Module 3: Gross Domestic Product (GDP)

Goods and services flow

Goods and services flow in one direction. Money payments flow in the other.

Economic exchange

In an economic exchange, the seller receives the same amount that the buyer spends.

GDP

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

Typical services included in GDP

Education and health services.

Typical factors of production in GDP

Labor, machines, land.

GDP reporting frequency

Quarterly and annually.

What does GDP measure?

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

Costs to low levels of GDP

Quality of life is lower and less healthcare services are available.

Correlation of quality of life and GDP

High quality of life positively correlates to higher GDP.

Effect of GDP on unemployment

It lowers unemployment.

Nominal Values

Measurements in terms of the actual market prices at which goods are sold, expressed in current dollars.

Real Values

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

Adjustment of GDP

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

Calculating nominal GDP

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

Calculating 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) x 100.

GDP Deflator Formula

GDP Deflator = (Nominal GDP / Real GDP) x 100.

Goods counted in GDP

Final goods.

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.

End user for a final good

Consumers are the end users.

Cloth in GDP

If a designer bought a piece of cloth and used it to design a dress, the cloth would not be counted in the GDP 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

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 not 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)