GROSS DOMESTIC PRODUCT (GDP) & GROSS NATIONAL PRODUCT (GNP) ECONOMIC INDICATORS GROSS DOMESTIC PRODUCT (GDP) & GROSS NATIONAL PRODUCT (GNP) MEASURING ECONOMIC GROWTH

GDP – Associated Concepts Intermediate Goods Final Goods Nominal GDP Real GDP Inflation GDP per capita GDP adjusted for PPP. (Purchasing Power Parity)

3 Main Ways to Calculate GDP The Expenditure Approach What people spend. Output Approach What is produced. Income Approach What people earn.

What is GDP? (Output Approach) The total value of all final goods and services produced in an economy within one year or a specified period of time. The economic growth of a country is measured by the increase or decrease in GDP.

GDP – FINAL GOODS What are final goods? Final goods are complete products sold to consumers. For example: a car you purchase from a Holden is a final good. However, the accelerator pedal in the car is an intermediate good. The cost of producing intermediate goods are not included in GDP calculations. Why???

DIFFERENCES BETWEEN INTERMEDIATE AND FINAL GOODS Classify each of the following as either an intermediate or final good: Windscreen wiper Mobile phone Bulb in a Television Computer chip Staples Pizza Aircraft propeller

What is GDP? (The Expenditure Approach)

What is GDP? (The Income Approach) This measures the value of all incomes earned in the economy. The involves compiling data on income earned from wages & salaries (by individuals) and the income earned from rent, interest and profits by companies. Not frequently used in the IB course.

What is the total GDP of the United States? Total US GDP is about $16.9 trillion (Q1 2017) data. (floatingpath.com) US GDP per capita is about $52,194 (based on the latest 2016 full year data) (Tradingeconomics.com) Naturally, GDP per capita does not imply, every person has an income of $52,194. Many people earn a lot less and a lot more in the United States.

US GDP Growth to July 2017 Source: http://topbinaryknzy.ga/cite/us-gdp-growth-chart-1376.php

http://www.rbnz.govt.nz/statistics/key-graphs/key-graph-real-gdp What major event happened in 2009-2010?. What was the impact on the global economy?

US ECONOMIC GROWTH: 2007 TO 2017 Source: https://www.novascotia.ca/finance/statistics/archive_news.asp?id=12860&dg=&df=&dto=0&dti=3 How many recession(s) has the US experienced from 2007 to 2017?

Source: http://www.floatingpath.com/2017/06/29/u-s-gdp-watch-2/

Source: http://www.floatingpath.com/2017/06/29/u-s-gdp-watch-2/

Explain the difference between Real & Nominal GDP

Which states had the strongest growth? The weakest growth? Based on the above data, which US States contributed the most to US GDP? Which states had the strongest growth? The weakest growth? Source: https://www.bea.gov/newsreleases/regional/gdp_state/qgsp_newsrelease.htm

Source: https://www.tumblr.com/search/us-gdp

Four Main Components of US GDP The Bureau of Economic Analysis, divides US GDP into four main components: Personal Consumption Expenditures Business Investment Government Spending Net Exports of Goods & Services

Components of GDP Nearly 70% of what the US produces is for personal consumption. The productions of goods is about 25% of total GDP. Services are a much larger component of personal consumption. Services are about 45% of GDP. Government spending is about 18% of GDP.

What is the total GDP of China? At the end of 2016 China’s GDP was about 11.19 trillion - the world’s second largest economy at official exchange rates. The 2016 estimate of China’s GDP per capita was about US$6894

CHINA’S TOTAL GDP IS NOW ABOUT 11.19 TRILLION DOLLARS Source: https://tradingeconomics.com/china/gdp

Source: http://marketrealist

Comment on the trends in this graph. Source: https://www.businessinsider.com.au/china-gdp-q2-preview-2017-7 Comment on the trends in this graph.

Although China has experienced very high GDP growth rates for more than 2 decades, per capita GDP is still only $6894, well behind the United States at over $50000. But China’s population is more than 4 times larger than the United States. Source: https://tradingeconomics.com/china/gdp-per-capita

Source: http://www.valuewalk.com/2017/06/america-1950/

How does US GDP compare to the rest of the world? The US is still the largest economy in the world despite the GFC (Global Financial Crisis) It position as the world largest economy is based on official exchange rates. By using another exchange rate measure (PPP – Purchasing Power Parity) China is just head of the United States.

THE WORLD’S LARGEST ECONOMIES AT THE OFFICIAL EXCHANGE RATE INTERNET ACTIVITY Go to the following website: https://www.weforum.org/agenda/2017/03/worlds-biggest-economies-in-2017/

10 Largest Economies in the World at Official Exchange Rates Country (GDP at Current Prices) or Nominal GDP GDP 2016 (trillions) 1 United States 2. China 3 4 5 6 7 8 9 10.

THE WORLD’S LARGEST ECONOMIES AT PURCHASING POWER PARITY (PPP) At official exchange rates (current prices), the US is still the largest economy in the world. However, a number of economics institutions and leading publications (eg: CIA World Fact Book) are citing PPP statistics. Based on PPP data, China is the largest economy in the world.

