Measuring GDP

Measuring GDP

• Gross Domestic Product (GDP) is the sum of the market values of all final goods and services produced within a country in a given period of time.
• GDP is the most common measure of the value of a national economy.
  • It answers questions like:
    • How big is an economy?
    • How do we know one country’s economy is larger than some countries but smaller than others?
    • What does it mean when a country’s economy doubles in size?

Measuring GDP

• Production = expenditure = income
  • The size of an economy is referred to as either output or production.
• Circular flow model:
  • Total output can be measured as total income.
  • Total output can also be measured as total expenditures.
• Expenditure = Income = Value of Production → Multiple approaches to measuring GDP

Measuring GDP (cont’d)

• Expenditure approach: GDP = sum of four categories of spending = total expenditures (Y)
  • $Y = C + I + G + NX$
  • Consumption (C) - spending on goods and services by private individuals and households.
  • Investment (I) - spending on productive inputs, such as factories, machinery, and inventory changes; and new homes
    • Includes inventory and residential investments.
  • Government purchases (G) - spending on goods and services by all levels of the government.
  • Net exports (NX) - exports minus imports.

Measuring the GDP (cont’d)

• Income method: add up labor income and capital income = Y
  • Includes wages, salaries, self-employed income
  • Includes rents, profits, net interest earned on capital investments, dividends, royalties, etc.
• Value-added method: add up market value of production = Y
  • Sum the value that each transaction adds to the economy.
• The value-added, expenditure, and income approaches all result in the same GDP.

Real vs. Nominal GDP

• GDP is a function of both the quantity of goods and services produced (output) and their market value (prices).
• Often an increase in GDP is the result of growth in both quantity and market value.
• Nominal GDP: Goods and services are valued at current prices.
• Real GDP: Goods and services are valued at constant prices.

Calculating nominal and real GDP

• Suppose base year of 2017.
• Formulas to compute Nominal GDP (NGDP) and Real GDP (RGDP) would require data on:
  • Year, Quantity of Apples, Quantity of Oranges, Price of Apples ($), Price of Oranges ($)

GDP deflator

• A measure of the overall change in prices in an economy
• $GDP\,deflator = \frac{Nominal\,GDP}{Real\,GDP} × 100$
• It is a ratio between current-year value and constant value

GDP deflator (cont’d)

• Inflation rate
  • Describes how fast the overall price level is changing.
  • Usually defined in terms of a year-to-year increase in prices
  • Can be calculated by percentage change in the GDP deflator between any two years
  • $Inflation\,rate = \frac{Deflator<em>{Year2} - Deflator</em>{Year1}}{Deflator_{Year1}} × 100$

GDP deflator: you try

• Compute GDP deflator for each year
• Compute inflation rate for 2017, 2018

Comparing economies

• 2018 GDPs - is this a fair comparison of economic well-being?
• Lists countries with their GDP in trillions of current U.S. dollars
  • United States - 1 (20.513)
  • China - 2 (13.457)
  • Japan - 3 (5.071)
  • Germany - 4 (4.029)
  • United Kingdom - 5 (2.809)
  • France - 6 (2.795)
  • India - 7 (2.690)
  • Italy - 8 (2.087)
  • Brazil - 9 (1.909)
  • Canada - 10 (1.734)

Comparing economies (cont’d)

• $GDP\,per\,capita = \frac{GDP}{Population}$
• A better picture of economic well-being
• But doesn’t convey income distribution

GDP growth rate

• Percentage change in GDP over time
• $GDP\,growth\,rate = \frac{GDP<em>t - GDP</em>{t-1}}{GDP_{t-1}} × 100$
  • where t is the current year and t-1 is last year
• Growth rate and the business cycle
  • 5 part of the business cycle: peak, recession, trough, recovery, expansion
  • Annual growth rates, U.S.

GDP growth rates (cont’d)

• Growth is more rapid in less developed nations.
• High growth rates are not necessarily associated with high total GDP or GDP per capita.
• World growth rates.

Is GDP the “best single measure of the economic well-being of a society”?

• In general, larger GDP,
  • Higher material standard of living
  • Better health and life expectancy
  • Better educational systems
• Measures ability to obtain many of the inputs into a worthwhile life

GDP and well-being? (cont’d)

• Presents a table comparing different countries:
  • Country, GDP per capita (Current U.S. $), Literacy rate (% of population over 15), Life expectancy at birth (Years), Child mortality (Deaths per 1,000 under age 5), Life satisfaction index (0 to 10)
• Data points for select countries:
  • Norway: 75,505, No data, 82, 3, 7.5
  • United States: 59,532, No data, 79, 7, 6.9
  • Equatorial Guinea: 9,850, 95.3, 58, 92, 3.6
  • Brazil: 9,821, 92.6, 74, 16, 6.6
  • Bulgaria: 8,032, 98.4, 75, 8, 4.8
  • China: 8,827, 96.4, 76, 11, 5.3
  • Mali: 824.5, 38.7, 58, 110, 4.0

GDP and well-being? (cont’d)

• GDP is not a perfect measure of well-being
• It doesn’t include:
  • Leisure
  • Value of almost all activity that takes place outside markets
  • Quality of the environment
  • Value of intangibles: Crime rates, traffic, open space
  • Income inequality