Download - LectureSlides Chp5
-
8/8/2019 LectureSlides Chp5
1/27
Chp. 5 1
Chapter 5
GDP: A Measure of Total
Production and Income
-
8/8/2019 LectureSlides Chp5
2/27
Chp. 5 2
Gross Domestic Product (GDP)
Gross domestic product (GDP) is the
market value of all the final goods and
serv
ices
produced w
ith
ina
cou
ntry
inagiven time period.
-
8/8/2019 LectureSlides Chp5
3/27
Chp. 5 3
Market value?
Using dollar values or market value avoids theapples and oranges problem. You cannot add
apples and oranges,BUT you can add up
dollars worth of apples and oranges.
-
8/8/2019 LectureSlides Chp5
4/27
Chp. 5 4
Final goods and services?
The term final goods and services refers to a good
orservice that is produced forits final user and notas a component of another good orservice.
Intermediate good or service is a good orservicethat is used up as a component in production of a
final good orservice. We do not separately include the value of
intermediate goods since the value of theintermediate goods are included in the price (value)of the final product.
Ifintermediate goods were separately included, thenyou would double count them and overestimateGDP.
-
8/8/2019 LectureSlides Chp5
5/27
Chp. 5 5
Produced?
A good orservice has to be produced to becounted in GDP.
Sales ofstocks and bonds are not counted inGDP because thisinvolves only transfer ofownership of financial assets without any goods
orservices being produced.
Note: If you buy a stock or bond from a broker andpaid a fee for that service that service fee will beincluded in GDP since a new service (the brokersservice) was produced.
-
8/8/2019 LectureSlides Chp5
6/27
Chp. 5 6
Within a country?
Any final good orservice produced within theborders of a country iscounted in that country's
GDP where the good has been produced.
Thisis regardless of ownership of the factors of
production.
-
8/8/2019 LectureSlides Chp5
7/27
Chp. 5 7
In a given time period?
GDP calculated for a given year will only includevalue ofnew goods and services produced in
that year.
Pur chases of used goodsisnot part of GDP
because these goods were part of GDP in theperiod in which they were produced and during
which time they were new goods.
-
8/8/2019 LectureSlides Chp5
8/27
Chp. 5 8
Two ways of calculating GDP
Expenditure Approach:
Adds up amount spent on
all final goods and services
during a given period
Income Approach:
Adds up all income received by all
factors of productionin producing the
goods
GDP Calculation
Total payment/ expenditure Total receipt/ incomeEQUALS
-
8/8/2019 LectureSlides Chp5
9/27
Chp. 5 9
Expenditure categories under Expenditure Approach
1. Consumption (C)
2. Investment (I)
3. Government spending (G)
4. Net Exports (NX)
-
8/8/2019 LectureSlides Chp5
10/27
Chp. 5 10
Consumption (C)
Expenditure by households onconsumptiongoods and services.
Durable goodsi.e. goods that are used over a
long period of time e.g. furniture, vehicles,
appliances. Non-Durable goodsi.e. goods that are consumed
immediately or over a short time e.g. food,
clothing.
Services e.g. medical service, banking service.
-
8/8/2019 LectureSlides Chp5
11/27
Chp. 5 11
Investment (I)
Non-residential investment i.e. purchase ofnewcapital goods (tools,instruments, machines) by
firms.
Residential investment i.e. purchase ofnew
houses and buildings by firms and households.
Change in businessinventories.
-
8/8/2019 LectureSlides Chp5
12/27
Chp. 5 12
Government Spending (G)
Spending by all levels of government onnewgoods and services Federal Spending such asnational defense.
State Spending such asnew highways.
Local Spending such as a new park or elementaryschool.
Note: Government transfer paymentssuch associal security benefits, welfare payments etc. arenot counted in G since they dont involveproduction ofnew goods and services
-
8/8/2019 LectureSlides Chp5
13/27
-
8/8/2019 LectureSlides Chp5
14/27
Chp. 5 14
GDP as expenditure
GDP = Total expenditure = C+I+G +NX
-
8/8/2019 LectureSlides Chp5
15/27
Chp. 5 15
-
8/8/2019 LectureSlides Chp5
16/27
Chp. 5 16
What GDP measures?
