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Gross Domestic Product: Prof. Wyatt Brooks

This document provides an overview of Gross Domestic Product (GDP) from an economics lecture. It defines GDP as the total market value of all final goods and services produced within a country in a given period, usually a year. GDP can be calculated based on total income or total expenditure in the economy. The four main components of GDP are consumption, investment, government spending, and net exports. While GDP is the primary measure of economic output, it does not account for all factors that affect welfare such as environmental quality, leisure time, and income inequality.

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Deepak Chauhan
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76 views

Gross Domestic Product: Prof. Wyatt Brooks

This document provides an overview of Gross Domestic Product (GDP) from an economics lecture. It defines GDP as the total market value of all final goods and services produced within a country in a given period, usually a year. GDP can be calculated based on total income or total expenditure in the economy. The four main components of GDP are consumption, investment, government spending, and net exports. While GDP is the primary measure of economic output, it does not account for all factors that affect welfare such as environmental quality, leisure time, and income inequality.

Uploaded by

Deepak Chauhan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 37

Lecture 1:

Gross Domestic Product


August 28, 2014

Prof. Wyatt Brooks

MEASURING A NATIONS INCOME

Structure of the Course


First Part of the Class:
The macroeconomy in the long run
Why are countries rich and poor?
What can government policy do about it?
Second Part of the Class:
The macroeconomy in the short run
What are business cycles?
How should governments react to them?

MEASURING A NATIONS INCOME

Rich and Poor


Spend the next several lectures looking at the
variation in income (production) across time and
across countries

Our study will be based on economic


observables rather than, for instance, culture

Particular question: what government/institutional


policies might help/harm development?

But first, we need to be able to know how were


measuring income, and how to make it
comparable across time/countries
MEASURING A NATIONS INCOME

Income and Expenditure


Gross Domestic Product (GDP) measures
total income of everyone in the economy.

GDP also measures total expenditure on the


economys output of goods & services.

For the economy as a whole,


income equals expenditure
because every dollar a buyer spends
is a dollar of income for the seller.
MEASURING A NATIONS INCOME

Gross Domestic Product (GDP) Is


the market value of all final goods &
services produced within a country
in a given period of time.
Goods are valued at their market prices, so:

All goods measured in the same units


(e.g., dollars in the U.S.)

Things that dont have a market value are


excluded.
MEASURING A NATIONS INCOME

Gross Domestic Product (GDP) Is


the market value of all final goods &
services produced within a country
in a given period of time.
Final goods: intended for the end user
Intermediate goods: used as components
or ingredients in the production of other goods
GDP only includes final goods they already
embody the value of the intermediate goods
used in their production.
MEASURING A NATIONS INCOME

Gross Domestic Product (GDP) Is


the market value of all final goods &
services produced within a country
in a given period of time.
GDP includes tangible goods
(beer, wine, brats, ketchup)
and intangible services
(dry cleaning, concerts, cell phone service).

MEASURING A NATIONS INCOME

Gross Domestic Product (GDP) Is


the market value of all final goods &
services produced within a country
in a given period of time.
GDP includes currently produced goods,
not goods produced in the past.

MEASURING A NATIONS INCOME

Gross Domestic Product (GDP) Is


the market value of all final goods &
services produced within a country
in a given period of time.
GDP measures the value of production that occurs
within a countrys borders, whether done by its own
citizens or by foreigners located there.

MEASURING A NATIONS INCOME

Gross Domestic Product (GDP) Is


the market value of all final goods &
services produced within a country
in a given period of time.
Usually a year or a quarter (3 months)

MEASURING A NATIONS INCOME

The Components of GDP


Recall: GDP is total spending.
Total spending is classified into four components:
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
These components add up to GDP (denoted Y):
Y = C + I + G + NX
MEASURING A NATIONS INCOME

10

Consumption (C)
is total spending by households on goods &
services.

Note on housing costs:


For renters,
consumption includes rent payments.

For homeowners,
consumption includes the imputed rental value
of the house, but not the purchase price or
mortgage payments.

MEASURING A NATIONS INCOME

11

Investment (I)
is total spending on goods that will be used in the
future to produce more goods.

includes spending on
capital equipment (e.g., machines, tools)
structures (factories, office buildings, houses)
inventories (goods produced but not yet sold)
Note: Investment does not
mean the purchase of financial
assets like stocks and bonds.
MEASURING A NATIONS INCOME

12

Government Purchases (G)


is all spending on the goods & services
purchased by government at the federal, state,
and local levels.

G excludes transfer payments, such as


Social Security or unemployment insurance
benefits.
They are not purchases of goods & services.

MEASURING A NATIONS INCOME

13

Net Exports (NX)


NX = exports imports

Exports represent foreign spending on the


economys goods & services.

Imports are the portions of C, I, and G


that are spent on goods & services produced
abroad.

