# gdp by hedongchenchen

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```									       Measuring a nation’s output
   Having a number that summarizes the
level of economic activity is clearly
convenient

   Alternative would be to see how much of
each type of good is available

   But then it is hard to compare
– One year output is 2 apples, 2 bananas
– Next year 3.5 apples, 1 banana
– Did output go up or down? Not clear!!
How would you measure
a nation’s output?
Gross domestic product
 Mostfrequently used measure of an
economy’s output

 Definition: GDP is the market value
of the final goods and services
produced in a country during a given
period
Computing GDP (Example)
The GDP produced in a typical night in
SoBe
 100  people go to a nightclub (cover
is \$20 each)
 100 go to the new world orchestra
(\$40 dlls per ticket)
 300 rolls of sushi are prepared (\$15
per roll)
 50 gallons of orange juice are
consumed (\$5 per gallon)
Computing GDP (Example)
A typical night at southbeach
 100 nightclub (times \$20)       \$2000
 100 orchestra (times \$40)      +\$4000
 300 rolls of sushi (times \$15) +\$4500

 50 gallons of OJ (times \$5)    +\$ 250

GDP=\$10750

Remark: GDP is a sum of quantities weighted by price
Important remarks
 When computing GDP more
expensive items receive a higher
weight than cheaper ones

 Is   that reasonable?
– Idea behind it: Amount people are
willing to pay is an indication of the
Important remarks (2)
 Only   final goods are counted in GDP

 We   did not include (to name a few)
– The DJ wages paid by the nightclub
– The wages of the musicians of the
orchestra
– The ingredients needed for sushi: Fish,
rice, wasabi
– Oranges purchased to prepare OJ
Definitions: Final vs intermediate goods

A  final good is the end product of a
process and it is the good or service
that consumers actually use

 The goods or services produced on
the way towards making the final
product are called intermediate
Why GDP includes only final
goods?
 Ifwe computed GDP by adding
market value of final + intermediate
goods we would be double counting
– Oranges (intermediate good) are
purchased to produce juice (final good)
and the final good price includes the
cost of the necessary inputs to produce
it
Computing GDP is rather
complicated and costly!
A  list of each final good produced
during the year is required (together
with prices).

 Itis mathematically simple, but the
amount of information required is
huge

 Is   there any alternative way?
The expenditure method for
measuring GDP
 Any good or service that is produced
will also be purchased and used by
some economic agent

 The4 economic agents considered in
national accounts are:
– Households
– Firms
– Government
– Foreign sector
Expenditure method (contd)
 Note:Amounts that purchasers
spend on various goods and services
is equal to the market value of those
goods
GDP can be measured with equal
accuracy by either of two methods:
   Adding up the market value of all goods and
services that are domestically produced

   Adding up the total amount spent by each of
the four groups on final goods and services,
and subtracting spending on imported goods &
services

(output) GDP=C+I+G+X-M (total expenditure)
What economists mean by investment
   Investment is spending by firms on new
factories, office buildings, machinery, and
inventories and spending by households
on new houses. Improvements on
existing structures are also included.

   Buying stocks only changes ownership and
does not add to GDP (this type of financial
expenditure is not investment in
economics)
The need for computing “real” GDP
 Economistslike making time
comparisons of aggregate data to
see “how the economy is performing”

 Nearelections a president would like
saying that the economy grew during
her/his term
Measured by GDP Mexico and Angola grow
much faster than the US

GDP, annual growth (% rate)
40                                                                                                                700
35                                                                                                                600
30
500
25
400
20
300
15
200
10
5                                                                                                                 100
0                                                                                                                 0
year

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002
Mexico          USA       Angola
What is going on then?
Consider the following hypothetical
economy
   Year: 2002                   Year: 2003

Goods produced                Goods produced
 10 Microsoft office 2000     10 Microsoft office 2000
(\$100 each)                   (\$200 each)
 2 Pentium 4 (\$2000           2 Pentium 4 (\$4000
each)                         each)
GDP =                         GDP =
10*100+2*2000=\$5000           10*200+2*4000=\$10,000

The quantities of goods and services produced are the
same, yet, GDP doubled. Why?
We need to exclude the effects of
price changes!!!!!
 How   to do it?
– Standard approach is to use a common
set of prices to value quantities
produced in different years

– One picks a particular year, called base
year, and uses the prices for that year
to calculate the market value of output
for all other years
Compute Real GDP for our example
   Step 1. Set the base year

   Year: 2002                     Year: 2003

   Goods produced              Goods produced
   10 Microsoft office 2000     10 Microsoft office 2000
(\$100 each)                   (\$200 each)
   2 Pentium 4 (\$2000           2 Pentium 4 (\$4000
each)                         each)
   Real GDP =                  Real GDP =
One problem with real
GDP: New goods bias
How to make cross-country
income comparisons?
• Each country reports GDP in terms of their
local currency

• How can we compare incomes across
countries?
Illustrative Example

Suppose all countries produce, each year, one good:
a big-mac

If GDP measures the quantity of goods and services
produced by each given country, any sensible
measure of GDP in this example should say all
countries have the same GDP
GDP in dollars is extremely different
across countries!!!
Country               Big mac price (local In US dollars
currency, april
2003)
US                    2.71                 2.71

China                 Yuan 9.90            1.20

Mexico                Peso 23.00           2.18

Argentina             Peso 4.10            1.43

Switzerland           S Franc 6.30         4.59
Source: The economist’s big mac index
What is going on?, How to
construct comparable GDP figures?
• A dollar has very different purchasing power
across countries
• In other words, relative prices vary a lot
across the world
• When making cross country comparisons
use PPP adjusted measures
• Method (in simple terms): Use one country’s
prices to compute the GDP of all other
countries
REAL GDP growth in Angola,
Mexico and the US

Real GDP, annual growth (% rate)
8                                                                                                                 16
6                                                                                                                 14
4                                                                                                                 12
2                                                                                                                 10
0                                                                                                                 8
-2                                                                                                                6
-4                                                                                                                4
-6                                                                                                                2
-8                                                                                                                0
year

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002
Mexico          USA     Angola
Measuring Economic Growth

The economic growth rate is the percentage change in
the quantity of goods and services produced from one
year to the next.

Growth year 2004: (GDP2004-GDP2003)/GDP2003 - 1
GDP vs Welfare

Real GDP is not a perfect measure of economic welfare
because:
1. Quality improvements tend to be neglected in calculating
real GDP so the inflation rate is overstated and real GDP
understated.
2. Real GDP does not include household production, that
is, productive activities done in and around the house by
members of the household.
GDP vs Welfare

3. Real GDP, as measured, omits the underground
economy, which is illegal economic activity or legal
economic activity that goes unreported for tax avoidance
reasons.
4. Health and life expectancy are not directly included in
real GDP.
5. Leisure time, a valuable component of an individual’s
welfare, is not included in real GDP.
6. Environmental damage is not deducted from real GDP.
7. Political freedom and social justice are not included in
real GDP.

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