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GDP Revised

GDP is the total market value of all final goods and services produced within a country in a given period of time, usually a year. It can be calculated using either the expenditure approach (total spending) or the income approach (total incomes). Real GDP measures output in constant prices to account for inflation, while nominal GDP includes price changes. Limitations of GDP include that it does not measure income distribution or non-monetary activities that affect welfare.

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67 views

GDP Revised

GDP is the total market value of all final goods and services produced within a country in a given period of time, usually a year. It can be calculated using either the expenditure approach (total spending) or the income approach (total incomes). Real GDP measures output in constant prices to account for inflation, while nominal GDP includes price changes. Limitations of GDP include that it does not measure income distribution or non-monetary activities that affect welfare.

Uploaded by

tamiokd
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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OUTLINE

• INTRODUCTION OF
CONCEPTS
• ANALYSIS
• APPLICATION (QUIZ)
MEASURING
NATIONAL OUTPUT
GDP Vocabulary
• Durable Good: a good that last three years or
more, such as a car or refrigerator
• Inventory: good that has been produced, but not
yet been sold
• National Income: includes all income earned:
wages, profits, rent, and profit income
• Nondurable Good: a good that lasts less than
three years, such as food and clothing
• Gross National Product (GNP): includes what
is produced domestically and what is produced
by domestic labor and business abroad in a year
GDP Vocabulary
• Net National Product (NNP): GDP minus
depreciation
• Depreciation: the process by which capital ages
and loses value
• Overheating, which means the economy is
picking up speed leading to increased inflation.
• Stagflation, which means the simultaneous
occurrence of stagnant growth (or recession)
and inflation.
GDP Vocabulary

• GDP per capita: GDP divided by the


population; often used as a measure of standard
of living
• Standard of Living: all elements that affect
people’s happiness, whether these elements are
obtained through market transactions or not
LABOR MARKETS
Gross Domestic Product
The market value of all production
for final demand within a given
country for a given period.
Three important distinctions within the
definition:
• the worth of the output in local
currency.
• all final goods and services produced
within the country
• calculated for a specific period of time,
usually a year or a quarter of a year.
The Problem of Double-Counting

firm: sells: for:


Farmer wheat P100,000
Miller flour P150,000
Baker bread P250,000

We need to find ways to measure national


output without this sort of exaggeration.
To do this is to focus on value added.
Value added is defined as the
revenue of the firm less the
amounts paid to other firms (for
raw and semi-finished materials
and services).
firm: sells: for: value added:
Farmer wheat P100,000 P100,000
Miller flour P150,000 P50,000
Baker bread P250,000 P100,000
Measuring GDP is complicated
(which is why we leave it to the
economists).

At its most basic, the calculation


can be done in one of two ways:
1. INCOME APPROACH

adding up what everyone


earned in a year
2. EXPENDITURE APPROACH

adding up what everyone spent


Expenditure measure of GDP
Y= C + I + G + Xn

Y – Output
C – Gross Private Consumption
I – Gross Private Investment
G – Government expenditure
Xn – Net export
Expenditure measure of GDP
The expenditure measure of GDP is obtained by
adding up all spending:
private consumption (spending on items such as
food and clothing / durable & non-durable)
+ investment (spending on houses, factories, and
so on)
+ government consumption (spending on public
sector salaries and so on)
= Final Domestic Demand
Expenditure measure of GDP
FINAL DOMESTIC DEMAND
+ stock building (increase in inventories)
= Total Domestic Demand
+ exports of goods and services (foreigners'
spending)
- imports of goods and services (spending abroad)
= GDP
GDP ( Expenditure approach)

Personal Investments Government Net Exports


Consumption I G X
C

Export less
Fixed Inventories Import
investments

business residential
Income measure of GDP
The income measure of GDP is
based on total incomes from
production. It is essentially the total of:
• wages and salaries of employees;
• income from self-employment;
• trading profits of companies;
• trading surpluses of government
corporations and enterprises; and
• income from rents.
• Other form of income are not included in
GDP estimate like transfer payments.

• These are known as incomes that does


not involved any productive activities and
only involves transfer of ownership
Real GDP vs. Nominal GDP

• Nominal GDP is the sum value of


all produced goods and services at
current prices.

• Nominal GDP is more useful in


comparing sheer output, rather
than the value of output, over time.
Real GDP vs. Nominal GDP

• Real GDP is the sum value of all


produced goods and services at
constant prices.
• Real GDP frees year-to-year
comparisons of output from the
effects of changes in the price
level.
Real GDP vs. Nominal GDP

• Current price GDP could grow


rapidly simply because prices
are rising.
• GDP measured at constant
prices shows how the quantity
of output is changing.
GDP Deflator
• Nominal GDP captures both changes in
quantity and changes in prices.
• Real GDP, on the other hand, captures
only changes in quantity and is
insensitive to the price level.
• The difference in nominal and real GDP
computation result into a third useful
statistic that can be computed, the GDP
DEFLATOR
GDP Deflator
• The GDP deflator illustrates how
much of the change in the GDP
from a base year is reliant on
changes in the price level.

((Nominal GDP/ Real GDP) -1) x 100=


DEFLATOR
Nominal GDP in year 3
= (10 X P2) + (9 X P6) = P74
Real GDP in year 3 (with year 1 as base
year)
= (10 X P1) + (9 X P6) = P64
The ratio of nominal GDP to real GDP is
(( P74 / P64 ) – 1) x 100 = 16%.
This means that the price level rose
16% from year 1, to year 3, the
comparison year.
Limitations of the National Output Measure
 Does not measure income distribution
 Does not measure non-monetary output

or transactions (e.g., barter, household


activities)
 Does not take into account desirable

externalities, such as leisure or


environment
 Does not measure social well-being

 Correlates to standard of living but is not

a measure of standard of living

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