) /Price Indexx100) /Price Index

Real GDP = Real GDP = (Nominal (Nominal GDP)/(Price Index in GDP)/(Price Index in hundreths)hundreths)

What is a Price Index?What is a Price Index?

A price index is a measure of the change A price index is a measure of the change in value of money (purchasing power).in value of money (purchasing power).

It is used to assess inflation or deflation.It is used to assess inflation or deflation. It is found by comparing the prices of a It is found by comparing the prices of a

set amount of goods in one year to that set amount of goods in one year to that of another year and multiplying by 100:of another year and multiplying by 100: 100[(Market Basket Year X)/(Market Basket Year Y)]100[(Market Basket Year X)/(Market Basket Year Y)]

How can GDP be used to How can GDP be used to assess economic growth?assess economic growth?

Output Growth RateOutput Growth Rate is a direct measure of the is a direct measure of the change in GDP from one year to another change in GDP from one year to another

100[(real GDP in Year 2 – real GDP in Year 1)/(real GDP in Year 1)]100[(real GDP in Year 2 – real GDP in Year 1)/(real GDP in Year 1)]

Real GDP per capitaReal GDP per capita allows economists to allows economists to analyze how much of output growth went to analyze how much of output growth went to standard of living improvements and how much standard of living improvements and how much went to an increased populationwent to an increased population

(real GDP in Year 1)/(population in Year 1)(real GDP in Year 1)/(population in Year 1)

Computing GDP & GrowthComputing GDP & Growth

Nominal GDPNominal GDP Price IndexPrice Index PopulationPopulation

Year 3Year 3 $5,000$5,000 125125 1111

Year 4Year 4 $6,600$6,600 150150 1212

What is the real GDP in Year 3?

What is the real GDP in Year 4?

What is the real GDP per capita in Year 3?

What Is the real GDP per capita in Year 4?

What is the rate of real output between Years 3 & 4?

What is the rate of real output growth per capita between Years 3 & 4? (Hint: Use per capita data in the output growth rate formula.)

GDP’s ShortcomingsGDP’s Shortcomings

Does not factor in the black market or Does not factor in the black market or non-market transactionsnon-market transactions

Does not account for externalitiesDoes not account for externalities Does not consider social benefits of Does not consider social benefits of

consumption or productionconsumption or production Does not account for utility gained or lost Does not account for utility gained or lost

as a result of consumption of a productas a result of consumption of a product (e.g. GDP can increase during war)(e.g. GDP can increase during war)