Lecture 17 (GDP Std of Living)
Transcript of Lecture 17 (GDP Std of Living)
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GDP and the Standardof Living
CHAPTER
21
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21.1 GDP, INCOME, AND EXPENDITURE
GDP & GNP DefinedGross Domestic Product (GDP)
The market value of all the final goods and services
produced within a country in a given time period.
Value Produced
Use market prices to value production.
Gross National Product (GNP)
The market value of all the final goods and servicesproduced anywhere in the world in a given timeperiod by the factors of production supplied by theresidents of the country.
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21.1 GDP, INCOME, AND EXPENDITURE
What Produced
Final good or service is a good or service that is
produced for its final user and not as a component ofanother good or service.
Intermediate good or service is a good or servicethat is produced by one firm, bought by another firm,
and used as a component of a final good or service.GDP includes only those items that are traded inmarkets.
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21.1 GDP, INCOME, AND EXPENDITURE
Where Produced
Within a country
When Produced During a given time period.
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21.1 GDP, INCOME, AND EXPENDITURE
Circular Flows in the Economy
Consumption expenditure is the expenditure by
households on consumption goods and services.
Investment is the purchase of new capital goods
(tools, instruments, machines, buildings, and other
constructions) and additions to inventories.
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21.1 GDP, INCOME, AND EXPENDITURE
Government expenditure on goods and services
is the expenditure by all levels of government on goods
and services.
Net exports of goods and services is the value of
exports of goods and services minus the value of
imports of goods and services.
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21.1 GDP, INCOME, AND EXPENDITURE
Exports of goods and services are the items that
firms in Malaysia produce and sell to the rest of the
world.
Imports of goods and services are the items that
households, firms, and governments in Malaysia buy
from the rest of the world.
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21.1 GDP, INCOME, AND EXPENDITURE
Total expenditure is the total amount received by
producers of final goods and services.
Consumption expenditure: CInvestment: I
Government expenditure on goods and services: G
Net exports: NX
Total expenditure = C+ I+ G + NX
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21.1 GDP, INCOME, AND EXPENDITURE
Income
Labor earns wages.
Capital earns interest.
Land earns rent.
Entrepreneurship earns profits.
Households receive these incomes.
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21.1 GDP, INCOME, AND EXPENDITURE
Expenditure Equals Income
Because firms pay out everything they receive as
incomes to the factors of production, total expenditureequals total income.
That is:
Y= C+I+ G + NX
The value of production equals income equals
expenditure.
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21.1 GDP, INCOME, AND EXPENDITURE
Figure 21.1
shows the
circular flow
of incomeand
expenditure.
The table
shows theU.S. data
for 2007.
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21.2 MEASURING GDP
The Expenditure Approach
Measures GDP by using data on consumptionexpenditure, investment, government expenditure on
goods and services, and net exports.Table 21.1 on the next slide shows the calculation for2007.
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21.2 MEASURING GDP
Expenditures Not in GDP
Used Goods
Expenditure on used goods is not part of GDP
because these goods were part of GDP in theperiod in which they were produced andduring which time they were new goods.
Financial Assets
When households buy financial assets suchas bonds and stocks, they are making loans,not buying goods and services.
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21.2 MEASURING GDP
The Income Approach
Measures GDP by summing the incomes that firms pay
households for the factors of production they hire. Wages
Interest
Rent
Profits
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21.2 MEASURING GDP
Wages
Wages, called compensation of employees in thenational accounts, is the payment for labor services.
It includes net wages and salaries plus fringebenefits paid by employers such health careinsurance, social security contributions, and pension
fund contributions.
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21.2 MEASURING GDP
Interest, Rent, and Profit
Interest, rent, and profit is the sum of the incomesearned by capital, land, and entrepreneurship.
Interestis the income households receive on loans theymake minus the interest they pay on their borrowing.
Rent includes payments for the use of land and other
rented inputs.Profitincludes the profits of corporations and smallbusinesses.
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21.2 MEASURING GDP
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21.2 MEASURING GDP
Net domestic product at factor cost is the sum of
wages, interest, rent, and profit.
Net domestic product at factor cost is notGDP.
We need to make two adjustments to arrive at GDP:
One from factor cost to market prices One from net product to gross product
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21.2 MEASURING GDP
From Factor Cost to Market Price
The expenditure approach values goods at marketprices; the income approach values them at factor cost.
Indirect taxes (such as sales taxes) make market pricesexceed factor cost.
Subsidies (payments by government to firms) makefactor cost exceed market prices.
To convert the value at factor cost to the value atmarket prices, we must:
Add indirect taxes and subtract subsidies
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21.2 MEASURING GDP
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21.2 MEASURING GDP
From Gross to Net
The expenditure approach measures gross product; the
income approach measures net product.
Gross profit is a firms profit before subtracting the
depreciation of capital.
Net profit is a firms profit aftersubtracting the
depreciation of capital.Depreciation is the decrease in the value of capitalthat results from its use and from obsolescence.
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21.2 MEASURING GDP
Income includes net profit, so the income approachgives a net measure.
Expenditure includes investment. Because some new
capital is purchased to replace depreciated capital, theexpenditure approach gives a gross measure.
To get gross domestic product from the incomeapproach, we must add depreciation to total income.
