# Nominal GDP by alicejenny

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• pg 1
EC 102

Lecture 2
Transactions: The Circular-Flow Diagram

The circular-flow diagram is a model that represents
the transactions in an economy by flows around a circle.
An Expanded Circular-Flow Diagram: The Flows
of Money Through the Economy
Gross Domestic Product
Gross domestic product , or GDP, measures the value of all
final goods and services produced in the economy by the factors
of production located in that country. It does not include the value
of intermediate goods.
Gross national product , or GNP, measures the value of all
final goods and services produced in the economy by the factors
of production owned by the citizens of that country. It does not
include the value of intermediate goods.
GNP-Net Factor Income=GDP
Net Factor Income= Turkish factors abroad-Good produced in
Turkey by foreign factors
Gross Domestic Product
Total value of final goods and services newly produced
in the country over a specified period of time (1 year)
Final goods – avoid double counting
“Domestic” – within the borders of the country
Value of production = value of spending = value of
income
Production – sum up value of all final goods and
services produced in each sector
Spending – sum up value of spending by all sectors
Income – sum up compensation received by all
involved in production and services.
Calculation of GDP
   Total expenditure
 Consumption   by households (C)
 Investment expenditures by firms (I) – on
capital goods, not intermediate goods
 Government expenditures (G)
 Exports (X)
 Imports (Z)
Y=C+I+G+X-Z
Calculating its Value – Three
Approaches
Income Approach – adding up production-related
domestic incomes (wages, rents, profits) earned
by all individuals and organizations
Closed vs. open economy
Need to taken into account
- Net income from RoW : to be deducted
- Depreciation: consumption of fixed capital – to be
GDP = NI – Net income from RoW + Depreciation
Calculating its Value – Three
Approaches
Product Approach – Rather than looking at the
final sale, utilize a “value-added” approach
Q: how much each industry contributes the the value
of the final good or service?
Start from the raw material and see how much
market value is added at each stage
Value of sold – value of intermediate inputs used
Value added at each stage must sum up to the final
value of the final product
Input-Output tables
Calculating its Value – Three
Approaches
Use of imputation to estimate the value of some
components
Esp. Government production is imputed by summing
up the payments to workers, payments for
intermediate goods and services, allowance for
depreciation of assets
What about household production for own use? Not
counted at all!
GDP = Business production + household and
institutions production + government production
Calculating GDP
U.S. GDP in 2004: Two Methods of Calculating GDP
Growth, Price Changes and Real
GDP
Nominal vs. Real GDP
Nominal GDP – total production valued at current
prices (current meaning the year in consideration)
!! Not only the level of output but also the price levels
change from one year to another.
Real GDP – Actual value of goods and services
produced which is net of price changes
GDP = Σ (P x Q)
Real vs. Nominal GDP

Real GDP: the value of the final goods and services produced
calculated using the prices of some base year.
Nominal GDP: output valued at current prices.
Real GDP per capita is a measure of average output per
person, but is not by itself an appropriate policy goal.
Growth, Price Changes and Real
GDP
Calculate Real GDP using constant prices from a base
year/reference year
For the base year Nominal and Real GDP are same!
Calculating GDP and Real GDP in a
Simple Economy
Real vs. Nominal GDP
Real vs. Nominal GDP
The Relationship between Real GDP and
Unemployment, 1949-2004
Issues with GDP
 Black market
 Unregistered works
 Not marketed services
 Quality of life
Growth, Price Changes and Real
GDP
GDP Growth – changes in GDP over time, percentage
change in the value of GDP from one year to another.
Percentage change = [(Value2-Value1)/Value1]*100
Annual growth and quarterly growth
Growth, Price Changes and Real
GDP
Use of price indices – to measure the changes in
prices as compared to another period.
CPI – consumer price index: measuring changes
in prices of goods and services bought by
households.
Weighted average of a bundle of goods and
services
Inflation – growth rate of prices
When weights are constant, tend to
overstate inflation – because people may
look for cheaper substitutes!
using information from household
budget/expenditure surveys
Growth, Price Changes and Real
GDP
Other indices are used: e.g. PPI – using prices
facing domestic producers
Baskets are different, inflation rates differ!
GDP Deflator – implicit price deflator
GDP Deflator = (Nominal GDP / Real GDP) *100
Reflects changes in all the prices of goods and
services included in GDP.
Price Indexes and the Aggregate
Price Level
A price index is the ratio of the current cost of that market
basket to the cost in a base year, multiplied by 100. It allows to
track the change in price of a weighted average of many goods
Calculating the Cost of a Market
The Makeup of the Consumer Price
Index in 2004
TURKEY
100.00

