GDP

Gross Domestic Product measures total production

  • Gross Domestic Product (GDP): The Market Value of all Final goods and services produces in a country during a period of time, typically one year.

  • GDP includes only the market value of final goods

    -Final good or service: A good or service purchased by a final user.

    -Intermediate good or service: A good or service that is an input into another good or service, such as a tire on a truck.

  • GDP Includes only Current Production

  • GDP includes only production that takes place during the indicated time period.

How to measure GDP? One way

  • The value of total production in the economy = the value of total income, since payments that firms receive are used to pay factors of production.

  • Firms use factors of production (labor, capital, natural resources and entrepreneurship) to produce goods and services.

  • Households supply factors of production, in exchange for income: wages, interest, profits and rent.

  • We can measure GDP as the sum of this income.

Measuring GDP by the Value-Added Method

The additional market value a firm gives to a product in the product chain= The difference between the price for which a firm sells a product and the price it paid other firms for intermediate goods.

A third way to measure GDP.

GDP= the value of all goods and services produced in a country in a given year.

Domestic firms sell goods and services to three groups: domestic households, the government and foreign firms and households

Therefore, GDP can be measured by (1) Expenditures by domestic households, (2) expenditures by the government and (3) exports to foreign firms and households, (4) minus the value of imported goods that these actors consume.

Measuring GDP by Summing Expenditures in the Economy

To measure GDP, the Bureau of Economic Analysis (BEA) in the Department of Commerce measures four major categories of expenditures:

  • Personal consumption expenditures, or consumption (C)

  • Gross private domestic investment, or investment(I)

  • Government consumption and gross investment, or government purchases (G)

Net exports of goods and services, or net exports (NX)

GDP can be expressed as the sum of these:

Y=C+I+G+NX

We examine each component of GDP in turn.

Consumption (C)

  • Consumption is spending by households on goods and services, not including spending on new houses ( which are counted instead in investment), In BEA statistics, consumption is further divided into expenditure on

  • Services, such as medical care, education, and haircuts.

  • Nondurable goods, such as food and clothing

Durable goods, such as automobiles and furniture.

Investment (I)

  • Investment is spending by firms on new factories, office buildings, and additions to inventories, plus spending by households and firms on new houses.

    The BEA measures the following categories of investment:

  • Business fixed investment, such as new factories, office buildings, machinery and research and development.

  • Residential investment, new single family and multi-family unit houses

Changes in business inventories, goods that have been produced but not yet sold

Government Purchases (G)

  • Government purchases are spending by federal state and local governments on goods and services, such as teachers’ salaries, highways, and aircraft carriers.

This does not include transfer payments, since those do not result in immediate production of new goods and services.

Net Exports (NX)

  • Net exports are the value of exports minus the value of imports

    This difference might be positive or negative; in recent years, this has been negative in the United States.

Since we ant to count domestic production (production in the United States), we add up the value of the goods and services sold to foreigners and subtract the value of the goods and services sold to Americans by foreigners

Some Notes about GDP components

  • Consumer spending on services is much greater than the sum of spending on durable and nondurable items

  • Purchases made by state and local governments are greater than purchases made by the federal government.

Imports are greater than exports, so net exports are negative.

GDP fails to measure total production

GDP does not measure production that occurs in Households

  • Household production refers to goods and services people produce for themselves.

    The Underground Economy

Underground Economy: Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

Shortcomings of GDP as a measure of wellbeing

GDP Per- Capita: (GDP divided by population) is often used to represent differences in standards of living from country to country. However even if it accurately measured total production, it would not reflect:

  • The value of leisure

  • Pollution and other negative effects of production

  • Crime and other social problems

The distribution of income

In fact, improvements in many of these will result in lower GDP per capita.

Other measures of total production and total income

Each quarter, the BEA publishes the National Income and Product Account tables. These include GDP computations but also:

  • Gross national product (GNP): Production preformed by citizens of a nation, including overseas production

  • National income: GDP minus the consumption of fixed capital. GDP minus depreciation.

  • Personal Income: Income received by households; includes transfer payments but excludes firms retained earnings.

Disposable personal income: Personal income minus personal tax payments; this measures the amount that households are able to spend or save.

Nominal vs Real GDP

  • GDP measures the total market value of all final goods and services produced in a country.

  • Value= quantity*price

  • We are mainly interested in GDP as a measure of production (i.e. quantity) need to separate the price changes from quantity changes.

  • Nominal GDP: is the sum of the current values of all final goods and services.

  • When we separate prices from nominal GDP, we get real GDP. Real GDP measures the volume of final goods and services produced in a country.

  • Real GDP- The value of final goods and services evaluated at base year prices

Nominal GDP- The value of final goods and services evaluated at current year prices

The price level measured by the GDP deflator

  • Price level- A measure of the average prices of goods and services in the economy. Often measured by either the Consumer price index or the GDP deflator

  • GDP Deflator- A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying 100