Macroeconomic Measurements, Part II GDP and Real GDP Del Mar College John Daly ©2002 South-Western Publishing, A Division of Thomson Learning

Gross Domestic Product GDP is the total market value of all final goods and services produced annually within a country’s borders. GDP is a Flow Variable: A Flow Variable is a variable that is only meaningful over a period of time. GDP is NOT a Stock Variable: A Stock Variable is a variable that is meaningful at a moment in time. The US money supply is a stock variable.

GDP? GNP? What’s different? Gross National Product is the total market value of all final goods and services provided annually by the citizens of a country GDP measures all final goods produced in a country, whether by citizens or not. GNP measures all final goods produced by citizens whether in that country or not.

Total Market Value Total Market Value is the monetary value of goods and services at today’s prices. Only final goods are counted to protect against the error of over-counting.

What GDP Omits Underground Activities Sale of Used Goods Financial Transactions Government Transfer payees. Leisure Not adjusted for “bads”

GDP or Per Capita GDP Per Capita GDP is the GDP divided by the population. GDP figures are useful for obtaining an estimate of the productive capabilities of an economy but they do not necessarily measure happiness or well being.

Q & A Give an example that illustrates the difference between the U.S. GDP and the U.S. GNP. Suppose the GDP for a country is $0. Does this mean that there was no productive activity in the country? Explain your answer.

Two Ways of Computing GDP Expenditures: Consumption includes spending on durable goods, spending on non-durable goods, and spending on services. Investment is the sum of purchases of newly produced capital goods, changes in business inventories, and purchase of new residential housing.

Expenditures Government purchases include federal, state, and local government purchases of goods and services and gross investment in highways, bridges, and so on. Net Exports is the total number of exports minus the number of imports.

Computing GDP using the Expenditure Approach Anything that is not sold is “bought” by the firm that produces it. GDP=Consumption + Investment + Government Purchases + Net Exports

The Income Approach to Measuring GDP Domestic Income is the total income earned by the people and businesses within a country’s borders. National Income is the total income earned by U.S. citizens and businesses, no matter where they are located.

Income Approach to GNP Compensation of Employees: Wages, salaries, Social Security benefits, and employee benefit plans plus the monetary value of fringe benefits, tips, and paid vacations Proprietors’ Income is all forms of income earned by self-employed individuals and the owners of unincorporated business, including unincorporated farmers. Corporate Profits include all income earned by the stockholders of corporations. Rental Income of Persons is the income received by individuals for the use of their non-monetary assets.

National Income 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

National GDP Making Some Adjustments Remember that the National income excludes foreign nationals and includes citizens abroad, but the GDP has to adjust for both of these incomes. Indirect Business Taxes usually comprise excise taxes, sales taxes, and property taxes. Capital Consumption Allowance or depreciation is the cost to replace capital goods that break or wear down Statistical discrepancies or pure computational errors often occur

Other National Income Accounting Measurements Net Domestic Product = GDP – Capital consumption allowance Personal Income = National income – Undistributed Corporate Profits – Social Security Taxes – Corporate Profits Taxes + Transfer Payments Disposable Income = Personal Income – Personal Taxes Per Capita Macroeconomic Measurements Divides these factors by the population.

Q & A Describe the expenditure approach to computing GDP. Will GDP be smaller than the sum of consumption, investment, and government purchases if net exports are negative? Explain your answer. If GDP is $400 billion, and the country’s population is 100 million, does it follow that each individual in the country has $40,000 worth of goods and services?

Real GDP Real GDP is GDP adjusted for price changes. Real GDP is equal to the change in Base year prices multiplied by current year quantities. Annual economic growth has occurred if the Real GDP in one year is higher than the previous year.

Ups and downs of the Business Cycle Peak: at the peak of the business cycle, Real GDP is at a temporary high. Contraction: A decline in the real GDP. If it falls for two consecutive quarters, it is said to be in a recession. Trough: The Low Point of the GDP, just before it begins to turn up. Recovery: When the GDP is rising from the trough. Expansion: when the real GDP expands beyond the recovery

The Business Cycle

Q & A Suppose GDP is $6,039 billion in year 1 and $6,245 billion in year 2. What has caused the rise in GDP? Suppose Real GDP is $5,233 billion in year 1 and $5,267 billion in year 2. What has caused a rise in the Real GDP? Can an economy be faced with endless business cycles and still have its Real GDP grow over time? Explain your answer.