1. Gross domestic product

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

3. Circular flow of expenditure and income

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

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

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

7. 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)

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

9. The production approach

10. 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.

11. 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 Bread1 00020 20 000 1 50025 37 500 2 00030 60 000 Roll 10 000 2 20 000 3 60 000 30 000 4 120 000 Nominal GDP 40 000 97 5000 180 000 Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P2P2 Q´* P Q´ 3 P3P3 Q´* P Bread1 00020 20 000 1 50025 37 500 2 00030 60 000 Roll 10 000 2 20 000 3 60 000 30 000 4 120 000 Nominal GDP 40 000 97 500 180 000

12. 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 Bread1 00020 20 000 1 50025 37 500 2 00030 60 000 Roll 10 000 2 20 000 3 60 000 30 000 4 120 000 Nominal GDP 40 000 97 5000 180 000 Year 1Year 2Year 3 O´ 1 P1P1 Q´* P Q´ 2 P1P1 Q´* P Q´ 3 P1P1 Q´* P Bread1 00020 20 000 1 50020 30 000 2 00020 40 000 Roll 10 000 2 20 000 2 40 000 30 000 2 60 000 Real GDP 40 000 70 000 100 000

13. Nominal a real GDP – first example Year 1Year 2Year 3 Nominal GDPReal GDPNominal GDPReal GDPNominal GDPReal GDP 40 000 97 500180 000 100 000

14. 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 1 00020 20 000 50040 20 000 30050 15 000 Roll 10 0002 20 000 8 0003 24 000 5 00010 50 000 Nomin al GDP 40 00044 00065 000

15. 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 1 00020 20 000 50020 10 000 30020 6 000 Roll 10 0002 20 000 8 0002 16 000 5 0002 10 000 Real GDP 40 00026 00016 000

16. Nominal a real GDP – second example Year 1Year 2Year 3 Nominal GDP Real GDPNominal GDP Real GDPNominal GDP Real GDP 40 000 44 00026 00065 00016 000

17. Real GDP per capita

19. 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.

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