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)

UNDERSTANDING GDP What is GDP? GDP – GROSS DOMESTIC PRODUCT 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 the total GDP of the United States? The 2009/10 estimate for US GDP is 14.4 trillion dollars or 14400 billion. At GDP per capita (GDP expressed on per person basis), this was the equivalent to $48,000 for every person living in the USA. Naturally, GDP per capita does not imply, every person has an income of $48,000. Many people earn a lot less and a lot more in the United States.

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) China recently overtook Japan (mid 2010), to become the world’s second largest economy. Country Rank (Order) (CIA World Fact Book) Total GDP (trillions) at the official exchange rate GDP per Capita 1. United States $14.4 trillion $48,000 2. China $4.7 trillion $6,600 3. Japan $4.6 trillion $32,600 4. Germany $3 trillion $34,900 5. France $2.9 trillion $32,700 6. United Kingdom $2.7 trillioin $36,600

Based on GDP per capita, what are the richest countries in the world? 1 Liechtenstein $ 118,000 2007 2 Qatar $ 103,500 2008 3 Luxembourg $ 81,100 2008 4 Bermuda $ 69,900 2004 5. Kuwait $ 57,400 2008 6 Jersey $ 57,000 2005 7 Norway $ 55,200 2008 8 Brunei $53,100 2008 9. Singapore $52,000 2000 10 USA $48,000 2008

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.

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.

What was the increase in US GNP from 1947 to 2009?

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 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

Economic Growth Rates High Income Advanced Economies Country GDP Growth Rates Economist Magazine Prediction Full Year 2010 August 12th 2010. Singapore 12.3% South Korea 5.9% Canada 3.5% Australia 3.1% Japan 3.2.% (mainly export led growth, very weak domestic demand) United States 3% Germany 1.9% France 1.4% Britain Greece -4.4% (negative)

Economic Growth Rates Developing Countries Country GDP Growth Rates Economist Magazine Prediction Full Year 2010 August 12th 2010. China 9.9% India 8% Brazil 7.8% Argentina 6.8% Vietnam 6.4% Indonesia 5.6% Chile 5.2% Colombia 4.6% Mexico South Africa 2.8% Venezuela -5.5% (negative growth)

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.

NOMINAL & REAL GDP Case Study Example In economy XYZ GDP increased from $10 billion in 2007 to $10.5 billion in 2008. Therefore our growth rate was 5% per annum. We can call this figure the nominal increase in GDP or the nominal growth rate. However, what if the inflation rate for this same period was 3%. Therefore 3% of our increase in GDP was not due to real growth, but rather to an increase in prices. Real GDP or the real growth rate is only 2% per annum.

Real GDP Basic Exercises (Calculations) Waxland Economy Waxland had a total GDP of $550 billion at the end of 2007. At the end of 2008, GDP was calculated to be $660 billion. However, the inflation rate during 2008 was 15%. Calculate the real GDP growth rate for 2008 in dollar and percentage terms.

Waxland Economy (Proposed Solution to Question)

Real GDP Exercises Swaziland Economy Swaziland had a total GDP of $850 billion at the end of 2007. At the end of 2008, GDP was calculated to be $910 billion. However, the inflation rate during 2008 was 5%. Calculate the real GDP growth rate for 2008 in percentage terms.

Swaziland Economy (Proposed Solution to Question)

GDP – PURCASHING POWER PARITY (PPP) Internet Activity: The GDP figures provided in slide 7 related to GDP at the official exchange rate. However, GDP at Purchasing Power Parity is considered more accurate by many commentators. What do they mean by PPP? Go the following website: https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html Click on Economy – GDP (Purchasing Power Parity)

GDP PPP – Definition CIA Factbook

GDP PPP Rankings What countries are in different position when using GDP at purchasing power parity? Why do you think this is the case?

850,000 750,000 10% inflation 75,000 +750,000 825,000 25,000 Growth 825/850 2.94% Growth

(850-750)/750=13.33% 13.33%-10%=3.33% 3.33%*750=24.975