GDP Notes

GDP and GNP

·         Economists collect statistics on production, income, investment, and savings. This is called national income average.

·         Most Important Measures of growth is GDP.

·         GDP – Total dollar value of all final goods and services produced within a countries borders within a given year.

·         GNP – total value of all final goods and services by citizens of that country on its land or on foreign land.

·         Not included in GDP –

a)    Intermediate goods – no multiple counting, only final goods.

b)    Second hand or used goods

c)    Non market activity – illegal drugs, babysitting, volunteering, etc.

d)    Final transaction – stocks, bonds, real-estate.

e)    Gifts

f)     Transfer Payments – Social security, scholarships

·         Included in GDP –

a)    Consumption – 67% of economy. All finished goods/services.

b)    Gross Private Domestic Investment – New factory equipment, construction of housing, factory equipment maintenance, unsold inventory products built in a year.

c)    Government Spending – anytime the government purchases goods and services.

d)    Net Exports = Exports – Imports

Expenditure Approach to GDP

·         Add up the market value of all domestic expenditures made on final goods and services in a single year.

·         Expenditure Approach – C+Ig+G+Xn= GDP

·         Add up all income earned by households and firms in a single year.

·         Income Approach – W+R+I+P+ Statistical adjustments= GDP

·         Wages – Compensation of employees. Salary supplements.

·         Rents – Tenants to landlords, lease payments by a corporation for a use of their space.

·         Interest – money paid by private businesses to the suppliers of loans used to purchase capital.

·         Profit – corporate income taxes, dividends, undistributed corporate profits.

·         Budget – government purchases of goods and services + government transfer payments – government tax and fee collection. Positive number is budget deficit, negative number is budget surplus.

·         Trade – exports – imports. Negative number is trade deficit, positive number is trade surplus.

·         GNP – GDP+ net foreign factor income

·         NNP – GNP – Depreciation

·         NDP – GDP – depreciation

·         National Income – GDP – indirect business taxes- depreciation- net foreign factor payments

Or

Compensation of employees + proprietors income + corporate profits +rental income+ Interest income

·         Disposable Income – NI – personal household taxes + government transfer payments

Nominal GDP Vs. Real GDP

·         Nominal GDP – Value of output produced in current prices. Can increase from year to year if output or price increase.

·         Real GDP – Value of output produced in constant or base year prices. Adjusted for inflation. It can only increase from year to year if output increases.

·         Formula – Price * Quantity

·         Price Index – measures inflation in the market basket of goods compared with that in base year. Price Market of goods in current year/ price market of goods in base year * 100

·         GDP Deflator – price index used to adjust from nominal to real GDP. Nominal GDP/ Real GDP * 100

·         In base year GDP deflator is always equal to 100. For years after the base years, the GDP deflator is greater than 100. For years before base year the GDP deflator is less than 100.

·         Inflation rate – New – old/old *100