GDP
- Gross Domestic Product (GDP) - the total market value of all final goods and services produced within a country's borders within a given year
- Gross National Product (GNP) - a measure of what its citizens produce and whether they produce these items within its borders
- What's NOT Included in GDP
- Used or "Second-Hand" Products
- avoid double or multiple counting
- Gifts/Transfer Payments (public or private)
- no output being produced
- public ex: welfare, social security
- private ex: scholarship
- recipients contribute nothing to current production
- Stocks & Bonds
- purely financial transaction
- no output being produced
- Unreported Business Activities
- "tips"
- Illegal Activities
- drugs, prostitution, etc...
- Intermediate Goods
- goods that require further processing before they are ready for final use
- ex: big mac, car
- Non-Market Activities
- volunteer/family work
Calculating GDP
- both approaches should yield the same amount
- expenditure = income
Expenditure Approach
- adds up all the spendings on goods and services produced in a given year
GDP = C + Ig + G + Xn
- C - the personal consumption expenditures (67 % of the economy)
- the purchase of finished goods and services
- Ig - gross private domestic investment
- covers new factory equipment
- factory equipment maintenance
- construction of housing
- unsold inventory of products built in a year
- G - government spending
- Xn - net exports
- (exports - imports)
Income Approach
- adds up all the income that resulted from selling all final goods and services produced in a given year
GDP = WRIP + Statistical Adjustments
- W - wages (salary, salary supplements, compensation of employees)
- R - rents (rental income)
- I - interests (interests income)
- P - profits (proprietors income)
Formulas
- Trade
- (export - import)
- [-] = deficit
- [+] = surplus
- Budget
- (govt purchases of goods & services) + (govt transfer payments) - (govt tax & fee collections)
- [-] = surplus
- [+] = deficit
- National Income
- Option 1: (compensation of employees) + (rental income) + (interests income) + (proprietors income) + (corporate profits)
- Option 2: (GDP) - (indirect business taxes) - (depreciation *consumption of fixed capital*) - (net foreign factor payments)
- Disposable Personal Income
- (national income) - (personal household taxes) + (govt transfer payments)
- Net National Product
- (GNP) - (depreciation)
- Net Domestic Product
- (GDP) - (depreciation)
- GNP
- (GDP) + (net foreign factor payment)
- Gross Private Domestic Investment
- (net private domestic investment) + (depreciation)
Nominal vs. Real GDP
- Nominal GDP - the value of output produced in current prices
- formula: P x Q
- can increase from year to year if either output or price increases
- Real GDP - the value of output produced in constant base-year prices that is adjusted for inflation
- formula: P x Q
- can increase from year to year if any output increases
- in the base-year, the current price is equal to constant prices
- base year → Nominal GDP = Real GDP
- in years after the base-year, nominal GDP will exceed real GDP
- in years before the base-year, real GDP will exceed nominal GDP
- GDP Deflator - a price index used to adjust from nominal to real GDP
- (nominal GDP / real GDP) x 100
- in the base-year, the GDP deflator will equal 100
- for years after the base-year, GDP deflator will be greater than 100
- for years before the base-year, the GDP deflator will be less than 100
- Inflation - a general rise in the price level
- Inflation Rate = (new price index - old price index) / (old price index) x 100
- Consumer Price Index (CPI) - measures the cost of a market basket of goods of a typical urban American family
- (cost of a market basket of goods in a given year) / (cost of a market basket of goods in the base-year) x 100
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