Gross Domestic Product and Real GDP. Gross Domestic Product What? What? Where? Where? When? When?...
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Transcript of Gross Domestic Product and Real GDP. Gross Domestic Product What? What? Where? Where? When? When?...
Gross Domestic Product
and Real GDP
Gross Domestic Product
What? What? Where? Where?
When? When? How?How?
GDP is a measure of the value of all final goods and services newly produced in a country during some period of time.
ProductProduct WeightWeight ValueValue
Adding Unlike Products
7 tapes+ 3 CDs
_____________________________
??????
$10 per tape$25 per CD
___________________________________________
$70 worth of tapes+ $75 worth of CDs
______________________________________________________________________
$145 of tapes & CDs
Table 6.1
Intermediate & Final Goods
• Intermediate goodsGoods that undergo further processing or added-value before being sold to consumers
• Final goodsNew goods that undergo no further processing before being sold to consumers
• Double counting problem
NZ System of National Accounts
• Every day there are millions of transactions taking place in the New Zealand economy:
• businesses buy and sell goods and services
• Government collects taxes and makes transfer payments to beneficiaries
• people are paid for the work they do and use this income to buy food or pay rent.
NZ System of National Accounts
• Measuring these transactions is a huge and complex task but one which is essential to understanding how the economy operates. In New Zealand, as in most other countries, these transactions are classified, measured and recorded in the national accounts
• NZSNA
Three Ways to Measure GDP
• Expenditure approach
• Income approach
• Production approach
Expenditure Method
Table 6.2
Consumption
Investment
Government Spending
Net Exports
National Expenditure = C + I + G + (X – M)
NZSNA Terminology
Table 6.2
Consumption
Investment
Government Spending
Net Exports
Final private expenditure
Gross fixed capital formation
Government final expenditure
Exports of goods and services – Imports of goods and services.
Unplanned Investment
• Unplanned investment refers to goods produced but not sold.
• In the NZSNA these are called “increases in stocks” .
• They may be positive or negative.• The symbol is ΔR.• They should be included in GDP as
they are products produced in this time period.
GDP – Expenditure Method
National Expenditure = C + I + G + (X – M)
Increases in stocks ΔR
GDP = C + I + G + (X – M) + ΔR + sd
Statistical discrepancy used to balance
GDP – INCOME METHOD.
• The total of all incomes in the economy = National Income.
• Plus depreciation. This is an expense incurred in production however not paid out in income.
• Plus net indirect taxes. These are included in expenditure method (products are measured at market price) and so must be added with this method.
NZSNA Terminology
Table 6.2
Wages and salaries
Gross Profits
Depreciation
Net Indirect Taxes
Compensation of Employees
Operating Surplus
Consumption of fixed capital
Indirect taxes minussubsidies.
GDP – INCOME METHOD
Compensation of Employees
Operating Surplus
Consumption of Fixed capital
Net Indirect Taxes
Calculating GDP
$ Million
Operating Surplus 21,000
Imports of Goods and Services 15,000
Increase in Stocks 2,000
Consumption of Fixed Capital 4,000
Final Consumption Expenditure by Government 10,000
Final consumption Expenditure by Private Sector 41,000
Compensation of Employees 35,000
Exports of Goods and Services 16,000
Net Indirect Taxes 6,000
Gross Fixed Capital Formation 12,000
GDP Income Method
Calculating GDP
$ Million
Operating Surplus 21,000
Imports of Goods and Services 15,000
Increase in Stocks 2,000
Consumption of Fixed Capital 4,000
Final Consumption Expenditure by Government 10,000
Final consumption Expenditure by Private Sector 41,000
Compensation of Employees 35,000
Exports of Goods and Services 16,000
Net Indirect Taxes 6,000
Gross Fixed Capital Formation 12,000
GDP Expenditure Method
GDP – PRODUCTION METHOD
• The “value-added” for all firms in the economy are added to calculate GDP.
• Value-added can be measured by subtracting purchases from sales.
GDP – PRODUCTION METHOD
$100
$150$200
$300
Tree GrowerSawmill. Buys trees, makes furniture.
Wholesaler. Buys furniture from sawmill, sells to shops.
Consumers buy from shop.
Value- AddedTree Grower $100Sawmill $50Wholesaler $50Shop $100Total $ 300
Consumer Price Index
• Is an index which measures changes in the price level for a country.
• The index is a “weighted” one which means products which we spend more of our income on have a higher weighting.
• The base year (the year the index series begins) is 1000
Consumer Price Index
Year CPI % price level change
2002 1000
2003 1222
2004 1300
2005 2300
22.2%30%
130%
Measures rate of change in price level from the
base year (2002).
Rate of change between 2003 and
2004 is
1300 – 1222 * 100 1222
6.4%
Change in CPI
• An increase in the CPI is called inflation. The price level increases. The purchasing power of money decreases.
• A decrease in the CPI is called deflation.
• Disinflation refers to a decrease in the inflation rate. The CPI is increasing at a decreasing rate.
REAL GDP
• Real GDP is nominal GDP adjusted for any changes in the price level.
• Real GDP is a better measure than nominal GDP as it is a better measure of quantity of production. Any inflationary or deflationary effects are eliminated.
REAL GDP
In base year production is 4 bananas @ $1
each. Nominal GDP at market prices is $4
In the second year nominal GDP is 4
bananas @ $2 each = $8
CPI
1000
Even though nominal GDP has increased there is no increase in production.
Real GDP in year two is $4/2000 * 1000 = $4
CPI
2000
The Business Cycle
The rate of change in real GDP for economiesoften follows a cyclic pattern as is evident above.
Times of economic growth are often followed by times of A slowing rate of increase or even a decrease.
The Business Cycle
In times of rapid economic growth an economy will usually
experience;
Increasing employmentDecreasing unemployment
Increasing incomesIncreasing government revenue
Decreasing government transfers
Increasing importsIncreasing C+I
Increase in inflationary pressures
Lower output gap (difference between real output and
potential output) or capacity constraints.
%GDP change
Time
Economic boom
The Business Cycle
In times of falling growth an economy will usually
experience;
Decreasing employmentIncreasing unemployment
Decreasing incomesDecreasing government revenueIncreasing government transfers
Decreasing C+IDecrease in inflationary
pressuresHigher output gap
%GDP change
Time
Economic
Recession