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GDP and Economic Growth

GDP and Economic Growth. Chapter 05. Outline. Gross Domestic Product Economic Growth. Gross Domestic Product (GDP). Gross Domestic Product Measuring GDP Nominal GDP versus Real GDP. Gross Domestic Product (GDP).

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GDP and Economic Growth

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  1. GDP and Economic Growth Chapter 05

  2. Outline • Gross Domestic Product • Economic Growth

  3. Gross Domestic Product (GDP) • Gross Domestic Product • Measuring GDP • Nominal GDP versus Real GDP

  4. Gross Domestic Product (GDP) • The total market value of all final goods and services produced within the borders of a given country during a given period of time, typically a year.

  5. Gross Domestic Product (GDP) • A monetary measure Year Annual Output Market Value Qx Px Qz Pz 1 3 $500 2 $2,000 $5,500 2 2 $500 3 $2,000 $7,000

  6. Gross Domestic Product (GDP) • Avoid multiple counting A new automobile sold for $20,000 Value of inputs used Value of GDP steel glass tires $27,000 $4,000 $2,000 $1,000 $20,000

  7. Gross Domestic Product (GDP) • Avoid multiple counting • GDP includes only the market value of final goods and ignores intermediate goods altogether. • Intermediate goods are goods that are purchased for resale or for further processing or manufacturing, e.g. steel, glass, tires, etc. • Final goods are consumption and capital goods purchased by final users, e.g. automobiles, etc.

  8. Gross Domestic Product (GDP) • Excluding secondhand sales • Secondhand sales do not contribute to current production and therefore are excluded from GDP. • e.g. many of the goods sold through eBay or Craigslist.

  9. Gross Domestic Product (GDP) • Measuring GDP • Personal Consumption Expenditure (C) • Gross Private Domestic Investment (I) • Government Purchases (G) • Net Exports (NX) • Adding it up: GDP = C + I + G + NX

  10. Gross Domestic Product (GDP) • Sectors and spending HouseholdSector BusinessSector GovernmentSector ROWSector PersonalConsumptionExpenditures GrossPrivateDomesticInvestment GovernmentPurchases Net Exports ConsumerSpending(C) BusinessSpending(I) GovernmentSpending(G) ROW Spending(NX)

  11. Gross Domestic Product (GDP) • Personal Consumption Expenditure (C) Expenditures on • durable consumer goods, e.g. automobiles, refrigerators, etc. • nondurable goods, e.g. bread, milk, etc. • services, e.g. payments to doctors, lawyers, car mechanics, etc.

  12. Gross Domestic Product (GDP) • Gross Private Domestic Investment (I) • All final purchases of machinery, equipment, and tools by business enterprises • All construction • Residential (home) construction • Construction of new factories, warehouses, and stores • Changes in inventories

  13. Gross Domestic Product (GDP) • Gross Private Domestic Investment (I) • Changes in inventories Date Changes in Inventories Changes in I 12/31/2006 +$10 billion 12/31/2007 +$10 billion 12/31/2007 -$8 billion 12/31/2008 -$8 billion

  14. Gross Domestic Product (GDP) • Gross Private Domestic Investment (I) • Noninvestment transactions • Transfer of paper assets (stocks, bonds) • Resale of tangible assets (houses, factories) • Why? No new capital assets are created.

  15. Gross Domestic Product (GDP) • Gross Private Domestic Investment (I) • Private • by private businesses, not government • Domestic • inside the country • Gross investment versus net investment • All investment (capital) goods • Replacement capital (depreciation) • Added capital (net additions/investment)

  16. Gross Domestic Product (GDP) • Government Purchases (G) Also called “government consumption expenditures and gross investment” • Expenditures for goods and services that government consumes in providing public services, e.g. cars, labor, etc. • Expenditures for publicly owned capital, e.g. schools, highways, buildings, etc. • Excluding transfer payments, e.g. SS payments, etc.

  17. Gross Domestic Product (GDP) • Net Exports (NX) • X = EX = Exports • Goods and services produced domestically and sold abroad • M = IM = Imports • G&S produced abroad and sold domestically • NX = X – M = EX - IM

  18. Gross Domestic Product (GDP) • Adding it up: GDP = C + I + G + NX Period GDP C I G NX (billion of $2005) IV 2008 13,126.1 9,195.3 1,857.7 2,544.0 -470.9 I 2009 12,953.4 9,209.2 1,558.5 2,527.2 -386.5 II 2009 12,883.9 9,189.0 1,456.7 2,568.6 -330.4 http://www.bea.gov/newsreleases/national/gdp/2009/pdf/gdp2q09_3rd.pdf

  19. Gross Domestic Product (GDP) • Nominal GDP versus Real GDP • GDP = market value = P * Q • GDP changes when either P changes or Q changes or both P & Q change.

  20. Gross Domestic Product (GDP) • Nominal GDP versus Real GDP • Nominal GDP • measures current-value, current-price GDP. (Both P and Q change.) • includes inflation, i.e. unadjusted for inflation • Real GDP • measures constant-value, base-price GDP. (Only Q changes; P is kept constant.) • excludes inflation, i.e. inflation-free, or adjusted for inflation

  21. Gross Domestic Product (GDP) • Nominal GDP (Ym) versus Real GDP (Y) Base year = 1 Year Q (units) P ($) Ym Y 1 5 $10 $50 $50 2 7 $20 $140 $70 3 8 $25 $200 $80 4 10 $30 $300 $100 5 11 $28 $308 $110

  22. Gross Domestic Product (GDP) • Applying the analysis – the underground economy • Illegal and unreported activities • Gamblers, smugglers, prostitutes, stolen goods, drug buying and selling, etc. • Unreported tips, cash-only jobs, etc. • About 8% of recorded GDP (U.S.) • Percentages vary across countries (p. 105)

  23. See You! Take Care!

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