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Tiffany Gayle R.

Bienvenuto
Measuring the
“When you can measure what you are speaking about,
and express it in numbers, you know something about
economy
it; when you cannot measure it, when you cannot
express it in numbers, your knowledge is of a meager
and unsatisfactory kind; it may be the beginning of
knowledge, but you have scarcely, in your thoughts,
advanced to the stage of science.”
-Lord Kelvin
GNP vs. GDP

• Gross national product (GNP): Total income earned by the


nation’s factors of production, regardless of where located.
• Gross domestic product (GDP): Total income earned by
domestically-located factors of production, regardless of
nationality.
• GNP – GDP = factor payments from abroad minus
factor payments to abroad
• Examples of factor payments: wages, profits, rent, interest &
dividends on assets.
Gross Domestic Product ( GDP )

 First developed in the 1930’s by a team of researchers led by the


economist Simon Kuznets, the gross domestic product (GDP)
measure was conceived in response to the recognition that
limited and fragmented economic information posed a challenge
to policymaking during the Great Depression.
Gross Domestic Product ( GDP )

*Expenditure and Income


Two definitions:
• Total expenditure on domestically produced final goods
and services.
• Total income earned by domestically located factors of
production

Expenditure equals income because


every dollar a buyer spends becomes
income to the seller.
G= goods
Circular flow diagram S= services
Diagram explanation

• The government- collects taxes, buys goods & services

• The financial system- matches savers’ supply of funds


with borrowers’ demand for loans

• The foreign sector- trades goods & services, financial


assets, and currencies with the country’s residents
The circular flow demonstrates how GDP
can be measured in two ways.

Aggregate expenditure
- Total expenditure on final goods and services, equals the
value of output of final goods and services, which is GDP.
- Total expenditure= C+ I+ G+ (X–M).
The circular flow demonstrates how GDP
can be measured in two ways.

Aggregate income
- Aggregate income earned from production of final goods,
Y, equals the total paid out for the use of resources, wages,
interest, rent, and profit.
- Firms pay out all their receipts from the sale of final
goods, so income equals expenditure,
- Y= C+ I+ G+ (X–M).
Gross Domestic Product ( GDP )

the market value of all final goods &


services produced within a country in a
given period of time.

Goods are valued at their market prices, so:


• All goods measured in the same units (e.g.,
dollars in the U.S.)
• Things that don’t have a market value are
excluded, e.g., housework you do for yourself
Gross Domestic Product ( GDP )

the market value of all final goods &


services produced within a country in a
given period of time.

Final goods: intended for the end user


Intermediate goods: used as components or
ingredients in the production of other goods
GDP only includes final goods—they already
embody the value of the intermediate goods used in
their production.
Gross Domestic Product ( GDP )

the market value of all final goods &


services produced within a country in a
given period of time.

GDP includes tangible goods (like DVDs,


mountain bikes, beer)
and intangible services (dry cleaning,
concerts, cell phone service).
Gross Domestic Product ( GDP )

the market value of all final goods &


services produced within a country in a
given period of time.

GDP includes currently produced goods, not


goods produced in the past.
Gross Domestic Product ( GDP )

the market value of all final goods &


services produced within a country in a
given period of time.

GDP measures the value of production that


occurs within a country’s borders, whether done
by its own citizens or by foreigners located
there.
Gross Domestic Product ( GDP )

the market value of all final goods & services


produced within a country in a given period
of time.

Usually a year or a quarter (3 months)


The Bureau of Economic Analysis uses
two approaches to measure GDP :

Expenditure approach
The expenditure approach measures GDP as the sum of
consumption expenditure, investment, government purchases of
goods and services, and net exports.
GDP(E)= household final consumption expenditure + final
consumption expenditure of non-profit serving households +
general government final consumption expenditure + gross
capital formation + exports – imports
The Bureau of Economic Analysis uses
two approaches to measure GDP :

Final consumption expenditure is the expenditure on goods and


services purchased for the last time and not to be consumed or
transformed in production process
Gross capital formation comprises investment in fixed assets,
changes in inventories and net acquisition of valuables
Exports and Imports relate to trade in goods and services with
the rest of the world and do not include other cross-border
financial flows.
Components of GDP (Expenditure
Approach)

Recall: GDP is total spending.


Four components:
• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (NX)

These components add up to GDP (denoted Y):

Y= C + I + G + NX
Consumption ( C )

• is total spending by households on goods & services.


