Module 3-Gross Domestic Product (GDP)

Economics B252

Do goods and services flow in the same direction as money payments?

No. Goods and services flow in one direction. Money payments flow in the other.

In an economic exchange, does the seller receive the same amount that the buyer spends?

Yes

GDP (Definition)

The total market value of all final goods and services produced by factors of production located within a nation’s boarders over a specific time.

What are typical services included in GDP?

Education and health services

What are typical factors of production in GDP?

Labor, machines, land

When is GDP reported? 

Quarterly and annually 

What does GDP measure?

Measures the dollar (nominal) value of final output. (Quantities x Price)

What are the costs to low levels of GDP?

Quality of life is lower and less healthcare services are available

Does high quality of life positively correlate to higher GDP? 

Yes

How does GDP affect unemployment?

It lowers it

Nominal Values (Definition)

Measurements in terms of the actual market prices at which goods are sold, expressed in current dollars. (Nominal values are what we see/read)

Real Values (Definition)

Measurements after adjustments have been made for changes in the average of prices between years; expressed in constant dollars.

Why would we want GDP to be adjusted?

We want GDP to be adjusted so we can use it across countries and time.

What do you multiply to get nominal GDP?

You multiply Quantity x Price. Both of these will be from the year that you want to calculate

What do you multiply to get real GDP?

You multiply Base year Price x Quantity. Price is constant when calculating real GDP

Real GDP (Formula)

Real GDP= (Nominal GDP/GDP Deflator)x100

GDP Deflator (Formula)

GDP Deflator= (Nominal GDP/Real GDP)x100

What kind of goods are counted in GDP?

Final goods

What are intermediate goods and services?

These are usually goods and services that are sold to professionals and then bundled or processed with other goods or services for sale at a later stage.

Who is the end user for a final good, that would be counted in GDP?

Consumers are the end users 

If a designer bought a piece of cloth, and used it to design a dress, would the cloth be counted in the GDP?

No, because it would be considered as an intermediate good instead of a final good.

What is not counted in GDP?

Transfer payments, financial transactions, major federal programs, and secondhand/used goods.

National Income Accounting (Definition)

A measurement system used to estimate national income and its components. 

Expenditure Approach (Definition)

Computing national income by adding up the dollar value at current market prices of all finals goods and services. (Spending approach)

Income Approach (Definition)

Computing national income by adding up the dollar value at current market prices of all income 

Output or Production Approach

Computing national income by adding up the value added from each step of production at current market prices. (Value added approach)

Expenditure Approach (Formula)

GDP=C+I+G+NX

What is included in consumption expenditure? (Expenditure approach)

Durables (goods), nondurables, and services (Healthcare, education, concerts, movies, intangible commodities)

What do more durables (goods) tells us about the economy?

That it is healthy. The more durables an economy has, the better the health of it. 

What is the lifespan for durables (goods)?

Life span is more than three years 

What is the lifespan for nondurables?

Life span is less than three years

Is education consumption or investment?

Consumption

What is included in Gross Private Domestic Investment? (Expenditure approach)

(1) The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future. (2) Fixed investment (new physical capital) (3) Inventory Investment (4) New Residential Structures (5) Business spending

Is financial investment included in Gross Private Domestic Investment?

No

Is physical investment financial investment?

No

What is included in Government Expenditures? (Expenditure approach)

State, local, and federal (military, infrastructure, roads, piping, cables) (Valued at cost)

What is included in Net Exports? (Expenditure approach)

All exports are part of GDP regardless of whether they are intermediate goods used abroad

What are exports?

Goods and services sold abroad

Why do you subtract net imports from net exports?

You subtract them to avoid double counting because they are frequently in consumption and government spending

Net Exports (NX) (Formula)

Net Exports (NX)=Total Exports-Total Imports

How to calculate GDP (Income Approach)

GDP=wages+rent+interest+profit+depreciation+indirect business taxes

Why do we put GDP into GDP per capita?

You adjust GDP so it can be comparable with smaller populations

GDP per Capita (Formula)

GDP per Capita = GDP/Population

What is no included in GDP but should be (ideally)?

Underground transactions and non-market production

What is non-market production?

Non market implies that nobody is paid money (most common is housework)

Types of business fluctuations

Expansions (booms) and contractions (recessions and depressions)