gross domestic product measures total production
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Gross domestic product ( GDP ) The market value of all final goods and services produced in a country during a period of time, typically one year. Gross Domestic Product Measures Total Production. GDP Is Measured Using Market Values, Not Quantities. - PowerPoint PPT PresentationTRANSCRIPT
Gross Domestic Product Measures Total Production
Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time, typically one year.GDP Is Measured Using Market Values, Not Quantities
The worth of a thing is the price it will bring.Final good or service A good or service purchased by a final user:
•Household consumption—C
•Business investment, including all residential construction—I
•Government purchases—G
•Exports to foreigners—X
vs
Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck.
GDP Includes Only Current Production
PRODUCTION AND PRICE STATISTICS FOR 2007
(1)PRODUCT
(2)QUANTITY
(3)PRICE PER UNIT
Eye examinations 100 $50.00
Pizzas 80 10.00
Textbooks 20 100.00
Paper (for textbooks) 2,000 0.10
PRODUCT(1)
QUANTITY(2)
PRICE PER UNIT(3)
VALUE
Eye examinations 100 $50 $5,000
Pizzas 80 10 800
Textbooks 20 100 2,000
Total GDP = $7,800
Measuring GDP by the Value-Added Method
Value added The market value a firm adds to a product.
FIRM VALUE OF PRODUCT VALUE ADDED
Cotton Farmer Value of raw cotton = $1
Value added by cotton farmer = 1
Textile Mill
Value of raw cotton woven into cotton fabric = $3
Value added by cotton textile mill = ($3 – $1) = 2
Shirt Company
Value of cotton fabric made into a shirt = $15
Value added by shirt manufacturer = ($15 –$3) = 12
L.L. Bean Value of shirt for sale on L.L. Bean’s Web site = $35
Value added by L.L. Bean = ($35 – $15) = 20
Total Value Added = $35
Components of GDP
Consumption (C) Spending by households on goods and services, not including spending on new houses.
Personal Consumption Expenditures, or “Consumption”
Investment (I) Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.
Gross Private Domestic Investment, or “Investment”
Government Consumption and Gross Investment, or “Government Purchases”
Government purchases (G)Spending by federal, state, and local governments on goods and services.
Net Exports of Goods and Services, or “Net Exports” (NX)
The mantra: Y = C + I + G + NX
GDP Facts
Consumer spending on services is greater than the sum of spending on durable and nondurable goods.
• Business fixed investment is the largest component of investment. Gross private domestic investment includes
New plant and equipment
New residential construction
Net additions to business inventories
• Purchases made by state and local governments are greater than purchases made by the federal government.
• Imports are greater than exports net exports are negative.
Transfer payments are not included in GDP: Payments by the government to individuals for which the government does not receive a new good or service in return.
•Unemployment benefits paid to someone not working.
•Social security benefits paid to someone who is retired.
•Interest income paid to a government bondholder
Since the government doesn’t produce anything for
the market, the interest payment can’t be for any
productive service.
“Underground economy” activities are not included in GDP
•Production “off-the-books”•Illegal activities…a matter of the law
•Legalize prostitution GDP up
Household production is not included in GDP•Marry your gardener GDP down
Does GDP Measure What We Want It to Measure?
GDP Not a Measure of Well-Being…but pretty close
The Value of Leisure Is Not Included in GDP
GDP Is Not Adjusted for Pollution or Other Negative Effects of Production
GDP Is Not Adjusted for Changes in Crime and Other Social Problems
GDP Measures the Size of the Pie but Not How the Pie Is Divided Up
GDP Accounting Conventions•Which component of GDP will be affected by each of these transaction?
•You buy a ticket to fly to Seattle.
•American Airlines buys a new jetliner from Boeing.
•AA buys new seats for a jetliner it already owns.
•AA buys 100 million gallons of jet fuel.
•A resident of France buys a ticket to fly from Paris to NY.
•Clark County extends a runway at McCarran so AA can land larger jets.
•In recent years, the BEA has classified government purchases into gov’t consumption and gross gov’t investment expenditures. How would you classify Homeland Security expenditures?•Which of the following would increase measured GDP and which would reduce it?
•The fraction of women working outside the home increases.
•There is a sharp increase in the crime rate.
•Higher tax rates cause some people to hide more of the income they earn.
•What would you expect to happen to household production as unemployment rises during a recession?
•Would you therefore expect fluctuation in actual production—GDP plus household production—to be greater or less than fluctuation in GDP?
PRODUCT2009
QUANTITY2000
PRICE VALUE
Eye examinations 100 $40 $4,000
Pizzas 80 11 880
Textbooks 20 90 1,800
2000 2009
PRODUCT QUANTITY PRICE QUANTITY PRICE
Eye examinations 80 $40 100 $50
Pizzas 90 11 80 10
Textbooks 15 90 20 100
Real GDP versus Nominal GDPReal GDP The value of this year’s final goods and services evaluated at base-year prices.
Nominal GDP The value of this year’s final goods and services evaluated at this year’s prices.
vs
$6,680Y2009 = Real GDP = GDP in base year prices =
$Y2009 = Nominal GDP = GDP in current year prices = $7,800
Comparing Real GDP and Nominal GDPNominal GDP and Real GDP, 1990–2006
Base year prices >
Current year prices
Y > $Y
Base year prices <
Current year prices
Y < $Y
The GDP Deflator GDP deflator A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.
100Nominal GDP
GDP deflatorReal GDP
$ GDP = Price Level x Real Output
$Y = P x YP = $Y/Y
In practice,, the GDP deflator is estimated first:
Deflatorthis yr = (Cost of outputthis yr /Cost of same stufflast yr) x Deflatorlast yr
Then,
Real GDPthis yr = $GDPthis yr/(GDP Deflator)this yr
Other Measures of Total Production and Total Income
Gross National Product (GNP)
=GDP + Net Foreign Earnings of US Residents
•Compensation of employees earned abroad
•Interest and profits earned abroad
Net National Product (NNP) = GNP - Capital Consumption Allowance (depreciation)
National Income (NI) = NNP - Indirect Business Taxes
+ Statistical discrepancy
Personal Income (PI) = NI + Net Transfer Payments – Corporate Retained Earnings
= Income earned from production of national product
Disposable Income (DI) = PI - Income Taxes
Disposable Income is split between consumption and saving
YD = C + S
Other Measures of Total Production and Total Income
FIGURE 7-4
Measures of Total Production and Total Income, 2006
Real GDP—NI/PI/DI
• If the quantity of final goods and services produced decreased, • Could real GDP increase?• Could nominal GDP increase?
• Suppose the amount the federal government collects in personal income taxes increases, while the level of GDP remains the same. What will happen to the values of
• National income• Personal income• Personal disposable income
Business cycle
Consumption
Economic growth
Expansion
Final good or service
GDP deflator
Government purchases
Gross domestic product (GDP)
Inflation rate
Intermediate good or service
Investment
K e y T e r m s
Macroeconomics
Microeconomics
Net exports
Nominal GDP
Price level
Real GDP
Recession
Transfer payments
Underground economy
Value added