GDP = Value of production = Expenditure = Income
-
8/8/2019 LectureSlides Chp5
17/27
Chp. 5 17
Value of Production = Expenditure
Anything not purchased in a yeariscounted asbusinessinventory investment by the firm that
produced the product.
So productionin a year (GDP) = Final salesin
that year+change in businessinventories
-
8/8/2019 LectureSlides Chp5
18/27
Chp. 5 18
Expenditure = Income
An expenditure by the buyer of anitem isincome for the producer orseller of that item
-
8/8/2019 LectureSlides Chp5
19/27
Chp. 5 19
Problem in comparing GDP of two years The problem arises because while productioncan
change between two yearsso can prices.
Prices are needed to calculate GDP which years
price to use to calculate GDP i.e. value of goods
and services?
If pr ices of respective years are used to calculate
GDP of those years thensuch GDP measure is
called nominal GDP.
e.g. nominal GDP of 2005 = units of goods andservices produced in 2005 valued in 2005 prices
Similarly nominal GDP of 2010 = units of goods and
services produced in 2010 valued in 2010 prices
-
8/8/2019 LectureSlides Chp5
20/27
Chp. 5 20
Problem in comparing GDP of two years Changesinnominal GDP can be caused by
changesin production,changesin prices, or both.
How can we then find out whether production ofgoods and services has really changed between twoyears? we use real GDP.
Real GDP measures value of goods and services
using price of a chosen yearcalled the base yeare.g. if we fix year 2005 as the base year, then
real GDP of 2005 = units of goods and servicesproduced in 2005 valued in 2005 (base year) prices
real GDP of 2010 = units of goods and servicesproduced in 2010 valued in 2005 (base year) prices
-
8/8/2019 LectureSlides Chp5
21/27
Chp. 5 21
Real GDP and Nominal GDP
N
ominal GDPis the value of the final goods andservices produced in a certain year expressed inthe prices of that same year.
Real GDPis the value of the final goods andservices produced in a given year expressed inthe prices of a chosen or base year.
Any change in real GDP is due to change inproduction only.
-
8/8/2019 LectureSlides Chp5
22/27
Chp. 5 22
-
8/8/2019 LectureSlides Chp5
23/27
Chp. 5 23
Standard of Living
To compare living standards over time wecalculate real GDP per person i.e. real GDPdivided by the population.
To compare living standards acrosscountries,we must convert real GDP into a commoncurrency and commonset of prices,calledpurchasing power parity.
-
8/8/2019 LectureSlides Chp5
24/27
Chp. 5 24Source:measuringworth.com
-
8/8/2019 LectureSlides Chp5
25/27
Chp. 5 25
Limitations of Real GDP
Household Production Real GDP omits household production,it
underestimates the value of the production of manypeople, most of them women.
Underground Production Hidden from government to avoid taxes and
regulations orillegal.
Because underground economic activity isunreported,it is omitted from GDP.
-
8/8/2019 LectureSlides Chp5
26/27
Chp. 5 26
Limitations of Real GDP
Leisure Time Our working time is valued as part of GDP, but our
leisure time isnot.
Environment Quality
Pollutionisnot subtracted from GDP. We do not count the deteriorating atmosphere as a
negative part of GDP.
If ourstandard of living is adversely affected bypollution, our GDP measure doesnot show this fact.
-
8/8/2019 LectureSlides Chp5
27/27
Chp. 5 27
Limitations of Real GDP
Health and Life Expectancy Good health and a long life do not show up directly in
real GDP.
Political Freedom and Social Justice
A country might have a very large real GDP perperson but have limited political freedom and socialjustice.
A lowerstandard of living than one that had the sameamount of real GDP but in which everyone enjoyed
political freedom.