GDP Notes

GDP Definition

• GDP measures total production as Gross Domestic Product.
  • Market value of all final goods/services produced within a country in a given time.
  • Market Value: Uses market prices; includes traded items.
  • Final good/service: For final user, not a component.
  • Intermediate good/service: Used as a component; its value is deducted to avoid double counting.
  • Within a country: Produced within a country's borders.
  • In a given time period: Currently produced during that period.

Measuring GDP

Expenditure Approach

• GDP at market value (GDPMV) = total expenditure = $C + I + G + NX$
  • C: Consumption expenditure (households).
  • I: Investment (new capital goods, inventories).
  • Gross Investment = Net Investment + Depreciation + Change in Inventories
  • G: Government expenditure on goods/services.
  • NX: Net exports (exports minus imports).
  • Net Exports = Total Exports – Imports

Items Excluded from GDP

• Used Goods: Already counted in the year they were new.
• Financial Assets: No direct production of new goods/services.

Income Approach

• Measures GDP by summing incomes firms pay to households for factors of production.
  • Income (Y) = Wages + Interest + Rent + Profit
  • Total expenditure equals total income: $Y = C + I + G + NX$
  • Value of production equals income equals expenditure.

Adjustments from Factor Cost to Market Price

• Indirect taxes (sales taxes) make market prices exceed factor cost.
• Subsidies make factor cost exceed market prices.
• $NDPMV = NDPfc + indirect tax - subsidies$
  • $NDPMV = w + i + r + p + indirect tax - subsidies$

Adjustments from Net to Gross

• Depreciation: Decrease in capital value from use/obsolescence.
• $GDPMV = NDPMV + Depreciation$
  • $GDPMV = w + i + r + p + indirect tax – subsidies + Depreciation$

Statistical Discrepancy

• Difference between expenditure and income approach estimates.
  • Occurs in real-world data collection.

Gross National Product (GNP)

• Market value of all final goods/services produced by a country's residents, regardless of location.
  • $GNP = GDP + Net factor income from abroad$

Real vs. Nominal GDP

• Nominal GDP: Value of final goods/services in current year prices.
• Real GDP: Value of final goods/services in base year prices.
  • Goal: Measure the increase in total production.
  • Real GDP removes the influence of price changes from nominal GDP.

Uses of Real GDP

• Compare the standard of living over time.
• Track the course of the business cycle: expansions, peaks, recessions, troughs.
• Compare the standard of living among countries (using purchasing power parity).

Limitations of Real GDP

• Household Production: Omitted, underestimates production value.
• Underground Production: Unreported, omitted from GDP.
• Leisure Time: Not valued, omitted from GDP.
• Environmental Quality: Pollution not subtracted from GDP.