Adding up all the components of GDP gives:


Y = C + I + G + NX
MEASURING A NATIONS INCOME

14

U.S. GDP and Its Components, 2011


billions

% of GDP

per capita

$14,991

100.0

$47,881

10,729

71.6

34,283

2,236

14.9

7,134

2,594

17.3

8,283

NX

568

3.8

1,819

MEASURING A NATIONS INCOME

15

France GDP and Its Components, 2011


billions

% of GDP

per capita

$2,306

100.0

$36,538

1,330

57.7

21,082

476

20.6

7,527

565

24.5

8,952

NX

65

2.8

1,023

MEASURING A NATIONS INCOME

16

China GDP and Its Components, 2011


billions

% of GDP

per capita

$11,167

100.0

$8,290

3,902

34.9

2,893

5,490

49.2

4,079

1,484

13.3

1,102

291

2.6

215

NX

MEASURING A NATIONS INCOME

17

Digression: Other Measures of Income


GNP (Gross National Product): total income
earned by a countrys permanent residents.

NNP (Net National Product):


= GNP depreciation (consumption of fixed
capital)

National Income:
= NNP indirect business taxes + business
subsidies

MEASURING A NATIONS INCOME

18

Real versus Nominal GDP


Inflation can distort economic variables like GDP,
so we have two versions of GDP:
One is corrected for inflation, the other is not.

Nominal GDP values output using current prices.


It is not corrected for inflation.

Real GDP values output using the prices of


a base year. Real GDP is corrected for inflation.

MEASURING A NATIONS INCOME

19

The GDP Deflator


The GDP deflator is a measure of the overall
level of prices.

Definition:
nominal GDP
GDP deflator = 100 x
real GDP

One way to measure the economys inflation


rate is to compute the percentage increase in
the GDP deflator from one year to the next.
MEASURING A NATIONS INCOME

20

ACTIVE LEARNING

Computing GDP
2007 (base yr)
P
Good A
Good B

$30
$100

2008
P

2009
Q

900 $31 1,000


192 $102
200

$36
$100

1050
205

Use the above data to solve these problems:


A. Compute nominal GDP in 2007.
B. Compute real GDP in 2008.
C. Compute the GDP deflator in 2009.
21

ACTIVE LEARNING

Answers
2007 (base yr)
P
Good A
Good B

$30
$100

2008
P

2009
Q

900 $31 1,000


192 $102
200

$36
$100

1050
205

A. Compute nominal GDP in 2007.

$30 x 900 + $100 x 192 = $46,200


B. Compute real GDP in 2008.

$30 x 1000 + $100 x 200 = $50,000


22

ACTIVE LEARNING

Answers
2007 (base yr)
P
Good A
Good B

$30
$100

2008
P

2009
Q

900 $31 1,000


192 $102
200

$36
$100

1050
205

C. Compute the GDP deflator in 2009.

Nom GDP = $36 x 1050 + $100 x 205 = $58,300


Real GDP = $30 x 1050 + $100 x 205 = $52,000
GDP deflator = 100 x (Nom GDP)/(Real GDP)
= 100 x ($58,300)/($52,000) = 112.1
23

GDP and Economic Well-Being


Real GDP per capita is the main indicator of
the average persons standard of living.

But GDP is not a great measure of


well-being.

MEASURING A NATIONS INCOME

24

GDP Does Not Value:


the quality of the environment
leisure time
non-market activity, such as the child care
a parent provides his or her child at home

an equitable distribution of income

MEASURING A NATIONS INCOME

25

GDP Maximization Strategies:


Require everyone to work 100 hours per week
Allow for (or encourage) child labor
Minimize consumption to maximize investment
Run perpetual trade surpluses (produce lots of
stuff, and send it abroad for nothing in exchange)

Clearly these outcomes are not good!


MEASURING A NATIONS INCOME

26

GDP and Welfare


Pete Klenow and Chad Jones (both from
Stanford University) measure welfare across
countries in a recent paper (2011). They take
into account:

Life expectancy at birth

Consumption of goods & services (instead of


income)

Leisure

Income inequality
MEASURING A NATIONS INCOME

27

GDP and Welfare

Jones & Klenow (2010), Figure 3, p. 17:


Welfare and Income across Countries, 2000

MEASURING A NATIONS INCOME

28

GDP and Welfare:


Digression on Correlations

MEASURING A NATIONS INCOME

29

GDP and Welfare

Correlation coefficient: .97

Jones & Klenow (2010), Figure 3, p. 17:


Welfare and Income across Countries, 2000

MEASURING A NATIONS INCOME

30

GDP and Welfare


Country
USA

France

Per capita
Life
Welfare
income
"Difference" expectancy
1.000

0.941

1.000

0.701

0.295

0.000

0.000

77.0

0.762

0.084

78.9
Singapore

0.426

0.829

-0.667

0.036
78.1

Botswana

0.074

0.179

-0.887

-0.577
48.9

MEASURING A NATIONS INCOME

C/Y

Leisure Inequality
0.000

0.000

-0.055 0.140

0.125

0.721
-0.581 -0.106

-0.016

0.426
-0.171 0.028

-0.167

0.642

31

GDP is not perfect, but


Having a large GDP enables a country to afford
better schools, a cleaner environment,
health care, better infrastructure, etc.

Many indicators of the quality of life are


positively correlated with GDP. For example

MEASURING A NATIONS INCOME

32

GDP and School Enrollment

33

GDP and Urbanization

34

GDP and Cell Phones

35

Next Class
Reading before class: Chapter 11
Topics: Inflation, the Consumer Price Index, and
the Producer Price Index

From todays lecture, you can do Section 1 of


the homework

MEASURING A NATIONS INCOME

36

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