Gross domestic product

Definition GDP = market value of the final good and services produced within country in a given period of time

Circular flow of expenditure and income

Why gross DP? GDP contains not only final but also capital goods Depreciation of capital goods Gross investment Net investment = gross investment - depreciation

Measuring of GDP The expenditure approach The income approach The production approach

The expenditure approach Y = C + I + G + NX C = personal consumer expenditures I = gross private domestic investment G = government expenditures NX = net exports

The income approach GDP = sum of the incomes that firms pay household for the factors of production they hire Compensation of employees: gross wages and salaries (including taxes, payments for health insurance and social securities) Net interest Rental income (for the use of land and other rented resources) Corporate profit (dividends, undistributed profit) Proprietor's´ income: income of a owner-operator of a business (compensation for his/her labor, capital, profit)

The income approach What it is necessary to add: + indirect taxes - subsidies that firms receive from government + depreciation of investment

The production approach

Nominal a real GDP Nominal = value of final good produced in a given year is valued at the prices of that year Real = value of final good produced in a given year is valued at the prices of a reference base year.

Nominal a real GDP – first example Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P2P2 Q´* P Q´ 3 P3P3 Q´* P Bread Roll Nominal GDP Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P2P2 Q´* P Q´ 3 P3P3 Q´* P Bread Roll Nominal GDP

Nominal a real GDP – first example Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P2P2 Q´* P Q´ 3 P3P3 Q´* P Bread Roll Nominal GDP Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P1P1 Q´* P Q´ 3 P1P1 Q´* P Bread Roll Real GDP

Nominal a real GDP – first example Year 1Year 2Year 3 Nominal GDPReal GDPNominal GDPReal GDPNominal GDPReal GDP

Nominal a real GDP – second example Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P2P2 Q´* P Q´ 3 P3P3 Q´* P Bread Roll Nomin al GDP

Nominal a real GDP – second example Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P2P2 Q´* P Q´ 3 P3P3 Q´* P Bread Roll Real GDP

Nominal a real GDP – second example Year 1Year 2Year 3 Nominal GDP Real GDPNominal GDP Real GDPNominal GDP Real GDP

Real GDP per capita

Potential GDP Potential gross domestic product (GDP) is defined in the OECD’s Economic Outlook publication as the level of output that an economy can produce at a constant inflation rate. Although an economy can temporarily produce more than its potential level of output, that comes at the cost of rising inflation. Potential output depends on the capital stock, the potential labor force (which depends on demographic factors and on participation rates), the non- accelerating inflation rate of unemployment (NAIRU), and the level of labor efficiency.

Limitations of real GDP Household production Underground economic activities Health and life expectancy Leisure time Environmental quality Public freedom and social justice