Measurements, Part II: GDP And Real GDP

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GDP (Gross Domestic Product)

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GDP: the total market value of all the final

goods and services produced annually within a country’s borders.

Final good: a good in the hands of its final user

GDP (Gross Domestic Product) (continued)

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Three ways to compute GDP: 1. The expenditure approach. 2. The income approach. 3. The value added approach.

GDP (Gross Domestic Product) (continued)

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Expenditure approach: add the amount of money spent by buyers

on final goods and services.

Income approach: simply find the sum of all wages and

profits.

Value added approach: find the sum of the values added at all the

stages of production.

What GDP Omits

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Some exchanges that take place in an economy are not included

in GDP. Such as:- Certain nonmarket goods and services.- Underground activities, both legal and

illegal.- Sales of used goods.- Financial transactions.- Government transfer payments.- Leisure

Per Capita GDP

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If we divide a country’s GDP by the population in the country, we get per capita GDP.

Example: If a country has a GDP of $ 5 trillion and its

population is 200 million, GDP per capita is $ 25000

The Expenditure Approach Computing GDP For A Real Word Economy

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Expenditure in a real word economy: - Often talk four sectors of the economy,

such as: -- household sector. -- business sector. -- government sector. -- foreign sector.

The Expenditure Approach Computing GDP For A Real Word Economy (continued)

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The expenditures of the sectors are called, respectively:

1. Consumption (C). 2. Gross private domestic investment, or

investment (I). 3. Government consumption expenditures

and gross investment, or simply government

purchases (G). 4. Net export (NX).

The Expenditure Approach Computing GDP For A Real Word Economy (continued)

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Consumption (C) includes: 1. Spending on durable goods. 2. Spending on nondurable goods. 3. Spending on services

The Expenditure Approach Computing GDP For A Real Word Economy (continued)

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Investment (I): is the sum of (1) the purchase of newly

produced capital goods, (2) changes in business inventories (inventory investment), and (3) the purchases of new residential housing.

Investment = fixed investment + inventory investment

The Expenditure Approach Computing GDP For A Real Word Economy (continued)

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Government purchases (G): include federal, state, and local

government purchases of goods and gross investment such as in highways, bridges, and so on.

Net export (NX) NX = EX – IM EX: exports IM: imports

The Expenditure Approach Computing GDP For A Real Word Economy (continued)

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GDP = C + I + G + (EX – IM)

The Income Approach To Computing GDP For A Real World Economy

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Computing national income: - National income, is the sum of five

components: 1. Compensation of employees. 2. Proprietors’ income. 3. Corporate profits. 4. Rental income of persons. 5. Net interest

The Income Approach To Computing GDP For A Real World Economy (continued)

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National Income = Compensation of employees +

Proprietors’ income + Corporate profits + Rental income + Net interest

The Income Approach To Computing GDP For A Real World Economy (continued)

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From National Income To GDP: Making Some Adjustment

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

Other National Income Accounting Measurements

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They are:1. Net Domestic Product (NDP). NDP = GDP – Capital Consumption

Allowance

Capital Consumption Allowance: the estimated amount of capital goods used

up in production through natural wear, obsolescence, and

accidental destruction.

Other National Income Accounting Measurements (continued)

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They are:2. Personal Income.

Personal Income = National Income – Undistributed Corporate

Profits – Social Insurance Taxes – Corporate Profits Taxes

+ Transfer Payments