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Gross Domestic Product
Module-2
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Gross Domestic Product
GDP is the total market value of all final goods andservices produced annually within a countrys borders.
Expenditure Approach: compute GDP by adding themoney spent by buyers on final goods and services.What are final goods? What are intermediate goods?Whats the difference?
Income Approach: compute GDP by adding all wagesand all profits.
Value-Added Approach: compute GDP by adding thevalues added to a product at all stages of production.
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GDP? GNP? Whats different? Gross National Product is the
total market value of all final
goods and services provided
annually by the citizens of a
country
GDP measures all final
goods produced in a country,
whether by citizens or not.
GNP measures all finalgoods produced by citizens
whether physically in that
country or not. GNP = GDP
minus foreign investment
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What GDP Omits
Certain Nonmarket Goodsand services
Underground Activities,
both legal and illegal Sale of Used Goods
Financial Transactions
Government Transfer
Payments. Leisure
Not adjusted for bads
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Total Market Value
Total Market Value is
the monetary value of
goods and services attodays prices.
Only final goods are
counted to protect
against the error ofover-counting.
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GDP or Per Capita GDP
Per Capita GDP is the GDP divided by the
population.
GDP figures are useful for obtaining anestimate of the productive capabilities of an
economy but they do not necessarily
measure happiness or well being.
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Q & A
Give an example that illustrates the
difference between the Indian GDP and
GNP. Suppose the GDP for a country is Rs 0.
Does this mean that there was no productive
activity in the country? Explain youranswer.
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Expenditures in a Real-World
EconomyExpenditures:
Consumption includesspending on durable goods,
spending on non-durablegoods, and spending onservices.
Investment is the sum ofpurchases of newly producedcapital goods, changes in
business inventories, andpurchase of new residentialhousing.
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Expenditures in a Real-World
Economy Government purchases
include federal, state, and
local government
purchases of goods andservices and gross
investment in highways,
bridges, and so on.
Net Exports is the totalnumber of exports minus
the number of imports.
i i h
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Computing GDP using the
Expenditure Approach
Anything that is not sold is bought by the firm thatproduces it.
GDP=Consumption + Investment + Government Purchases
+ Net Exports
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The Income Approach to Computing
GDP For A Real World Economy Domestic Income is the
total income earned by the
people and businesses
within a countrys borders.
National Income is the
total income earned by
Indian citizens and
businesses, no matterwhere they are located.
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Computing National Income
Compensation of Employees: Wages, salaries, SocialSecurity benefits, and employee benefit plans plus themonetary value of fringe benefits, tips, and paidvacations
Proprietors Income is all forms of income earned byself-employed individuals and the owners ofunincorporated business, including unincorporatedfarmers.
Corporate Profits include all income earned by thestockholders of corporations.
Rental Income of Persons is the income received byindividuals for the use of their non-monetary assets.
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Computing National Income Part 2
Net Interest: the interest income received by
U.S. households and government minus the
interest they paid out. National Income = Compensation of
employees + Proprietors Income +
Corporate Profits + Rental Income + NetInterest
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National Income 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 consumptionallowance + Statistical
discrepancy
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National GDP Making Some
Adjustments Remember that the National income excludes
foreign nationals and includes citizens abroad, butthe GDP has to adjust for both of these incomes.
Indirect Business Taxes usually comprise excisetaxes, sales taxes, and property taxes.
Capital Consumption Allowance or depreciation is
the cost to replace capital goods that break or weardown
Statistical discrepancies or pure computationalerrors often occur
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Other National Income
Accounting Measurements Net Domestic Product = GDPCapital
consumption allowance
Personal Income = National incomeUndistributed Corporate ProfitsSocial SecurityTaxesCorporate Profits Taxes + TransferPayments
Disposable Income = Personal IncomePersonalTaxes
Per Capita Macroeconomic Measurements Dividesthese factors by the population.
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Q & A
Describe the expenditure approach to computingGDP in a real-world economy.
Will GDP be smaller than the sum ofconsumption, investment, and governmentpurchases if net exports are negative? Explainyour answer.
If GDP is $400 billion, and the countryspopulation is 100 million, does it follow that eachindividual in the country has $40,000 worth ofgoods and services?
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Real GDP
Real GDP is GDP adjusted for pricechanges.
Real GDP is equal to the change in Baseyear prices multiplied by current yearquantities.
Annual economic growth has occurred ifthe Real GDP in one year is higher than theprevious year.
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If You Know the Price Index and
GDP For A Year, Can You ComputeReal GDP?
Real GDP =
GDP x 100
Chain Weighted Price Index
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What Does It Mean If Real GDP
Is Higher In One Year Than In
Another Year? GDP can rise from one
year to the next if:
Prices rise and outputremains constant;
Output rises and prices
remain constant;
Or prices and outputrise.
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Real GDP, Economic Growth,
and Business CyclesEconomic Growth has
occurred if Real GDP
in one year is higherthan Real GDP in the
previous year.
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Ups and downs of the Business
Cycle Peak: at the peak of the business cycle, Real GDP
is at a temporary high.
Contraction: A decline in the real GDP. If it fallsfor two consecutive quarters, it is said to be in arecession.
Trough: The Low Point of the GDP, just before it
begins to turn up. Recovery: When the GDP is rising from thetrough.
Expansion: when the real GDP expands beyond
the recovery
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The Business Cycle
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Recession
The NBER definition of a
recession is a significant
decline in activity spread
across the economy,lasting more than a few
months, visible in
industrial production,
employment, real income,and wholesale-retail
trade.
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Q & A
Suppose GDP is $6,039 billion in year 1 and
$6,245 billion in year 2. What has caused the rise
in GDP? Suppose Real GDP is $5,233 billion in year 1 and
$5,267 billion in year 2. What has caused a rise in
the Real GDP?
Can an economy be faced with endless businesscycles and still have its Real GDP grow over
time? Explain your answer.