Macroeconomics Chapter 6:GDP and Real GDP
Transcript of Macroeconomics Chapter 6:GDP and Real GDP
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Paul Schneiderman, Ph.D., Professor of Finance & Economics, SouthernNew Hampshire University2008 South-Western
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Gross Domestic Product
Expenditures
Computing GDPMeasurements Other Than
GDP
Real GDPEconomic Growth and
Business Cycles
In This Lecture..
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Gross Domestic Product(GDP)
The total marketvalue of all final
goods and servicesproduced annuallywithin a countrys
borders.
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Ways to Compute GDP -Expenditure Approach
Add the amount of money spent bybuyers of final goods and services*
Avoid double counting.
Do not count intermediate goods**
* Goods in the hands of their final users.** Goods that are inputs for the production of final
goods.
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Ways to Compute GDPIncome and Value added
Approaches
Income Approach add the sum of all
incomes earned (wages, interest, rents, andprofits) in producing goods and services
Value-added Approach add the value
added at each stage of production of allgoods and services
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Whats Not Included in GDP
Certain non-
market goodsand services suchas chores
performed athome by familymembers.
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Undergroundactivities, both legal
and illegal
Whats Not
Included inGDP
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Whats Not Included in GDP
Sales of used
goods
Financial
transactions suchas trading ofstocks and bonds
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Whats Not Included in GDP
Governmenttransfer payments
such as socialsecurity
Leisure time
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GDP and Bads
GDP counts thegoods and services,
but it does not net out
the air and waterpollution.
Thus, someeconomists argue that
GDP overstates ouroverall economicwelfare.
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GDP Per Capita
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Self-Test Questions
Identify and explain the three approachesto computing GDP.
Suppose the GDP for a country is $0. Doesthis mean that there was no productiveactivity in the country? Explain your
answer.
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GDP - Expenditure Approach4 Sectors
Household Sector - Consumption
Business Sector - InvestmentGovernment Sector Government Purchases
Foreign Sector Net Exports
C + I + G + (X M)GDP =
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Consumption
The sum of household spending on:
Durable goodsNondurable goods
Services
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Durable Goods
Durable goods are goods that are expectedto last for more than three years, such asrefrigerators, ovens, or cars.
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Nondurable Goods
Nondurable goods are goods that are notexpected to last for more than three years,such as food.
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Services
Services are intangible items such as lawncare, car repair, and entertainment.
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Investment
The sum of all purchases of:
Newly produced capital goods -Business purchases of capital goods,such as machinery and factories
Changes in business inventories -Changes in the stock of unsold goods.
Purchases of new residential housing
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Government Purchases
Includes:
Federal, state, and local governmentpurchases of goods and services and grossinvestment in highways, bridges, and soon.
Excludes:
Government transferpayments to personsthat are not made in return for goods andservices currently supplied.
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Net Exports
Exports(X)- Total foreign spending ondomestic (U.S.) goods
Less
Imports (M) - Total domestic (U.S.) spendingon foreign goods
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Expenditure Approach
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GDP 2006
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Bureau of Economic Analysis
BEA is an agency of the U.S. Departmentof Commerce. One of its major functionsis to assemble the data which is then used
to calculate GDP.
To get the latest information on GDPand other economic data, click below
http://www.bea.gov/index.htm -
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GDP Income Approach
1. Purchases (expenditures) made in productmarkets flow to business firms.
2. Business firms then use these monies to buyresources in resource markets.
3. These monies flow to the owners (suppliers) ofland, labor, capital, and entrepreneurship.
4. The sum of these resource payments is totalincome, which flows to households. In this
simple economy total purchases (expenditures)equal total income.5. Because total purchases (expenditures) equal
GDP and total purchases equal total income, itfollows that GDP equals total income.
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National Income
Total income earned by U.S. citizens andbusinesses, no matter where they reside orare located.
National income is the sum of thepayments to resources (land, labor,capital, and entrepreneurship).
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Computing National Income
National income =
Compensation of employees
+ Proprietors income+ Corporate profits
+ Rental income
+Net interest
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COMPENSATION OFEMPLOYEES
Compensation of employees consists ofwages and salaries paid to employees plusemployers contributions to Social
Security and employee benefit plans plusthe monetary value of fringe benefits, tips,and paid vacations.
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PROPRIETORS INCOME
Proprietors income includes all forms ofincome earned by self-employedindividuals and the owners of
unincorporated businesses, includingunincorporated farmers.
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CORPORATE PROFITS
Corporate profits include all the incomeearned by the stockholders ofcorporations.
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RENTAL INCOME (OFPERSONS)
Rental income is the income received byindividuals for the use of their non-monetary assets (land, houses, offices).
It also includes returns to individualswho hold copyrights and patents.
Finally, it includes an imputed value toowner-occupied houses.
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NET INTEREST
Net interest is the interest income receivedby U.S. households and governmentminus the interest they paid out.
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From NI to GDP
GDP =
National income
- Income earned from the rest of the world+ Income earned by the rest of the world
+ Indirect business taxes
+ Capital consumption allowance+ Statistical discrepancy
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GDP = Income Approach
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Net Domestic Product
NDP measures the total value of new goodsavailable in the economy in a given year afterworn-out capital goods have been replaced.
Net domestic product (NDP) =
GDP Capital consumption allowance*
*The estimated amount of capital goods used upin production through natural wear,obsolescence, and accidental destruction.
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Personal and Disposable Income
Personal income =National income Undistributed corporate profits
Social insurance taxes Corporate profits taxes+ Transfer payments
Disposable income =Personal income Personal taxes
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Self-Test Questions
Describe the expenditure approach tocomputing GDP in a real-world economy.
Will GDP be smaller than the sum of
consumption, investment, and governmentpurchases if net exports are negative?Explain your answer.
If GDP is $400 billion and the countryspopulation is 100 million, does it follow thateach individual in the country has $40,000worth of goods and services?
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Real GDP
The value of the entire output producedannually within a countrys borders,adjusted for price changes (inflation).
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Economic Growth
Economic Growth is measured by increasesin Real GDP.
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Business Cycle
Recurrent swings (up and down) in
Real GDP.
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Business Cycles and the NBER
For current economic data and businesscycle information visit the NationalBureau of Economic Research by clicking
the logo below.
http://www.nber.org/ -
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Self-Test Questions
Suppose GDP is $6 trillion in year 1 and$6.2 trillion in year 2. What has caused therise in GDP?
Suppose Real GDP is $5.2 trillion in year 1and $5.3 trillion in year 2. What hascaused the rise in Real GDP?
Can an economy be faced with endlessbusiness cycles and still have its Real GDPgrow over time? Explain your answer.
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Other Sources of Economic Data
White House -Economic StatisticsBriefing Room
CongressionalBudget Office
Bureau of the
Census
Click above to Select
http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.cbo.gov/http://www.cbo.gov/http://www.census.gov/http://www.census.gov/http://www.census.gov/http://www.census.gov/http://www.cbo.gov/http://www.cbo.gov/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/http://www.whitehouse.gov/infocus/economy/ -
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Wall Street Journal
The Wall Street Journal is a is a rich sourceof information which provides real lifeexamples of micro- and macro economic
activities. Check todays issue to see themost current news.
http://www.wsj.com
http://www.wsj.com/http://www.wsj.com/ -
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