Econ Unit 3 - Measuring GDP

GDP Gross Domestic Product

the total market VALUE of all FINAL goods and services produced within a GIVEN period of time by factors of production LOCATED within a country

What is excluded from GDP?

Used Goods, and paper goods, like stocks or bonds

Caveat is

included in GDP.

GNP Gross National Product

The total market VALUE of all final goods and services produced within a given period of time by the nation’s factors of production, REGARDLESS OF WHERE the factors of production are located

What is the difference between GDP and GNP?

GNP = GDP + Factor payments from abroad - factor payments to abroad

Factor Payments are

wages, profits, rent, interest, and dividends on assets

Factor Payments FROM abroad are

payments made to citizens of the domestic country (US) by other countries. For example, a US English Teacher, working in China, being payed by China

Factor Payments TO abroad

Payments made by the domestic country (US) to citizens of another country. Ex: US citizens purchasing Japanese Hondas

A country reports GDP of 2,000. Factor payments from abroad are 200 while factor payments to abroad are 300. Compute GNP.

To get GNP we take GDP(2,000) plus factor payments from abroad (200) and minus factor payments to abroad (300) to get GNP which is 1900.

Using Prices, we can…

Calculate GDP using the total value of goods and services produced. Inflation must be accounted for.

Why is GDP adjusted for inflation when we use prices to calculate GDP?

So that we measure changes in production rather than changes in prices.

NGDP is

Nominal GDP is gross domestic product measured in CURRENT dollars.

RGDP is

Real GDP is gross domestic product measured in BASE YEAR dollars

How do we calculate NGDP?

We multiply the quantity produced by the price of the good in the current year. We do this for each good in the economy and add up numbers to get NGDP.

How do we calculate RGDP?

We multiply the quantity produced by the price of the good in the base year. We do this for each good in the economy and add up the numbers to get RGDP.

Will NGDP and RGDP ever be the same number?

Yes in the base year because they use the same prices.

How do we fix the problem of inflation when calculating GDP?

RGDP. Real GDP controls for inflation by using the same prices from the base year.

How do we calculate the growth rate of BOTH NGDP and RGDP?

Growth Rate = New NGDP or RGDP - the Old NGDP or RGDP divided by the old value.

When we talk about economic growth, we refer to

the growth rate of RGDP