1. Macroeconomic Measurements, Part II: GDP and Real GDP
References: Ch. 7, Macroeconomics, Roger A. Arnold

2. Gross Domestic Product
Gross Domestic Product (GDP) : Total market value of all final goods and services produced annually within a country’s borders Final Good : A good meant for the final consumer Intermediate Good : An input to the production of a final good Avoiding ‘Double Counting’ - counting the good more than once when computing GDP

3. What GDP Omits / Limitations of GDP…
Certain non-market goods and services (no transaction/trade takes place) Underground activities both legal and illegal (unreported transaction/trade) Sales of used goods (not part of current production) Financial transactions (no new production; simply exchange of current assets) Government transfer payments (not an exchange/trade) Leisure (it is a good but too difficult to quantify)

4. GDP is not adjusted for bads (e. g
GDP is not adjusted for bads (e.g. pollution) generated in the production of goods… …Another limitation of GDP Any other? (in class discussion) GDP per capita : GDP divided by the population in the country Neither measures HAPPINESS or WELL-BEING!

5. Computing GDP: The Expenditure Approach
Sum the spending in usually four sectors of the economy Consumption (C) Households Investment (I) Business / Firms Government Government Purchases (G) Net Exports Rest of the world (Foreign)

6. Consumption (C) : The sum of spending on durable goods (durability > 3 years), nondurable goods (durability < 3 years) and services Generally, consumption is the largest spending component of GDP Investment (I) : The sum of all purchases of newly produced capital goods, changes in business inventories and purchases of new residential housing Government Purchases (G) : Government purchases of goods and services and investment in infrastructure (roads, bridges, etc.)

7. Net Exports (NX) : NX = Exports (EX) – Imports (IM) EX : Total foreign spending on domestic goods IM : Total domestic spending on foreign goods Putting it all together… GDP = C + I + G + (EX – IM)

8. Computing GDP: The Income Approach
National Income is the sum of five components:
Compensation of employees (wages, pension funds, fringe benefits – bonuses and paid vacations)
Proprietor’s income (Income earned by self-employed individuals, farm income)
Corporate Profits (Income earned by stockholders of corporations, retained earnings and corporate profit taxes)
Rental Income of persons (Income received from non-monetary assets – land, houses and offices)
Net Interest (Interest income received by households and government minus the interest they paid out)

9. From National Income to GDP
GDP = National Income (NI) – income earned from the rest of the world + income earned by rest of the world + indirect business taxes* + capital consumption allowance** – statistical discrepancy*** *Included in the price of goods and services (consumers bear it) **The cost to replace capital goods - depreciation (not included in NI) ***GDP and NI computed using different data sets / computational errors

10. Other NI Accounting Measurements
Net Domestic Product (NDP) = Capital Consumption – Capital consumption allowance … measures total value of new goods Personal Income = NI – undistributed corporate profits – social insurance taxes – corporate profit taxes + transfer payments Disposable Income = Personal Income – personal taxes

11. Real GDP
Real GDP : The value of the entire output produced annually within a country’s borders, adjusted for price changes. Real GDP = ∑ 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒𝑠 ×𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠 Real GDP rises ONLY if output rises! Economic growth => increases in real GDP (annually) % change in real GDP = ( 𝑅𝑒𝑎𝑙 𝐺𝐷 𝑃 𝑙𝑎𝑡𝑒𝑟 𝑦𝑒𝑎𝑟 −𝑅𝑒𝑎𝑙 𝐺𝐷 𝑃 𝑒𝑎𝑟𝑙𝑖𝑒𝑟 𝑦𝑒𝑎𝑟 𝑅𝑒𝑎𝑙 𝐺𝐷 𝑃 𝑙𝑎𝑡𝑒𝑟 𝑦𝑒𝑎𝑟 )×100

12. The Business Cycle
Business Cycle - Recurrent swings in real GDP… - Measured from peak to peak (Exhibit 7, p. 159, 11th ed) Peak : Real GDP at temporary high Contraction : A decline in real GDP Trough : The low point in real GDP Recovery : Real GDP is rising Expansion : Increase in Real GDP beyond recovery Recession : Contraction in two consecutive quarters