Gross domestic product ( GDP ) The market value of all final goods and services produced in a country during a period of time, typically one year. Gross Domestic Product Measures Total Production. GDP Is Measured Using Market Values, Not Quantities. - PowerPoint PPT Presentation
Gross Domestic Product Measures Total Production Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time, typically one year. GDP Is Measured Using Market Values, Not Quantities The worth of a thing is the price it will bring. Final good or service A good or service purchased by a final user: • Household consumption • Business investment, including all residential construction • Government purchases vs Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck. GDP Includes Only Current Production
Transcript
Gross Domestic Product Measures Total Production
Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time, typically one year.GDP Is Measured Using Market Values, Not Quantities
The worth of a thing is the price it will bring.Final good or service A good or service purchased by a final user:
• Household consumption
• Business investment, including all residential construction
• Government purchases
• Exports to foreigners
vs
Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck.
GDP Includes Only Current Production
PRODUCTION AND PRICE STATISTICS FOR 2011
(1)PRODUCT
(2)QUANTITY
(3)PRICE PER UNIT
Eye examinations 100 $50.00
Pizzas 80 10.00
Textbooks 20 100.00
Paper (for textbooks) 2,000 0.10
PRODUCT(1)
QUANTITY(2)
PRICE PER UNIT(3)
VALUE
Eye examinations 100 $50 $5,000
Pizzas 80 10 800
Textbooks 20 100 2,000
Total GDP = $7,800
Production, Income, and the Circular Flow Diagram
SprivateIm
X
C T
T
G + Tr
G
DeficitNX = X - Im
I = Sprivate
- NX - Deficit
Y: Components of GDP = $15.5 trillion (2012:Q1)
Consumption Spending by households on goods and services, not including spending on new houses.
C: Personal Consumption Expenditures = “Consumption” = 71.6% of Y
Investment Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.
I: Gross Private Domestic Investment, or “Investment” = 12.9% of Y
G: Government Consumption and Gross Investment,or “Government Purchases” = 19.4 % of Y
Government purchases Spending by federal, state, and local governments on goods and services.
NX: Net Exports of Goods and Services, or “Net Exports” = -0.6% of Y
X = 13.9 % of Y Im = 17.7% of Y
Transfer payments are not included in GDP: Payments by the government to individuals for which the government does not receive a new good or service in return.
• Unemployment benefits paid to someone not working.
• Social security benefits paid to someone who is retired.
• Interest income paid to a government bondholder
Since the government doesn’t produce anything for
the market, the interest payment can’t be for any
productive service.
“Underground economy” activities are not included in GDP
• Production “off-the-books”• Illegal activities
Household production is not included in GDP
Does GDP Measure What We Want It to Measure?
Shortcomings of GDP as a Measure of Well-Being
The Value of Leisure Is Not Included in GDP
GDP Is Not Adjusted for Pollution or Other Negative Effects of Production
GDP Is Not Adjusted for Changes in Crime and Other Social Problems
GDP Measures the Size of the Pie but Not How the Pie Is Divided Up
• Consumer spending on services is greater than the sum of spending on durable and nondurable goods.
• Business fixed investment is the largest component of investment. Gross private domestic investment includes
New plant and equipment
New residential construction
Net additions to business inventories
• Purchases made by state and local governments are greater than purchases made by the federal government.
• Imports are greater than exports
net exports are negative.
An Equation for GDP and Some Actual Values
Components of GDP in 2006
NXGICY
Measuring GDP by the Value-Added Method
Value added The market value a firm adds to a product.
FIRM VALUE OF PRODUCT VALUE ADDED
Cotton Farmer Value of raw cotton = $1
Value added by cotton farmer = 1
Textile Mill
Value of raw cotton woven into cotton fabric = $3
Value added by cotton textile mill = ($3 – $1) = 2
Shirt Company Value of cotton fabric made
into a shirt = $15Value added by shirt manufacturer = ($15 –$3) = 12
L.L. BeanValue of shirt for sale on L.L. Bean’s Web site = $35
Value added by L.L. Bean = ($35 – $15) = 20
Total Value Added = $35
PRODUCT2009
QUANTITY2000
PRICE VALUE
Eye examinations 100 $40 $4,000
Pizzas 80 11 880
Textbooks 20 90 1,800
2000 2009
PRODUCT QUANTITY PRICE QUANTITY PRICE
Eye examinations 80 $40 100 $50
Pizzas 90 11 80 10
Textbooks 15 90 20 100
Real GDP versus Nominal GDPReal GDP The value of this year’s final goods and services evaluated at base-year prices.
Nominal GDP The value of this year’s final goods and services evaluated at this year’s prices.
vs
Comparing Real GDP and Nominal GDPNominal GDP and Real GDP, 1990–2006
The GDP Deflator GDP deflator A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.
100Nominal GDP
GDP deflatorReal GDP
$ GDP = Price Level x Real Output
$Y = P x Y
P = $Y/Y
Other Measures of Total Production and Total Income
Gross National Product (GNP)
=GDP + Net Foreign Earnings of US Residents• Compensation of employees earned abroad• Interest and profits earned abroad
Net National Product (NNP) = GNP - Capital Consumption Allowance (depreciation)
National Income (NI) = NNP - Indirect Business Taxes
Personal Income (PI) = NI + Net Transfer Payments
= Income earned from production of national product
Disposable Income (DI) = PI - Income Taxes
• Disposable Income is split between consumption and saving
Other Measures of Total Production and Total Income
FIGURE 7-4
Measures of Total Production and Total Income, 2006
Other Measures of Total Production and Total Income
