Source: books and web materials Circular flow model Wages, rent, COST Interest, RESOURCE MARKET capital profit RESOURCES Labor, land HOUSEHOLDS BUSINESS FIRMS & services expenses Goods & goods PRODUCT MARKET services Consumption, revenue Investment Capital market savings Dr. Aminul I Akanda Source: books and web materials

capital Labor, land, costs Goods & services resources RESOURCE MARKET Labor, land, costs Interest, profit Wages, rent, Export of goods, services, manpower expenditures Resources Goods &services HOUSEHOLDS Direct tax GOVERNMENT BUSINESS FIRMS Foreign trade Goods & services Indirect tax Expenditures consumption Goods and service Import of goods, services & manpower Goods & services expenses revenue PRODUCT MARKET Goods & services Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials Dr. Aminul I Akanda National accounting Gross domestic product (GDP) is the total market value of all final goods and services produced within a country in a given period of time. “GDP is the Market Value . . .” Output is valued at market prices. “. . . Of All Final . . .” Records only the value of final goods, not intermediate goods (as value is counted only once). “. . . Goods and Services . . . “ Includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials “. . . Produced . . .” Includes goods and services currently produced, not transactions involving goods produced in past. However, GDP is not the market value of total sales during a period—it is the market value of total production “ . . . Within a Country . . .” Measures the value of production within the geographic confines of a country. “. . . In a Given Period of Time.” Measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months). Dr. Aminul I Akanda Source: books and web materials

IS GDP A COMPLETE MEASURE ? GDP includes all items produced in the economy and sold legally in markets. What Is Not Counted in GDP? GDP excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs. Dr. Aminul I Akanda Source: books and web materials

Economy’s income and expenditure For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. The equality of income and expenditure can be illustrated with the circular-flow diagram. Dr. Aminul I Akanda Source: books and web materials

Approaches of GDP Measurement (GDP = W + R + I + P) Income (wages, rent, interest (I), profits) Income Approach Value of what is earned Same As Households Firms Expenditures Approach Value of what is spent Expenditures by Consumers, Investors, Government, and Traders (GDP = C + I + G + Xn ) Dr. Aminul I Akanda Source: books and web materials

Y = C + I + G + NX Components of Expenditure in GDP Total demand for domestic output (GDP) Consumption spending by households Investment spending by businesses and households Government purchases of goods and services Net exports or net foreign demand Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials COMPONENTS OF GDP Consumption (C): Spending by households exception of purchases of new house. Durable goods: Goods that last a relatively long time, such as cars and appliances. Nondurable goods: Goods that are used up fairly quickly, such as food and clothing. Services: Things that do not involve the production of physical things, such as legal services, medical services, and education Investment (I): Nonresidential investment includes expenditures by firms for machines, tools, plants, and so on. Residential investment includes expenditures by households and firms on new houses and apartment buildings. Change in inventories computes the amount by which firms’ inventories change during a given period. Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials Government Purchases (G): The spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services. Net Exports (NX): Exports minus imports. Dr. Aminul I Akanda Source: books and web materials

GDP AND ECONOMIC WELL-BEING GDP is not a perfect measure of the happiness or quality of life, however it is the best single measure of the economic well-being of a society. Per Capita GDP (measured by dividing real GDP by population) calculations may be a better measure of the standard of living. For comparing standards of living between citizens of a country and citizens of different countries. Higher per capita GDP indicates a higher standard of living. However, the measurement of per capita GDP suffers from fallacious composition of income. Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials Shortcomings of the GDP to be a perfect measure the economic well-being. 1. Non-market Transactions: All productive activities do not pass through markets. Thus, GDP understates productive activity in the economy. 2. Leisure time is not considered by GDP, but additional leisure can easily be argued to increase well being. 3. Improved product quality does not directly enter GDP. Only quality enhancements that result in higher prices get into GDP. 4. Voluntary and social works do not enter in GDP. The value of the time parents spend with their children and the value of volunteer work takes place outside of markets and not included in GDP. Dr. Aminul I Akanda Source: books and web materials

REAL VERSUS NOMINAL GDP Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices. Dr. Aminul I Akanda Source: books and web materials

Table: Real and Nominal GDP Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials The GDP Deflator The GDP deflator is calculated from the ratio of nominal GDP to real GDP for same year times 100 — measures the level of prices in the economy. The GDP deflator tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. Dr. Aminul I Akanda Source: books and web materials

GDP Deflator from Real and Nominal GDP How do you interpret the result of GDP deflator? What is the use of it? Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials GDP VERSUS GNP Gross national product (GNP) add receipts of factor income (wages, profit, and rent) from the rest of the world and subtract payments of factor income to the rest of the world from GDP (remittance adjusted). GNP = GDP + Factor Payments from Abroad - Factor Payments to Abroad Whereas GDP measures the total income produced domestically, GNP measures the total income earned by nationals (residents of a nation). Dr. Aminul I Akanda Source: books and web materials

Source: books and web materials Exercise Given the following items produced in your economy for different years. 2000 2001 2002 2003 2004 Price Quantity Food 9 950 10 1000 12 1100 13 1200 15 1250 Energy 45 20 50 60 30 65 35 75 40 Shelter 450 2 500 600 700 3 750 Clothing 55 70 Find out the following Nominal GDP for each year, Real GDP for each year taking 2002 as base year, GDP deflator for 2000 and 2003, Growth rates of real GDP for 2003 and 2004, and interpret your results. Dr. Aminul I Akanda Source: books and web materials