1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

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

15. 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

16. 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

17. 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

18. 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