GDP & Measurement of Progress

GDP

the market value of all final goods and services produced within a country in a year.

GDP per capita

GDP divided by a countries population

GDP as Market Value

(price x quanity) = y = GDP Ex: (P cars x Q cars) + (P computer x Q computer)

Intermediate Good

sold to firms and then bundled or processed with other goods and services for sale later on

Final Goods

the finished product sold to final users and then consumed or held in personal inventories to avoid double-counting.

only final goods are accounted for in GDP ex:(goods: tangible products services: intangible products)

what does GDP measure

production

are used goods included in GDP

(false) NO! EX: if a used car/house is sold it does NOT count be the house or car was not made this year.

are taxes included in GDP

(false) NO! users prices before tax are included.

is the sale of financial assets (stocks & bonds) included in GDP?

(false) NO!

is the service of realtors, stock brokers, used car salesmen included in GDP?

(true) YES! because their services represent current economic activity

True or false: only production that takes place in the boarders of a country is included in GDP

TRUE

ex: cars produced in Mexico by an American firm is not included, cars produced in the US by Japanese firms ARE included.

GNP (Gross National Product)

the value of goods and services produced by US residents no matter where they live

what is the current GDP in the US

31 trillion

what is the US GDP per capita

$90,000

Growth rate of GDP

tells how rapidly the country’s production is rising or falling (new-old/old)

ex: GDP growth (2023): GDP2023 - GDP2022 / GDP2022

Nominal GDP

calculated using prices at the time of production (nominal GDP in 2025 is calculated using 2025 prices)

• creates problems when comparing GDP over time because you cannot tell if an increase was due to greater production or increased price

Nominal Vairables

• Nominal vairables: have not been adjusted for chnges in prices (includes increase in price and output)

Real variables

have been adjusted for changes in prices

• Holding the price of goods and sevices fixed at their 2005 values, quantites change → chnages in real GDP reflect changes in quantity

• when using real GDP you need to specify the year of prices you are using “base year”

• real gdp is more used bc it tells how the quantity of goods and services changes

Nominal GDP equation

current price X current quantity

Real GDP equation

base year x current quantity

GDP per capita for both Nominal and Real

divide nomial or real by the population to get answer

ex: nominal gdp=200, population=20 GDP/capita = 200/20=10 (same for real)

GDP deflator

price index that can be used to measure inflation (measures change in price over time)

• GDP deflatior equation: Nominal/Real x 100

• if the GDP deflator is higher than 100 ex: 116.67, then this shows prices increased by 16.67 % (116.67-100) from the following year

• if its less than 100, it has decreased

The expression (2011 prices ÷ 2001 prices) × 100 is equal to:

the GDP deflator between 2001 and 2011.This would tell how prices in 2011 compared to prices in 2001.

Inflation

growth rate in the price level

• infaltion = gNominal - gReal

• πt= pt - p(t-1) / p(t-1)

• if inflation is 2% and nominal GDP is 5%, what is real? 2=5-x, x=real=3%

What does growth in real GDP tell us?

• changing of living standards

Does the growth of Real GDP account for changes in population?

no

growth rates equation for real gdp populations

g(real GDP per capita) = g(real GDP) - g (population)

• g = growth rates

EX) annual growth of real gdp = 4%, growth rate of the population = 2%, growth rate of per capita real gdp = 4%-2%=2%

Growth rate equation

new-old/old or gt = Year(t) - Year(t-1) / Year (t-1)

• measures how rapidly production rises or falls over time

History of 9 recessions since 1960

• recessions occur from business fluxuations/cycles

• short-run movements in read GDP around long-run trends

• 1929-1933 great depression — stock market crash, unemployment = 17%

• 1972-1975, recession due to oil production, OPEC increased prices causing inc. in unemploynemtn and inflation (these don’t typically move in the same direction

• 2001 collapse due to internet (dotcom)

• 2007-2009 housing crash (great recession) unemployment 10%

• 2020 covid

• IMPORTANT: unemployment spikes take much longer to come back to normal over time

short run changes in GDP

• quarterly data is not available until month after the quarter is over

• data is revised, but often gets updated years after the first estimates are released

GDP broken down in 2 APPROACHES (hint NS and FI)

1. National Spending: add up what people buy

Y = C + I + G + NX

2. Factor income: add up the income generated by producing goods and services (determine long-term trends)

Y = Wages + Rent + Interest + Profit

• (C) consumption, spending by households

• (I) investments, private spending on tools, plants, equipment to produce future product, machines (not finance and stocks) (includes building a new home)

• (G) government spending: airplane, new road (Not payment programs like social security, those are just transfers of money)

• (N) net exports (exports - imports) you subtract imports because that is already reported in consumption, so you don’t want to double-count it

GDP = production

what happens to consumption when imports increase

consumption increases by the same amount

3 shortcomings of GDP

1. does not count for underground activity (illegal, cartel, not registered sellers)

2. Does not count non-priced production (work done at home, favors)

3. does not describe income distribution (growth in GDP/capita does not mean everyone’s income grows at the same rate, excludes inequality)

What is not included in GDP?

• intermediate goods: toppings for a pizza, things used in production

• land/stocks: that is a transfer of ownership

• informal markets: home production

• used goods: not made in that year, already counted

• goods produced outside the country (not in GDP, but yes for GNP)

GNP

Gross national product: finished goods and services produced by a country's permanent residents, wherever located, in a year.

If pressed to choose a single indicator of current economic performance, MOST economists would probably choose

real gdp growth

If GDP for a certain economy is $1,510 billion at the end of year 1 and it grows by 6%, what will be the GDP at the end of year 2?

calculate GDP knowing growth rate: $1,510 × [1 + (6 ÷ 100)] = $1,510 × 1.06 = $1,600.60.