After making these two adjustments the incomeapproach almost gives the same estimate of GDP asthe expenditure approach.
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21.2 MEASURING GDP
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21.2 MEASURING GDP
Statistical Discrepancy
The income approach and the expenditure approach do
not deliver exactly the same estimate of GDPthere is
a statistical discrepancy.
Statistical discrepancy is the discrepancy between
the expenditure approach and income approach
estimates of GDP, calculated as the GDP expendituretotal minus the GDP income total.
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21.2 MEASURING GDP
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21.2 MEASURING GDP
GDP and Related Measures of Production and
Income
Gross national product (GNP) is the market value ofall the final goods and services produced anywhere in the
world in a given time period by the factors of production
supplied by residents of the country.
Msia GNP =Msia GDP + Net factor income (Y) from abroad**
(**Y received from other countries - Y paid to other countries)
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21.2 MEASURING GDP
Real GDP and Nominal GDP
Real GDP is the value of the final goods and servicesproduced in a given year expressed in the prices of thebase year.
Nominal GDP is the value of the final goods andservices produced in a given year expressed in the
prices of that same year.
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21.2 MEASURING GDP
Calculating Real GDP
The goal of calculating real GDP is to measure the
extent to which total production has increasedReal GDP removes the influence of price changes from
the nominal GDP numbers.
To focus on the principles and keep the numbers easy
to work with, well calculate real GDP for an economy
that produces only one consumption good, one capital
good, and one government service.
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21.2 MEASURING GDP
Table 21.3 shows the calculation with 2000 (base year)
and 2008.
To find the total expenditure in 2000 multiply the
quantity of each item produced in 2000 by its price in
2000.
Then sum the expenditures to find nominal GDP in
2000.
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Nominal
GDP in2000 is$100million.
Because2000 is thebase year,
real GDPin 2000 isalso $100million.
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21.2 MEASURING GDP
In part (b) of Table 21.3, we calculate nominal GDP in
2008.
Again, we calculate nominal GDP by multiplying the
quantity of each item produced by its price and then
sum the expenditures to find nominal GDP in 2008.
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Nominal
GDP in2000 is$100million.
NominalGDP in2008 is
$300million.
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21.2 MEASURING U.S. GDP
The increase in real GDP will tell by how much the
quantity of good and services has increased.
Real GDP in 2008 is what the total expenditure would
have been in 2008 if prices had remained the same as
they were in 2000.
To calculate real GDP in 2008 multiply the quantities
produced in 2008 by the price in 2000 and the sumthese expenditures to find real GDP in 2008.
Part (c) of Table 21.3 shows the details.
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Real GDP
in 2000 is$100million.
Real GDPin 2008 is$160million
only 1.6times realGDP in2000.
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21.3 THE USE AND LIMITATIONS OF REAL GDP
We use estimates of real GDP for two main purposes:
To compare the standard of living over time
To compare the standard of living among countries
The Standard of Living Over Time
To compare living standards we calculate real GDP per
person (GDP per capita / income per capita)- realGDP divided by the population.
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21.3 THE USE AND LIMITATIONS OF REAL GDP
In 1967, real GDP in the United States was $3,485 billionand the population of the United States was 198.7million.
Real GDP per person = $3,485 billion 198.7 million
Real GDP per capita in US = $17,536
GDP per capita (current price) in Malaysia
2011= US$9977.32
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21.3 THE USE AND LIMITATIONS OF REAL GDP
Long-Term Trend
Figure 21.3 showsthe long-term trend
in U.S. real GDP perperson.
Real GDP per persondoubled in the 36
years from 1967 to2002.
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21.3 THE USE AND LIMITATIONS OF REAL GDP
Short-Term Fluctuations
Fluctuations in the pace of expansion of real GDP is
called the business cycle.
The business cycle is a periodic irregular up-and down
movement of total production and other measure of
economic activity.
The four stages of a business cycle are expansion,peak, recession, and trough.
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21.3 THE USE AND LIMITATIONS OF REAL GDP
The shaded periodsshow the
recessionsperiods of fallingproduction thatlasts for at least sixmonths.
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21.3 THE USE AND LIMITATIONS OF REAL GDP
Standard of Living Across Countries
To compare living standards across countries, we must
convert real GDP into a common currency and common
set of prices, called purchasing power par i ty.
Purchasing power parity in Msia in 2008 = US$14,206
Goods and Services Omitted from GDP
Household production
Underground production
Leisure time
Environment quality
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21.3 THE USE AND LIMITATIONS OF REAL GDP
Leisure Time
Our working time is valued as part of GDP, but ourleisure time is not.
Environment Quality
Pollution is not subtracted from GDP.
We do not count the deteriorating atmosphere as a
negative part of GDP. If our standard of living is adversely affected by
pollution, our GDP measure does not show thisfact.
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21.3 THE USE AND LIMITATIONS OF REAL GDP
Other Influences on the Standard of Living
Health and Life Expectancy
Good health and a long life do not show up directlyin real GDP.
Political Freedom and Social Justice
A country might have a very large real GDP perperson but have limited political freedom andsocial justice.
A lower standard of living than one that had thesame amount of real GDP but in which everyoneenjoyed political freedom.