chapter 9 gross domestic product 9-1 copyright 2005 by the mcgraw-hill companies, inc. all rights...

Chapter 9

Gross Domestic Product

9-1Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives• What is GDP?• How is GDP measured?• What are the national income accounts?• What is the difference between GDP and

real GDP?• How does our GDP compare to those of

other nations?• How is per capita GDP calculated?• What are the shortcomings of GDP as a

measure of national economic well-being?9-2

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

• GDP is the nation’s expenditures on all FINAL goods and services produced during the year at market prices.

• An alternate definition of GDP is– the value of all goods and services produced

within a nation’s boundaries during the year

What Is GDP?


9-4

• Consumption– Durable goods …………$ 872

– Nondurable goods …….. 2,115

– Services ……………….. 4,317

– Total C …………………………….$7,304

• Investment– Plant & Equipment …….$ 1,117

– Residential Housing …… 472

– Inventory change ………. 4

– Total I ……………………………….1,593

• Government Purchases– Federal ………………….$ 694

– State and Local …………. .1,279

– Total G ……………………………..$1,973

• Net Exports (Xn)– Exports ………………….$ 1,015

– Imports …………………..- 1,439

– Xn …………………………………$ - 424

• GDP …… …………………………$1,446

The Components of GDP, 2002 (in $ billions)


9-5

• Consumption– Durable goods …………$ 872

– Nondurable goods …….. 2,115

– Services ……………….. 4,317

– Total C …………………………….$7,304

• Investment– Plant & Equipment …….$ 1,117

– Residential Housing …… 472

– Inventory change ………. 4

– Total I ……………………………….1,593

• Government Purchases– Federal ………………….$ 694

– State and Local …………. .1,279

– Total G ……………………………..$1,973

• Net Exports (Xn)– Exports ………………….$ 1,015

– Imports …………………..- 1,439

– Xn …………………………………$ - 424

• GDP …… …………………………$10,446

The Components of GDP, 2002 (in $ billions)


GDP = C + I + G + Xn

GDP =7,304+1,593+1,973+(-424)

GDP = 10,446

How GDP Is Measured?

HouseholdsFirms

Income (wages, salary, rent, interest, profits)

Expenditures by Consumers, Investors, Government, and Net Exports



HouseholdsFirms



9-7

Same As



HouseholdsFirms



9-8

Same As

Value of what is produced

Value of what is spent



HouseholdsFirms



9-9

Same As



Flow of Income Approach

Expenditures Approach



HouseholdsFirms



9-10

Same As



Flow of Income Approach

Expenditures Approach

(GDP = C + I + G + Xn )Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

The Flow of Income Approach(Most Complex)

9-11

Consumption

+ Investment

+ Government Spending

+ Net Exports

GDP (Gross Domestic Product)

- Depreciation

NDP (Net Domestic Product)


The Flow of Income Approach

9-12

GDP (Gross Domestic Product) - Depreciation


Why is NDP better than GDP

Country North Atlantis South Atlantis

GDP 500 500

- Depreciation 50 100

NDP 450 400

North Atlantis is better off because it had a higher NDP! South Atlantis had a lower NDP because it had to devote more of its resources to replacing worn out and obsolete equipment. These resources could not go toward additional plant and equipment nor

could they even be used for more consumer goods. Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.


9-13


- Depreciation


- Indirect business taxes and subsidies

DI (Domestic Income)Indirect business taxes and subsidies are mainly general sales taxes on specific items such as gasoline, liquor and cigarettes, and subsidies (such as government payments to farmers).



- Depreciation



DI (Domestic Income)

9-14


Distribution of Domestic Income (2002)

Wages, salaries & fringes ……….71.6%

Net Interest ……………………… 8.2%

Proprietor’s Income …………….. 9.1%

Corporate Profits ……………….. 9.4%

Rent …………………………….. 1.7%Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.


- Depreciation




- Earnings not received

+ Receipts not earned

PI (Personal Income)

9-16


Earnings not received are almost all Social Security taxes and corporate profits that were not paid out as dividends



- Depreciation







9-17


Receipts not earned are mainly Social Security benefits and other government transfer payments, and interest income


9-18



- Depreciation







- Personal taxes

DPI (Disposable Personal Income)

Personal taxes are chiefly personal income taxes


9-19



- Depreciation







- Personal taxes


Disposable Personal Income is ours to dispose of, to spend and save as we see fit


9-20



- Depreciation







- Personal taxes


The “red” indicates the three main parts of the “Flow of Income” approach to GDP


9-21



(+) - Depreciation


(+) - Indirect business taxes and subsidies


(+) - Earnings not received

(-) + Receipts not earned


(+) - Personal taxes


If we start with “DPI” and work up - the signs have to be changed!


Two Things to Avoid When Compiling GDP

• Multiple counting– Only expenditures on final products – what

consumers, businesses, and government units buy for their own use belong in GDP

• Intermediate goods are not counted

• Used goods are not counted

• Transfer payments– Transfer payments are not payments for currently

produced goods and services• When they are spent for final goods and services they will

go into GDP as consumer spending

• Financial transactions do not go into GDP


9-23

The Value-added Approach to Measuring GDP

Production Generated Added

Farmer harvest wheat $100 $100

Miller makes into flour 200 100

Baker makes into bread 300 100

$600 $300

GDP counts only the $ value of the final good

This is the same as the “value-added.”


