Chapter 7
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Define gross domestic product.
Calculate gross domestic product.
Differentiate between GDP and GNP
Differentiate between real GDP and nominal
GDP.
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Gross Domestic Product – The market value
of final goods and services produced within a
country during a specific time period.
Performance measure
Announced quarterly, at annual rate
Gross Domestic Product – The market value of final
goods and services produced within a country during
a specific time period, usually a year.
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Do include final goods and services
Don’t include intermediate goods
◦ Intermediate goods – goods purchased for resale or
for use in producing another good or service
◦ Final goods and services – items purchased by their
ultimate end-user
Gross Domestic Product – The market value of final
goods and services produced within a country during
a specific time period, usually a year.
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Do include services rendered and sales
commissions
Don’t include income transfers, financial
transactions, welfare, Social Security
Gross Domestic Product – The market value of final
goods and services produced within a country during
a specific time period, usually a year.
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Do include production by individuals of any
citizenship within U.S.
Don’t include count production by U.S.
citizens working outside the U.S.
◦ Citizenship doesn’t matter
◦ Location does!
Gross Domestic Product – The market value of final
goods and services produced within a country during
a specific time period, usually a year.
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Do include value of services provided by
realtor, car dealer, clothing reseller, etc
Don’t include value of the used goods
+
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+
+
Each good/service counted increases GDP by
its market price
22oz of Bud Light at pro baseball game: $7
22oz of Bud Light from the gas station: $2
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1) Add up all expenditures on goods and
services produced during the year
 OR
2) Add up all the income payments to the
resource suppliers of the things used to
produce the goods and services
Dollar flow of expenditures on final goods =
Dollar flow of income (and indirect cost) from final goods
Expenditure Approach
Personal consumption expenditures
+
Gross private domestic investment
+
Government consumption
and gross investment
+
Net exports of goods and services
= GDP
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Personal consumption expenditures –
◦ Household spending on consumer goods and
services
◦ 71% of GDP
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Private investment
◦ Production of capital goods that provide a flow of
future services
◦ 14% of GDP
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Government consumption and gross
investment
◦ Expenditures on goods, services consumed
◦ Purchases of capital goods
◦ 20% of GDP
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Net Exports – exports minus imports
◦ Exports – goods and services produced
domestically and sold to foreigners
◦ Imports – goods and services produced abroad but
purchased by domestic consumers, businesses, and
governments
◦ -4% of GDP
Expenditure Approach, 2013 data
(billions)
Personal Consumption
$11,484
Durable Goods
$1,249
Non Durable Goods
$2,601
Services
$7,633
Gross Private Investment
Fixed Investment
Inventories
$2,648
$2,574
$74
Government Consumption and
Gross Investment
$3,144
Federal
$1,232
State and Local
$1,912
Net Exports
Gross Domestic Product
-$508
$16,768
Resource Cost-Income Approach
Aggregate income:
•
•
•
•
•
Employee Compensation
Income of self-employed
Rents
Profits
Interest
+
Non-income cost items:
• Indirect business taxes
• depreciation
+
Net income of foreigners
=
GDP
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Indirect business taxes
◦ Taxes that increase a business firm’s cost of
production
◦ Examples: sales, excise, property taxes
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Depreciation
◦ Estimated based on expected life of the asset
◦ Capital consumption
Resource Cost-Income Approach,
2013 data
(billions)
Employee Compensation
$8,606
Proprietors’ Income
$1,260
Rents
Corporate Profits
Interest Income
$533
$2,023
$492
Indirect Business Taxes
$1,074
Depreciation (Capital Consumption)
$2,627
Net Income of Foreigners
Gross Domestic Product
-$224
$16,768
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Gross National Product –
◦ Total market value of all final goods and services
produced by the citizens of a country
◦ Equal to GDP minus the net income of foreigners
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Nominal GDP may rise because
◦ (1) More goods/services
◦ (2) Higher prices
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Nominal values (money values)
◦ Expressed in current (Now) dollars
◦ Not adjusted for inflation
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Real values
◦ Expressed in constant dollars (base year)
◦ Adjusted for inflation
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Imagine a country that only produces kibbles
and Frisbees. In 2013
◦ 10 bags of kibble, $5 each
◦ 3 Frisbees, $4 each
◦ Nominal GDP = $62
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Scenario 1: in 2014
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10 bags of kibble cost $6 each,
3 Frisbees, $5 each
Nominal GDP = $75
Real GDP (base year 2013) = $62
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Imagine a country that only produces kibbles
and Frisbees. In 2013
◦ 10 bags of kibble, $5 each
◦ 3 Frisbees, $4 each
◦ Nominal GDP = $62
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Scenario 2: in 2014
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11 bags of kibble cost $6 each,
5 Frisbees, $5 each
Nominal GDP = $91
Real GDP (base year 2013) = $75
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If real GDP increases
◦ output is increasing
◦ Incomes are rising
◦ Economy is growing 
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If real GDP decreases
◦ output is decreasing
◦ Incomes are falling
◦ Two quarters falling real GDP  recession 
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Inflation – increase in the general level of
prices over time
◦ Purchasing power of money is falling
◦ If unexpected, borrowers win, savers lose
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Deflation – decrease in the general level of
prices over time
◦ Purchasing power of money is rising
◦ If unexpected, savers win, borrowers lose
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Consumer price index (CPI) – measures the
impact of price changes on the cost of the
typical bundle of goods purchased by
households, 1982-84=100
GDP deflator – measures the change in the
average price of the market basket of goods
included in GDP, 2009 = 100
Both help us measure inflation!
(This year's PI - Last year's PI)
Inflation rate 
x 100
Last year's PI
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Example: The CPI in 2012 was 229.6. The
CPI in 2013 was 233.0. Calculate the
inflation rate.
Answer: 1.5%
(Today' s CPI )
Price today's dollars  Price old dollars 
(Old CPI)
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Example: I earned $5.15 per hour in 1997.
The CPI in 1997 was 160.5. The CPI in 2013
was 233.0. Find the wage rate in 2013
dollars
Answer: $7.48
Percent change in real GDP equals the percent
change in nominal GDP minus the inflation
rate
%∆Real GDP = %∆Nominal GDP – inflation
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GDP does not include or take into account
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Nonmarket or household production
Underground or black market economy
Leisure and human costs
Quality variation, introduction of new goods
Harmful side effects, economic “bads”
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Define gross domestic product.
Calculate gross domestic product.
Differentiate between GDP and GNP
Differentiate between real GDP and nominal
GDP.