FOOD AND NON-ALCOHOLIC BEVERAGES                                      28.63

ALCOHOLIC BEVERAGES AND TOBACCO                                        5.00

CLOTHING AND FOOTWEAR                                                  8.07

HOUSING, WATER, ELECTRICITY, GAS AND OTHER FUELS                      16.60

FURNISHINGS, HOUSEHOLD EQUIPMENT, ROUTINE MAINTENANCE OF THE HOUSE     7.42

HEALTH                                                                 2.54

TRANSPORT                                                             12.59

COMMUNICATIONS                                                         4.30

RECREATION AND CULTURE                                                 2.81

EDUCATION                                                              2.24

HOTELS, CAFES AND RESTAURANTS                                          5.64

MISCELLANEOUS GOODS AND SERVICES                                       4.16
The CPI, 1913–2004
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CPI-PPI: 1982-2004

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CPI-PPI: 2003-2008

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The CPI, the PPI, and the GDP
Deflator
Growth, Price Changes and Real
GDP
Other indices are used: e.g. PPI – using prices
facing domestic producers
Baskets are different, inflation rates differ!
GDP Deflator – implicit price deflator
GDP Deflator = (Nominal GDP / Real GDP) *100
Reflects changes in all the prices of goods and
services included in GDP.
Biases in price indices
   Bias = A consistent form of error (i.e. being usually too
high)
   New Product Bias: CPI ignores new products until they
become cheap enough to be popular
 Causes CPI to overestimate inflation
   Quality Improvement Bias: If the price of a product goes
up because it's better, then it's no inflation
 Causes CPI to overestimate inflation
   Substitution Bias: People switch between substitutes in
response to high or low prices
 Causes CPI to overestimate inflation
Comparing Economies Across Time
and Space
   Following graphs (Tablo 1 and Grafik 2-5) are from

Buyume (1820-2005)”, Uluslararasi Ekonomi ve Dis
Ticaret Politikalari, 1(2): 3-26

For a similar text in English:
Pamuk, Ş., 2006. “Estimating Economic Growth in the
Middle East since 1820,” The Journal of Economic
History 66: 809-28.
Pamuk, Sevket. 2007. “Dunyada ve Turkiye’de Iktisadi Buyume (1820-2005)”, Uluslararasi Ekonomi ve Dis Ticaret Politikalari, 1(2): 3-26
Pamuk, Sevket. 2007. “Dunyada ve Turkiye’de Iktisadi Buyume (1820-2005)”, Uluslararasi Ekonomi ve Dis Ticaret Politikalari, 1(2): 3-26
Pamuk, Sevket. 2007. “Dunyada ve Turkiye’de Iktisadi Buyume (1820-2005)”, Uluslararasi Ekonomi ve Dis Ticaret Politikalari, 1(2): 3-26
Pamuk, Sevket. 2007. “Dunyada ve Turkiye’de Iktisadi Buyume (1820-2005)”, Uluslararasi Ekonomi ve Dis Ticaret Politikalari, 1(2): 3-26
Pamuk, Sevket. 2007. “Dunyada ve Turkiye’de Iktisadi Buyume (1820-2005)”, Uluslararasi Ekonomi ve Dis Ticaret Politikalari, 1(2): 3-26
U.S. Real GDP per Capita
Income Around the World
Rule of 70
The Rule of 70 tells us that the time it takes a variable that
grows gradually over time to double is approximately 70 divided
by that variable’s annual growth rate.
Average Annual Growth Rates of Real
GDP per Capita, 1975–2003
The Sources of Long-Run Growth
- Definitions:
Labor productivity
Physical capital
Human capital
Technology
Accounting for Growth: The
Aggregate Production Function

The aggregate production function is a
hypothetical function that shows how productivity
(real GDP per worker) depends on the quantities
of physical capital per worker and human capital
per worker as well as the state of technology.
Physical Capital and Productivity
Technological Progress and
Productivity Growth
Why Growth Rates Differ
A number of factors influence differences among
countries in their growth rates.
savings and investment spending,
foreign investment,
education,
infrastructure,
research and development,
as well as foster political stability, and
the protection of property rights.
Poor Countries Regulate Business the Most…

Source: Doing Business database of the World Bank, 2004.
Success, Disappointment, and Failure
Success, Disappointment, and
Failure
East Asian economies have done many things right and
achieved very high growth rates.
In Latin America, where some important conditions are
lacking, growth has generally been disappointing.
In Africa, real GDP per capita has declined for several decades,
although there are some signs of progress now.

The convergence hypothesis fits the data only when factors
that affect growth, such as education, infrastructure, and
favorable policies and institutions, are held equal across countries.
Economics in Action: Are
economies converging?

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