• Note on housing costs:
• For renters, consumption includes rent payments.
• For homeowners, consumption includes the imputed
rental value of the house, but not the purchase price or
mortgage payments.
Investment ( I )

• is total spending on goods that will be used in the


future to produce more goods.
• includes spending on
• capital equipment (e.g., machines, tools)
• structures (factories, office buildings, houses)
• inventories (goods produced but not yet sold)
Government Purchase ( G )

• is all spending on the goods & services purchased by


government at the federal, state, and local levels.
• G excludes transfer payments, such as Social Security
or unemployment insurance benefits.
• They are not purchases of goods & services.
Net Exports ( NX )

• NX= exports –imports


• Exports represent foreign spending on the economy’s
goods & services.
• Imports are the portions of C, I, and G that are spent
on goods & services produced abroad.

Adding up all the components of GDP gives:

Y= C + I + G + NX
The Bureau of Economic Analysis uses
two approaches to measure GDP :
Income approach
The income approach measures GDP by summing the incomes
that firms pay households for the factors of production they hire.

The National Income and Product Accounts divide incomes into five
categories:
• Compensation of employees
• Net interest
• Rental income
• Corporate profits.
• Proprietors’ income.
The sum of these five income components is net domestic income at
factor cost.
The Bureau of Economic Analysis uses
two approaches to measure GDP :
Income approach

GDP(I)= compensation of employees + gross operating surplus


+ mixed income + taxes on production and products – subsidies
in production and products
Compensation of employees is all the income from
employment (employer’s pension and social contributions)
Operating surplus is primarily made up of trading profits and
rental income
Mixed income is the income of the self-employed
European System of Accounts;
The third approach

Production approach
The production approach to GDP, known as GDP (P), is the sum of
all production activity within an economy. In the form of an
equation, this is described by:
GDP(P)= output- intermediate consumption + taxes on products-
subsidies on product
Output is all the goods and services produced
Intermediate consumption comprises all the goods and services
consumed or transformed in production process
Taxes and Subsidies are included in order to put all three
approaches on a consistent valuation basis.
Two adjustments must be made to get
GDP

• Indirect taxes minus subsidies are added to get from factor


cost to market prices.
• Depreciation (or capital consumption) is added to get
from net domestic product to gross domestic product.
Real vs. Nominal GDP

Inflation can distort economic variables like GDP, so we


have two versions of GDP: One is corrected for inflation,
the other is not.

Nominal GDP values output using current prices. It is


not corrected for inflation. = Q x P
Real GDP values output using the prices of a base year.
Real GDP is corrected for inflation and is the value of
final goods and services produced in a given year when
valued at constant prices. = Q x P(base year)
GDP Deflator

The GDP deflator is a measure of the overall level of


prices.
Definition:

𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
GDP deflator= 100 x 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃

One way to measure the economy’s inflation rate is to


compute the percentage increase in the GDP deflator from
one year to the next.
GNP (Gross National Product)

• Is the value of all goods and services made by a country’s


residents and businesses, regardless of production location.
• Doesn’t count any income earned in the country by foreign
residents or businesses
• Excludes products ,manufactured in the country by overseas
firms.
• More accurate measure of country’s income than its
production.
GNP (Gross National Product)

• The formula to calculate the components of GNP is


Y= C + I + G + X + Z

• GNP= consumption + investment + government + net


exports + net income
Z= Net income earned by domestic residents from overseas
investments- net income earned by foreign residents from
domestic investments.
GNP (Gross National Product)

• GNP per capita is a measurement of GNP divided by the


number of people in the country.
• World Bank replaced GNP with Gross National Income, fairly
compared between nations with widely different populations
and standard of living.
• World Bank also use PPP purchasing power parity method
which values each nation’s output by what it would be worth
in the U. S.
CPI (Consumers Price Index)

PPP (Purchasing Power of Peso)


Economic Growth Rate

• The economic growth rate is the percentage change in the


quantity of goods and services produced from one year to
the next.
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 −𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟
• 𝐸𝐺𝑅 = 100 𝑥
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟
• We measure economic growth so that we can make:
a) economic welfare comparisons
b) business cycle forecasts
c) international welfare comparisons
SUMMARY

• Gross Domestic Product (GDP) measures a country’s total


income and expenditure.
• The four spending components of GDP include:
Consumption, Investment, Government Purchases, and Net
Exports.
• Nominal GDP is measured using current prices. Real GDP is
measured using the prices of a constant base year and is
corrected for inflation.
• GDP is the main indicator of a country’s economic well-
being, even though it is not perfect.
SOURCES

Dr. S. Ghosh, Principles of Macroeconomics


N. Gregory Mankiw, Principles of Economics
N. Gregory Mankiw, Macroeconomics, The data
of Economics, Modified for ECON 2204 by Bob
Murphy
Paul Samuelson and William Nordhaus,
Economics Nineteenth Edition
Prof. Wyatt Books, Gross Domestic Product