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Learning Objectives
Chapter 9
Gross Domestic Product
v When you have finished this chapter, you will know
the answers to these questions:
1.
2.
3.
4.
5.
6.
7.
8.
What Is GDP?
What is GDP?
How is GDP measured?
What are the national income accounts?
What is the difference between nominal GDP and real
GDP?
How does our GDP compare to those of other nations?
How is per capita GDP calculated?
What are the shortcomings of GDP as a measure of
national economic well-being?
What is the Gross Progress Index?
Hypothetical C + I + G + Xn
v GDP is the nation’s expenditures on all FINAL
goods and services produced during the year at
market prices.
v An alternate definition of GDP is
• the value of all goods and services produced within a nation’s
boundaries during the year.
Components of GDP 2007
Percent Components of GDP 2007
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How GDP Is Measured?
The Flow of Income Approach
(Most Complex)
Income (wages, salary, rent, interest, profits)
Consumption + Investment + Government Spending
+ Net Exports = GDP (Gross Domestic Product)
GDP – Depreciation = NDP (Net Domestic Product)
Wages and Salaries + Rent + Interest + Profits + Indirect
Taxes + Depreciation = GDP
Expenditures by Consumers, Investors,
Government, and Net Exports
The Flow of Income Approach
The Flow of Income Approach
Why is NDP better than GDP?
Country
GDP
- Depreciation
NDP
Sweden
Canada
200
200
50
30
150
170
Canada is better off because it had a higher NDP! Sweden had a lower
NDP because it had to devote more of its resources to replacing worn out
and obsolete equipment. These resources could not go toward additional
plant and equipment nor could they even be used for more consumer
goods.
Distribution of Domestic Income (2005)
Wages, salaries & fringes ……….71.6%
v GDP (Gross Domestic Product) –
Depreciation = NDP (Net Domestic
Product)
v NDP – Indirect business taxes
and subsidies = DI (Domestic
Income)
Indirect business
taxes and
subsidies are
mainly general
sales taxes on
specific items
such as gasoline,
liquor and
cigarettes, and
subsidies (such
as government
payments to
farmers).
Personal Income and Disposable Personal
Income
v GDP (Gross Domestic Product) – Depreciation =
NDP (Net Domestic Product)
Net Interest ……………………… 8.2%
Proprietor’s Income …………….. 9.1%
Corporate Profits ……………….. 9.4%
v NDP – Indirect business taxes and subsidies = DI
(Domestic Income)
Rent …………………………….. 1.7%
v DI (Domestic Income) – Earnings not received +
Receipts not earned = PI (Personal Income) –
Personal Taxes = Disposable Personal Income
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Features of Disposable Income
v DI (Domestic Income) – Earnings not received +
Receipts not earned = PI (Personal Income) –
Personal Taxes = Disposable Personal Income
v Receipts not earned are mainly Social Security
benefits and other government transfer payments,
and interest income.
v Personal taxes are chiefly personal income taxes.
v Disposable Personal Income is ours to dispose of,
to spend and save as we see fit.
The Value-added Approach to Measuring
GDP
Two Things to Avoid When Compiling GDP
v Multiple counting
• Only expenditures on final products—what consumers,
businesses, and government units buy for their own use
belong in GDP.
• Intermediate goods are not counted.
• Used goods are not counted.
v Transfer payments and Financial Transactions
• Transfer payments are not payments for currently produced
goods and services.
• When they are spent for final goods and services they will go
into GDP as consumer spending.
• Financial transactions do not go into GDP.
Deflating the GDP to Get Real GDP
v Nominal GDP/GDP Deflator x 100 = Real GDP
v What is the Real GDP if nominal GDP is 15,000 dollars
and the GDP deflator is 125?
v 15,000/125 x 100 =12,000
GDP in Billions of Dollars 1930–2007
GDP by Nation in Trillions of Dollars
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Nominal and Real GDP 1997-2007
Calculating Percentage Changes
v %Change = New Number – Original Number/Original
Number
v What is the percentage change from 1979 to 1980 if
1980 GDP is 2784.2 and 1970 GDP is 2557.5?
v 2784 – 2557.5/2557.5=226.7/2557.5= .089 or 8.9%
Per Capita GDP
Per Capita Real GDP 1776-2007
v Per Capita GDP = GDP/Population
v To compare per capita GDP in one year with that of
another year we have to correct for inflation. In other
words, we really need to revise our formula.
Per Capita Real GDP = Real GDP/Population
$12,000,000,000,000/300,000,000=$40,000
GDP Per Capita Nations
Questions for Thought and Reflection
v Why do we only count value added as contributing
to GDP?
v How do you calculate percentage change in GDP
from one year to the next? Give an example.
v Name some of the wealthiest countries per capita
and some of the wealthiest countries in terms of
absolute size of GDP. Explain the difference.
v International comparisons for per capita GDP over the short run
(less than 10 years) are quite valid. Over the long run (20 years
or longer) this comparison is like comparing apples and
oranges.
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Shortcomings of GDP as a Measure of
National Economic Well-being
v Production that is excluded
• Household production
• Illegal production
• The underground economy
v Treatment of leisure time
• While the average workweek has declined, many more
mothers with young children work.
• 1960: 79% of all families with children had one stay-at- home
parent. Now this has fallen to just 28%.
v Human cost and benefits
v GDP gives us a “ballpark” idea of how much we
produce, not necessarily how well off we are.
The Last Word on GDP
v GDP includes some things that really shouldn’t be
counted.
v GDP has excluded some things that should be
counted.
v Nevertheless, if we can accept GDP while
acknowledging all of its limitations, it serves us
well.
Current Issue: GDP or GPI
v The per capita GPI for 2005 was less than one
quarter of per capita GDP for 2005 which was
$41,597.
What Goes into GDP
v When a large part of our production goes toward
national defense, police protection, pollution control
devices, repair and replacement of poorly made
cars and appliances, and cleanups of oil spills, a
large GDP is not a good indicator of how we’re
doing.
v In general, the problem with using GDP as a
measure of national economic well-being is that
GDP is just one number, and no single number can
possibly provide us with all of the information we
need.
Current Issue: GDP or GPI
v The Gross Progress Index (GPI) using GDP as a
starting point
• It adds in positive things like housework, volunteer work,
environmental contributions, such as clean air, water,
moderate climate, etc.
• It subtracts negative things like crime, natural resource
depletion, loss of leisure time, family breakdown, etc.
• Many of these things (positive & negative) are hard to
quantify.
Questions for Thought and Reflection
v What are the shortcomings of the GDP method of
calculating a nation’s well-being? Do other methods
exists to calculate well-being? Why aren’t they used?
v Real per capita GPI has not grown over the last four
decades.
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