Measuring Economic Performance

GDP x GNP

The market value of the final goods and services produced by workers and other resources located within the border of a nation over period of one year

the market value of final output produced annually by all labour and property supplied by a nation’s households, no matter where those resources are employed

Nominal GDP x Real GDP

the market value of nation’s final output based on current prices for the goods and services produced during the year

an estimate of the value of a nation’s final products based on prices of certain base year

01

11

PY

PYrGDPdeflato

Intermediate Products and Value Added

Intermediate products – products produced by business firms for resale by other firms or for use as materials or services that will be included in the value of resold good

VALUE ADDED = the extra worth that a business firm adds to intermediate products, it is measured by the difference between the market value of a firm’s sales, and the market value of the intermediate products that the firm purchases

Total value added = market value of - market value of in a nation (GDP) all products intermediate products

Computing Value Added - example

Sales transactions Intermediate purchases Value added (Sales receipts – Intermediate purchases)

1. EUR 1 mil. sale of cotton by farmers to weavers

None EUR 1 mil.

2. EUR 2 mil. Sale of cloth by weavers to manufacturer of blue jeans

EUR 1 mil. of cotton EUR 1 mil.

3. EUR 4 mil. Sale of blue jeans by blue jean manufacturer to consumers

EUR 2 mil. of cloth EUR 2 mil.

Market value of all products - Market value of intermediate products

= Total value added

EUR 7 mil. - EUR 3 mil. = EUR 4 mil.

METHODS OF MEASURING GDP

1) Flow-of-Product Approach (The EXPANDITURE COMPONENTS OF GDP)

2) Earnings or cost approach (The INCOME SIDE OF GDP)

Net National Product - Indirect business taxes and other adjustments

National Income - corporate profits- net interest paid - social security (payroll) taxes + government transfer payments + personal interest, dividends and other transfers

• Personal Income - Personal taxes = Disposable income

From NNP to Disposable Income

NET ECONOMIC WELFARE

GDP

Nonmarket production

The value of leisure time

The underground economy

Cost of enviromental damage

X

Y

unattainable

waste

Potential output

Production-possibility frontier

Tasks:1. Based on following dates calculate: GDP, NDP, NI, NX, DI

Item Mld. EUR

Consumption expenditure 600

Personal taxes 400

Transfer payments 250

Export 240

Import 220

Government expanditure 200

Gross Investment 150

Capital consumption allowance 60

2. Calculate nominal GDP, net investment and real GDP, assuming GDP deflator 116, C = 740, a = 21, G = 305, X = 194, M = 178, indirect taxes = 289, profits = 357, wages = 481, rents = 9, net interests = 18.

3. Calculate real and nominal GDP using following dates:

Output 2000

Output 2006

Price 2000 Price 2006

Chicken 100 150 2 4

Apples 100 140 4 6

Total