Macroeconomics Chapter 6:GDP and Real GDP

8/3/2019 Macroeconomics Chapter 6:GDP and Real GDP

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Paul Schneiderman, Ph.D., Professor of Finance & Economics, SouthernNew Hampshire University2008 South-Western


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Gross Domestic Product

Expenditures

Computing GDPMeasurements Other Than

GDP

Real GDPEconomic Growth and

Business Cycles

In This Lecture..


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Gross Domestic Product(GDP)

The total marketvalue of all final

goods and servicesproduced annuallywithin a countrys

borders.


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Ways to Compute GDP -Expenditure Approach

Add the amount of money spent bybuyers of final goods and services*

Avoid double counting.

Do not count intermediate goods**

* Goods in the hands of their final users.** Goods that are inputs for the production of final

goods.


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Ways to Compute GDPIncome and Value added

Approaches

Income Approach add the sum of all

incomes earned (wages, interest, rents, andprofits) in producing goods and services

Value-added Approach add the value

added at each stage of production of allgoods and services


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Whats Not Included in GDP

Certain non-

market goodsand services suchas chores

performed athome by familymembers.


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Undergroundactivities, both legal

and illegal

Whats Not

Included inGDP


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Sales of used

goods

Financial

transactions suchas trading ofstocks and bonds


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Governmenttransfer payments

such as socialsecurity

Leisure time


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GDP and Bads

GDP counts thegoods and services,

but it does not net out

the air and waterpollution.

Thus, someeconomists argue that

GDP overstates ouroverall economicwelfare.


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GDP Per Capita


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Self-Test Questions

Identify and explain the three approachesto computing GDP.

Suppose the GDP for a country is $0. Doesthis mean that there was no productiveactivity in the country? Explain your

answer.


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GDP - Expenditure Approach4 Sectors

Household Sector - Consumption

Business Sector - InvestmentGovernment Sector Government Purchases

Foreign Sector Net Exports

C + I + G + (X M)GDP =


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Consumption

The sum of household spending on:

Durable goodsNondurable goods

Services


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Durable Goods

Durable goods are goods that are expectedto last for more than three years, such asrefrigerators, ovens, or cars.


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Nondurable Goods

Nondurable goods are goods that are notexpected to last for more than three years,such as food.


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Services

Services are intangible items such as lawncare, car repair, and entertainment.


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Investment

The sum of all purchases of:

Newly produced capital goods -Business purchases of capital goods,such as machinery and factories

Changes in business inventories -Changes in the stock of unsold goods.

Purchases of new residential housing


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Government Purchases

Includes:

Federal, state, and local governmentpurchases of goods and services and grossinvestment in highways, bridges, and soon.

Excludes:

Government transferpayments to personsthat are not made in return for goods andservices currently supplied.


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Net Exports

Exports(X)- Total foreign spending ondomestic (U.S.) goods

Less

Imports (M) - Total domestic (U.S.) spendingon foreign goods


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Expenditure Approach


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GDP 2006


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Bureau of Economic Analysis

BEA is an agency of the U.S. Departmentof Commerce. One of its major functionsis to assemble the data which is then used

to calculate GDP.

To get the latest information on GDPand other economic data, click below
http://www.bea.gov/index.htm


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GDP Income Approach

1. Purchases (expenditures) made in productmarkets flow to business firms.

2. Business firms then use these monies to buyresources in resource markets.

3. These monies flow to the owners (suppliers) ofland, labor, capital, and entrepreneurship.

4. The sum of these resource payments is totalincome, which flows to households. In this

simple economy total purchases (expenditures)equal total income.5. Because total purchases (expenditures) equal

GDP and total purchases equal total income, itfollows that GDP equals total income.


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National Income

Total income earned by U.S. citizens andbusinesses, no matter where they reside orare located.

National income is the sum of thepayments to resources (land, labor,capital, and entrepreneurship).


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Computing National Income

National income =

Compensation of employees

+ Proprietors income+ Corporate profits

+ Rental income

+Net interest


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COMPENSATION OFEMPLOYEES

Compensation of employees consists ofwages and salaries paid to employees plusemployers contributions to Social

Security and employee benefit plans plusthe monetary value of fringe benefits, tips,and paid vacations.


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PROPRIETORS INCOME

Proprietors income includes all forms ofincome earned by self-employedindividuals and the owners of

unincorporated businesses, includingunincorporated farmers.


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CORPORATE PROFITS

Corporate profits include all the incomeearned by the stockholders ofcorporations.


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RENTAL INCOME (OFPERSONS)

Rental income is the income received byindividuals for the use of their non-monetary assets (land, houses, offices).

It also includes returns to individualswho hold copyrights and patents.

Finally, it includes an imputed value toowner-occupied houses.


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NET INTEREST

Net interest is the interest income receivedby U.S. households and governmentminus the interest they paid out.


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From NI to GDP

GDP =

National income

- Income earned from the rest of the world+ Income earned by the rest of the world

+ Indirect business taxes

+ Capital consumption allowance+ Statistical discrepancy


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GDP = Income Approach


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Net Domestic Product

NDP measures the total value of new goodsavailable in the economy in a given year afterworn-out capital goods have been replaced.

Net domestic product (NDP) =

GDP Capital consumption allowance*

*The estimated amount of capital goods used upin production through natural wear,obsolescence, and accidental destruction.


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Personal and Disposable Income

Personal income =National income Undistributed corporate profits

Social insurance taxes Corporate profits taxes+ Transfer payments

Disposable income =Personal income Personal taxes


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Self-Test Questions

Describe the expenditure approach tocomputing GDP in a real-world economy.

Will GDP be smaller than the sum of

consumption, investment, and governmentpurchases if net exports are negative?Explain your answer.

If GDP is $400 billion and the countryspopulation is 100 million, does it follow thateach individual in the country has $40,000worth of goods and services?


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Real GDP

The value of the entire output producedannually within a countrys borders,adjusted for price changes (inflation).


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Economic Growth

Economic Growth is measured by increasesin Real GDP.


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Business Cycle

Recurrent swings (up and down) in

Real GDP.


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Business Cycles and the NBER

For current economic data and businesscycle information visit the NationalBureau of Economic Research by clicking

the logo below.
http://www.nber.org/


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Self-Test Questions

Suppose GDP is $6 trillion in year 1 and$6.2 trillion in year 2. What has caused therise in GDP?

Suppose Real GDP is $5.2 trillion in year 1and $5.3 trillion in year 2. What hascaused the rise in Real GDP?

Can an economy be faced with endlessbusiness cycles and still have its Real GDPgrow over time? Explain your answer.


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Other Sources of Economic Data

White House -Economic StatisticsBriefing Room

CongressionalBudget Office

Bureau of the

Census

Click above to Select
http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.cbo.gov/http://www.cbo.gov/http://www.census.gov/http://www.census.gov/http://www.census.gov/http://www.census.gov/http://www.cbo.gov/http://www.cbo.gov/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/


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Wall Street Journal

The Wall Street Journal is a is a rich sourceof information which provides real lifeexamples of micro- and macro economic

activities. Check todays issue to see themost current news.

http://www.wsj.com
http://www.wsj.com/http://www.wsj.com/


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