lecture recording on 07 March 2025 at 14.04.42 PM

Gross Domestic Product (GDP)

• Definition: GDP measures the total market value of final goods and services produced within a country during a specific time period.

Components of GDP

• Consumption:

  • Defined as household spending on goods and services.

  • Examples include purchasing items from stores like Target, dining out, or paying rent.

• Investment:

  • Refers to spending by businesses and individuals on capital goods.

  • Includes the purchase of machines, factories, and housing (e.g., buying a home is considered an investment).

  • Renting does not count as investment, only consumption.

• Government Purchases:

  • The government buys goods and services, such as infrastructure like roads and defense spending.

  • Transfer payments (e.g., Social Security, Medicaid) are excluded as they do not constitute purchases of goods/services.

• Net Exports:

  • Calculated as exports (sales to foreign consumers) minus imports (goods purchased from abroad).

  • Indicates the balance of trade for the country.

GDP Calculations

• Nominal GDP:

  • Measures the value of goods and services using current prices.

  • Computed as: Nominal GDP = Current Year Price × Current Year Quantity.

• Real GDP:

  • Adjusted for inflation and uses base year prices for calculations to reflect true economic growth.

  • Computed as: Real GDP = Base Year Price × Current Year Quantity.

Key Differences Between Nominal and Real GDP

• Price Impact: Nominal GDP can increase due to price inflation even if production levels remain unchanged, while Real GDP reflects actual production growth.

Important Equations

• GDP Deflator:

  • A measure that represents the level of prices in an economy, calculated as:

    • GDP Deflator = (Nominal GDP / Real GDP) × 100.

  • A GDP deflator greater than 100 indicates inflation above base year prices; less than 100 indicates deflation.

• Percentage Change in Prices:

  • Calculates price changes from one year to the next using deflator values:

    • Percentage Change = ((Current Year Deflator - Previous Year Deflator) / Previous Year Deflator) × 100.

Gross National Product (GNP)

• Definition: Represents the total income earned by a nation's residents, regardless of whether the income is earned domestically or abroad.

• Difference from GDP:

  • GNP includes income earned by residents working abroad and excludes income generated by foreign residents within the country.

  • For example, income from Canadian workers in the U.S. contributes to Canada's GNP but not to the U.S. GNP.

Relation Between GDP and GNP

• If GDP > GNP, it indicates that foreign entities are significantly contributing to domestic production within the U.S.