GDP and the Standard
of Living
CHAPTER
5
EYE ONS
Business Cycle
Consumption expenditure
Depreciation
Disposable personal income
Intermediate good or service
Final good or service
GDP deflator
Govt expenditure on goods & services
Exports of goods & services
Imports of goods & services
Net domestic product at factor cost
Net exports of goods & services
GDP
GNP
Real GDP
Real GDP/person
Nominal GDP
Standard of living
Statistical discrepancy
Investment
Is a Computer Program an Intermediate Good or
a Final Good?
When American Airlines buys a new reservations
software package, is that expenditure an expenditure on
a final good or an intermediate good?
Before 1999, the national income accountants counted
the purchase of software as expenditure on an
intermediate good—and it was excluded from GDP.
Since 1999, the national income accountants have
classified the purchase of new software as investment—
and is now included in GDP.
Is a Computer Program an Intermediate Good or
a Final Good?
How big of a deal is this?
When the Bureau of Economic Analysis (BEA)
recalculated the 1996 GDP, the estimate of GDP in 1996
increased by $115 billion—a lot of money.
In 1996, GDP was $7,662 billion, so the increase of $115
billion is 1.5 percent of GDP.
This example shows how the BEA works to measure
GDP as accurately as possible.
Making GDP Personal
Where in the National Income and Product Accounts do your
transactions appear? How can you use information about
GDP in your life?
Your Contribution to GDP
Your own economic transactions show up in the National
Income and Product Accounts on both the expenditure side
and the income side.
Most of your expenditure is part of Consumption
Expenditure.
If you were to buy a new home, that expenditure would
appear as part of Investment.
Making GDP Personal
Because you buy goods produced in another country,
expenditure on these goods shows up as part of Imports.
If you have a job, your income appears in Compensation of
Employees.
Because the GDP measure of the value of production
includes only market transactions, some of your own
production of goods and services is most likely not counted
in GDP.
What are the nonmarket goods and services that you
produce? How would you go about valuing them?
Making GDP Personal
Making Sense of the Numbers
To use the GDP numbers in a news report, you must first
check whether the reporter is referring to nominal GDP or
real GDP.
Using U.S. real GDP per person, check how your income
compares with the average income in the United States.
When you see GDP numbers for other countries, compare
your income with that of a person in France, or Canada, or
China.
DEFINITION
GDP
1. The market value
VALUE Produced
2. of all the final goods and services WHAT Produced
3. produced within a country
WHERE Produced
4. in a given time period.
WHEN Produced
•
Does GDP count the value of everything produced?
•
Does GDP count the market value of a new home?
•
Does GDP count purchases of Stocks and Bonds?
DEFINITION
Total Expenditure = C+I+G+NX
Also, the total amount received by the producers of final goods and services
C =
Consumption
nondurables (food), durables (DVD), services (haircut), rent (apts/houses)
I =
Investment
new capital goods (machines), additions to inventory, new home purchases
G =
Government
Anything purchased by any level of government
NX=
Net Exports
export goods – import goods
Market Flows
DEFINITION
Total Income (Y) = C+S+NT
Expenditure = Income
(b/c firms pay out everything they receive as income to the factors of
production
Y =
Total Income
wages, interest, rent, profit EARNED FROM labor, capital, land, entr.
C =
Consumption
food, housing, vacations, Walmart, etc.
S =
Savings
amount of income NOT SPENT on taxes or consumption goods
NT=
Net Taxes
taxes paid – cash benefits received from government
GDP - EXPENDITURE APPROACH
Does not include:
 Intermediate goods
 Used goods
 Financial Assets (loans not assets)
Values Goods at MARKET PRICE
GDP – INCOME APPROACH
 Income from ALL factors of production:
 Wages, interest, rent, profit
Values Goods at FACTOR COST
GDP – INCOME APPROACH
 Indirect taxes (sales tax) = make MKT price > FTR cost = MUST ADD
 Subsidies = make FTR cost > MKT price = MUST SUBTRACT
Values Goods at FACTOR COST
GDP – INCOME APPROACH
 GDP Exp – GDP Inc = Statistical Discrepancy
 Tips are missed in income but caught in expenditure when spent
 Most income is reported through IRS but expenditures are typically estimated
Values Goods at FACTOR COST
Expenditure Approach WINS!
GNP
GNP = GDP + Net Factor Income from Abroad
DISPOSABLE PERSONAL INCOME
GDP – NOMINAL vs REAL
X
=
X
=
X
=
WHY?
REAL GDP PER PERSON
Real GDP per person = Real GDP / population
Value of goods & services a person can enjoy
Long-Term trend? Doubles every 30 yrs
Short-Term fluctuations? Business cycle
WHAT DOES Real GDP PER PERSON MEASURE?
Standard of living ?
Cost of living ?
GDP – NOMINAL vs REAL
Edition 5
2001 verse 2008
Edition 5
When Did the Recession Begin?
STANDARD OF LIVING <> COST OF LIVING
Omitted from GDP
Household Production
Decreasing
Underground Production #80’s, $90’s
Leisure Time
Increases overtime
Environment Quality
OTHER INFLUENCES on STANDARD OF LIVING
Health and Life Expectancy
Political Freedom and Social Justice
Thus, . . .
HDI – Human Development Index
The Human Development Index
The figure shows the
relationship between real
GDP per person and the
Human Development Index
(HDI).
Each dot represents a
country.
The small Africa country of
Sierra Leone has the
lowest HDI and the second
lowest real GDP per
person.
The Human Development Index
The United States has the
third highest real GDP per
person but has the eighth
highest HDI.
Why is the United States
not ranked higher on the
HDI?
Because the people who
live in seven countries live
longer, have better access
to health care and
education than do
Americans.
FORMULAS
Expenditure Approach:
GDP = C + I + G + NX
(Consumption, Investment, Government, Net Exports)
Net Exports = Exports - Imports
Savings = Y – C - NT
Income Approach:
GDP = W + I + R + P + Indirect taxes – Subsidies + Depreciation
GDP = Net domestic product at factor cost+ Indirect taxes – Subsidies +
Depreciation
Net Domestic Product at Factor Cost = Wages + Interest + Rent + Profit
Total Income: Y = C + S + NT
(Consumption + Savings + Net Taxes)
Income = Expenditure
Edition 5
Edition 5