Macroeconomics Measurements: GDP and Real GDP

							    Gross Domestic Product
            (GDP)

The total market
value of all final
goods and services
produced annually
within a country’s
borders.
       Ways to Compute GDP -
          Expenditure Approach
Add the amount of money spent by
 buyers of final goods and services*
Avoid double counting.
Do not count intermediate goods**

* Goods in the hands of their final users.
** Goods that are inputs for the production of final
   goods.
      Ways to Compute GDP
     Income and Value –added
         Approaches
Income Approach – add the sum of all
 incomes earned (wages, interest, rents, and
 profits) in producing goods and services
Value-added Approach – add the value
 added at each stage of production of all
 goods and services
  What’s Not Included in GDP

Certain non-
 market goods
 and services such
 as chores
 performed at
 home by family
 members.
  What’s Not
  Included in
     GDP

Underground
activities, both legal
and illegal
 What’s Not Included in GDP

Sales of used
Government transfer payments such
 as social security goods
Financial transactions such as
 trading of stocks and bonds
Leisure time
               GDP and Bads
 GDP counts the
 goods and services,
 but it does not net out
 the air and water
 pollution.
 Thus, some
 economists argue that
 GDP overstates our
 overall economic
 welfare.
GDP Per Capita
  GDP - Expenditure Approach
           4 Sectors

Household Sector - Consumption
Business Sector - Investment
Government Sector – Government Purchases
Foreign Sector – Net Exports

    GDP = C + I + G + (X – M)
        Consumption

The sum of household spending on:
Durable goods
Nondurable goods
Services
         Durable Goods
Durable goods are goods that are expected
to last for more than three years, such as
refrigerators, ovens, or cars.
        Nondurable Goods
Nondurable goods are goods that are not
expected to last for more than three years,
such as food.
                Services
Services are intangible items such as lawn
care, car repair, and entertainment.
            Investment

The sum of all purchases of:
Newly produced capital goods -
 Business purchases of capital goods,
 such as machinery and factories
Changes in business inventories -
 Changes in the stock of unsold goods.
Purchases of new residential housing
       Government Purchases
Includes:
  Federal, state, and local government
  purchases of goods and services and gross
  investment in highways, bridges, and so
  on.
Excludes:
  Government transfer payments to persons
  that are not made in return for goods and
  services currently supplied.
             Net Exports
Exports (X) - Total foreign spending on
  domestic (U.S.) goods
                  Less
Imports (M) - Total domestic (U.S.) spending
  on foreign goods
Expenditure Approach
GDP 2006
     GDP – Income Approach
1. Purchases (expenditures) made in product
   markets flow to business firms.
2. Business firms then use these monies to buy
   resources in resource markets.
3. These monies flow to the owners (suppliers) of
   land, labor, capital, and entrepreneurship.
4. The sum of these resource payments is total
   income, which flows to households. In this
   simple economy total purchases (expenditures)
   equal total income.
5. Because total purchases (expenditures) equal
   GDP and total purchases equal total income, it
   follows that GDP equals total income.
          National Income
Total income earned by U.S. citizens and
 businesses, no matter where they reside or
 are located.
National income is the sum of the
 payments to resources (land, labor,
 capital, and entrepreneurship).
 Computing National Income
National income =
Compensation of employees
+ Proprietors’ income
+ Corporate profits
+ Rental income
+Net interest
      COMPENSATION OF
         EMPLOYEES
Compensation of employees consists of
wages and salaries paid to employees plus
employers’ contributions to Social
Security and employee benefit plans plus
the monetary value of fringe benefits, tips,
and paid vacations.
 PROPRIETORS’ INCOME
Proprietors’ income includes all forms of
income earned by self-employed
individuals and the owners of
unincorporated businesses, including
unincorporated farmers.
   CORPORATE PROFITS
Corporate profits include all the income
earned by the stockholders of
corporations.
       RENTAL INCOME (OF
           PERSONS)
Rental income is the income received by
 individuals for the use of their non-
 monetary assets (land, houses, offices).
 It also includes returns to individuals
 who hold copyrights and patents.
 Finally, it includes an imputed value to
 owner-occupied houses.
         NET INTEREST
Net interest is the interest income received
by U.S. households and government
minus the interest they paid out.
          From NI to GDP
GDP =
National income
- Income earned from the rest of the world
+ Income earned by the rest of the world
+ Indirect business taxes
+ Capital consumption allowance
+ Statistical discrepancy
GDP = Income Approach
      Net Domestic Product
NDP measures the total value of new goods
available in the economy in a given year after
worn-out capital goods have been replaced.

Net domestic product (NDP) =
GDP – Capital consumption allowance*

*The estimated amount of capital goods used up
in production through natural wear,
obsolescence, and accidental destruction.
 Personal and Disposable Income
Personal income =
  National income
  – Undistributed corporate profits
  – Social insurance taxes
  – Corporate profits taxes
  + Transfer payments

Disposable income =
 Personal income
 – Personal taxes
            Real GDP
The value of the entire output produced
annually within a country’s borders,
adjusted for price changes (inflation).
        Economic Growth
Economic Growth is measured by increases
  in Real GDP.
          Business Cycle
Recurrent swings (up and down) in
Real GDP.