Final Chapter 10 GDP (2/12/2026 ECON 102)

Overview of GDP

  • GDP (Gross Domestic Product) is a measure of the economic performance of a country.

  • It includes only the goods and services produced within the economy and excludes imported goods.

GDP Calculation Approaches

  • There are three main approaches to measuring GDP: Expenditure Approach, Income Approach, and Value Added Approach.

1. Expenditure Approach

  • The formula for GDP using the Expenditure Approach is: Y = C + I + G + X - N where:

    • Y = GDP

    • C = Consumption

    • I = Investment

    • G = Government Spending

    • X = Exports

    • N = Imports

  • It emphasizes that demand drives expenditure in an economy:

    • Consumers demand consumption goods.

    • Investors demand investment goods.

2. Supply Side of GDP

  • The production side of the economy focuses on what is produced:

    • Goods

    • Nondurable Goods: items consumed immediately and cannot be stored (e.g. food).

    • Durable Goods: items that last longer and are used over time (e.g. machinery).

    • Structure: buildings and other infrastructure.

    • Change in Inventory: unsold goods produced in the current year.

    • Services: contribute a large portion to GDP; as of 2020, services accounted for 61% of GDP.

3. Income Approach to GDP

  • The GDP from the Income Approach comprises:

    • Wages and Salaries

    • Rent

    • Interest Income

    • Corporate Profits

    • Indirect Business Taxes

    • Depreciation (capital consumption allowance)

  • Emphasizes that income generated from expenditures is distributed across factors of production.

  • Two parts of income:

    1. Compensation to workers (wages/salaries).

    2. Capital owners receive rent and interest.

  • Statistical Discrepancy: recognizes that GDP by income and expenditure will often not match due to errors in measuring these values.

4. Value Added Approach to GDP

  • Value added is calculated at each stage of production:

    • Value at each stage = Value of Output - Value of Intermediate Inputs.

  • Example:

    • Farmer sells wheat for $1, Miller sells flour for $2, Baker sells bread for $3.

    • Total GDP = $3 (final value) = $1 (wheat) + $1 (flour) + $1 (bread).

Other Income Measures

  • GNP (Gross National Product) considers the income given to citizens abroad and excludes income earned by foreigners domestically:
    GNP = GDP + Net Factor Income from Abroad

  • NNP (Net National Product) is derived by subtracting depreciation from GNP:
    NNP = GNP - Depreciation

  • National Income includes:

    • Compensation to Workers, Rent, Interest, Profits, Indirect Business Taxes.

Personal Income

  • Personal Income = National Income + Dividends - Indirect Taxes + Net Interest.

  • Disposable Personal Income = Personal Income - Taxes.

Philosophical Considerations on GDP

  • GDP's limitations:

    • It cannot measure aspects like well-being, quality of life, or environmental conditions.

  • Example discussions prompted by President Kennedy's inquiries into GDP:

    • Does GDP reflect societal values?

    • More production vs. cleaner environment?

    • E.g. the dilemma between increased production and economic pollution.

  • Importance of equitable income distribution in enhancing societal well-being.

  • Exploration of wealth vs. poverty, microcredit’s role, and the economic behavior of citizens across nations.

Lessons from Nations

  • Nations with higher GDP often experience better overall quality of life indicators, including literacy and healthcare.

  • Economic policies impact social factors such as educational opportunities and citizen contributions.

Conclusion

  • The discussion about GDP and its implications is ongoing and evolves with perspectives on economic measurement, policy considerations, and their socio-economic realities.