GDP versus Real GDP (RGDP)

$8 $9 $10 $11

1998 1999 2000 2001

GDP is the Price RGDP is the pie

GDP is measured in current dollars. Therefore it appears as if GDP was larger in 2001 than in previous years. To make year-to-year GDP comparisons, we have to get rid of inflation


Deflating GDP to Get RGDP

RGDPcy = GDPcy X --------------------------GDP DEFLATORcy

GDP DEFLATORby




GDP DEFLATORby

9-26

RGDP 86 = 4422.2 X ------------------------------------ 100

80.6




GDP DEFLATORby

9-27

RGDP 86 = 4422.2 X ------------------------------------ 100

80.6RGDP 86 = 4422.2 X 1.2406948




GDP DEFLATORby

9-28

RGDP 86 = 4422.2 X ------------------------------------ 100

80.6RGDP 86 = 4422.2 X 1.2406948

RGDP 86 = 5486.6


9-29


RGDP97 = GDP97 X --------------------------GDP DEFLATOR by

GDP DEFLATOR 97


9-30



GDP DEFLATOR 97

RGDP 97 = 8083.4 X ---------------------------------------- 100

115.2


9-31



GDP DEFLATOR 97

RGDP 97 = 8083.4 X ---------------------------------------- 100

115.2

RGDP 97 = 8083.4 X .8680556


9-32



GDP DEFLATOR 97

RGDP 97 = 8083.4 X ----------------------------------------`100

115.2

RGDP 97 = 8083.4 X 8680556

RGDP 97 = 7016.8



GDP and Real GDP(in 1992Dollars), 1960-2002Survey of Current Business, May 2003

Calculating Percentage Changes

9-34

% change = ------------------------------------Change

Original Number



9-35

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5



9-36

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7



9-37

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7

% change = --------------------226.7

2557.5



9-38

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7

% change = --------------------226.7

2557.5

% change = .0886413 = 8.8%Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.


9-39

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7

% change = ---------------------226.7

2557.5

% change = .0886413 = 8.8%

1980 RGDP = 4611.9

1979 RGDP = 4624.0



9-40

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7

% change = ---------------------226.7

2557.5

% change = .0886413 = 8.8%

1980 RGDP = 4611.9

1979 RGDP = 4624.0

Change ------> 12.9



9-41

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7

% change = ---------------------226.7

2557.5

% change = .0886413 = 8.8%

1980 RGDP = 4611.9

1979 RGDP = 4624.0

Change ------> 12.9

% change = -------------------------12.9

4624.0



9-42

% change = ------------------------------------Change

Original Number

1980 GDP = 2784.2

1979 GDP = 2557.5

Change -----> 226.7

% change = ---------------------226.7

2557.5

% change = .0886413 = 8.8%

1980 RGDP = 4611.9

1979 RGDP = 4624.0

Change ------> 12.9

% change = -------------------------12.1

4624.0

% change = .0026168 = .26 %Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

Per Capita GDP

9-43

Per capita GDP = ---------------------------------GDP

Population


Per Capita GDP

9-44

Per capita GDP = --------------------------------GDP

Population20000

2000

2000


Per Capita GDP

9-45


Population20000

2000

2000

Per capita GDP = --------------------------------$9,965,700,000,000

281,000,000


Per Capita GDP

9-46


Population20000

2000

2000

Per capita GDP = --------------------------------$9,965,700,000,000

281,000,000

Per capita GDP = $35,465

20000

20000


Per Capita Real GDP

9-47

Per capita real GDP = --------------------------------Real GDP

Population

To compare per capita GDP in one year with that of another year we have to correct for inflation. In other words, we really need to revise our formula



International comparisons for per capita GDP are at least somewhat suspect because of varying national income accounting systems as well as fluctuations of foreign exchange rates

Shortcomings of GDP as a Measure of National Economic Well-being

• Production that is excluded– Household production– Illegal production– The underground economy– Bartering (exchange of services)– Pirated CDs and Videos

• Treatment of leisure time– While the average workweek has declined, many more

mothers with young children work– 1960 79 percent of all families with children had one stay-at-

home parent. Now this has fallen to just 28 percent

• Human cost and benefits• GDP gives us a “ballpark” idea of how much we

produce, not necessarily how well off we are


• When a large part of our production goes toward national defense, police protection, pollution control devices, repair and replacement of poorly made cars and appliances, and cleanups of oil spills, a large GDP is not a good indicator of how we’re doing

• In general, the problem with using GDP as a measure of national economic well-being is that GDP is just one number, and no single number can possibly provide us with all of the information we need

What Goes into GDP


The Last Word on GDP

• GDP includes some things that really shouldn’t be counted

• GDP has excluded some things that should be counted

• Nevertheless, if we can accept GDP while acknowledging all of its limitations, it serves us well


chapter 9 gross domestic product 9-1 copyright 2005 by the mcgraw-hill companies, inc. all rights...

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