What is a Purchasing Power Parity (PPP) Exchange rate? Go to your online Cambridge Textbook. Type Purchasing Power Parity (in the search box) Select the 2nd returned section. Write a definition for PPP:

Definition of PPP (Purchasing Power Parity)

10 LARGEST ECONOMIES AT PPP (PURCHASING POWER PARITY) Web Source: (Go to) http://www.statista.com/statistics/264575/countries-with-the-largest-gross-domestic-product-gdp-at-purchasing-power-parity/ Total GDP At PPP Exchange Rates 1. 2. 3. 4. 5. 6. 7 8 9 10

What is the richest country in the world (per capital GDP)? Source: https://www.mapsofworld.com/world-top-ten/world-top-ten-richest-countries-map.html What is the richest country in the world (per capital GDP)?

Gross National Product (GNP) GNP is often confused with GDP. They are calculated differently. For some countries there is a significant difference between GNP and GDP figures. For other countries, there is very little difference in the specific figures.

Gross National Product (GNP An estimated value of the total worth of production and services, by citizens of a country, on its land and on foreign land, calculated over the course on one year.

GROSS NATIONAL PRODUCT (GNP) Gross National Product is GDP + Net Foreign Income from Abroad. For example, GNP for the US would be GDP + (plus) US company/individual income from overseas – (minus) . Foreign company/individual income from the US

Which is greater GDP or GNP? When Americans receive more income from their overseas investments than foreigners receive from their investments in the United States, American GNP will be somewhat larger than GDP in that year. If Americans receive less income from their overseas investments than foreigners receive from their US investments, on the other hand, American GNP will be somewhat smaller than GDP.

GDP versus GNP Final goods/services produced within GDP v. GNP (8 min vid) - http://www.youtube.com/watch?v=QiNZdGAZzeA GDP versus GNP It’s a matter of LOCATION vs. OWNERSHIP Final goods/services produced within a country Final goods/services produced anywhere by a country’s citizens

What is US GNP? The United States, stopped using GNP statistics in its national accounts in 1992, although these figures are still collected by statistical agencies. US GNP and GDP have been similar for a number of years. However, for many countries their GNP is significantly less than their GDP.

GDP – A VITAL ECONOMIC INDICATOR Why is GDP a very important economic indicator? It helps to measure the size of a country’s economy relative to other countries. All government spending can be expressed as a percentage of GDP for global comparison purposes. GDP can be expressed on a per capita (person basis) – to further assist our understanding of global differences between nations & regions.

GDP – A VITAL ECONOMIC INDICATOR Countries can be classified into different income groups based on GDP figures. For example the high income, middle income, and low income countries. GDP figures are used in all reference books, and business/ economic journals.

GDP – A MEASURE OF ECONOMIC GROWTH A country’s growth rate is determined by the percentage increase or decrease in GDP. For example if GDP was $10 billion in 2007 and increased to $10.5 billion in 2008, the growth rate for the country would be 5% per annum. However it is necessary to distinguish between Real and Nominal GDP. (future slides)

What is a recession? Negative GDP Growth Two consecutive quarters of negative economic growth OR 6 months of negative economic growth. What does negative economic growth mean? GDP went backwards (declined from the previous period) Expansion: increase in GDP / economic growth Contraction: decrease in GDP / economic growth

The Latest Economic Data: Economist.com Go to economist.com Click on economics (top tab) Click on market & data. Stroll down to output, markets and jobs.

Economic Growth Rates High Income Advanced Economies Country GDP Growth Rates Economist Magazine Prediction Full Year 2017 Economist Magazine: August 2017 Singapore South Korea Canada Australia Japan United States Germany France Britain Greece

Economic Growth Rates Developing Countries Country GDP Growth Rates Economist Magazine Prediction Full Year 2017. August 2017. China India Brazil Argentina Vietnam Indonesia Chile Colombia Mexico South Africa Venezuela

Nominal GDP vs Real GDP Nominal GDP GDP which is not adjusted for inflation. As a consequence nominal GDP figures are distorted by inflation and are not accurate. Real GDP GDP which is adjusted for inflation. As consequences these GDP figures are more accurate, than nominal figures.

The GDP Deflator A price index commonly used to covert nominal GDP to real GDP is called the GDP deflator. The word “deflate” suggests that nominal GDP will be reduced to take account of inflation. How to calculate the GDP Deflator = Nominal GDP Real GDP x 100

How to Calculate Real GDP? Formula for calculating Real GDP = Nominal GDP GDP Deflator x 100

Real GDP Question for Country XYZ Year Nominal GDP $ Real GDP $ GDP Deflator 2001** 881 100.00 2002 1160 976 118.8 2003 1223 ?? 130 ** 2001 is the Base Year, and used for comparison purposes. Statistical agencies have to establish a year for comparison purposes. What is Real GDP for country XYZ in 2003? Example Source: Tragakes, Economics for the Diploma Program. p229

Real GDP Questions What is Real GDP for country XYZ in 2003?

Calculating the Economic Growth Rate The % percentage change in Real GDP over a specific period of time. Formula: Current Year Real GDP – Previous Year Real GDP Previous Year Real GDP x 100 Question: For country XYZ, what was the economic growth rate between 2002 & 2003?

A final word: Green GDP Source: https://www.ontario.ca/page/green-gross-domestic-product-related-forest-management How would you calculate Green GDP for China? What would be the Green GDP for China?