Ch 6: Macroeconomic
Measurements, Part II
GDP and Real GDP
James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University
©2005 Thomson Business & Professional Publishing, A Division of Thomson Learning
1
Gross Domestic Product




GDP: the total market value of all final goods
and services produced annually within a country’s
borders.
Expenditure Approach: Add the money spent
by buyers on final goods and services.
Income Approach: Adding all wages and all
profits.
Value-Added Approach: Adding the values
added to a product at all stages of production.
2
GDP? GNP? What’s
different?


Gross National
Product: the total
market value of all final
goods and services
provided annually by the
citizens of a country.
GDP: the final market
value of all goods
produced in a country,
whether by citizens or
not.
3
What GDP Omits
What GDP Omits
 Certain non-market goods and services
 Underground activities, both legal and illegal
 Sales of used goods
 Financial transactions
 Government transfer payments.
 Leisure
 Not adjusted for “bads”
Transfer Payment: a payment to a person that is
not made in return for goods and services
currently supplies.
4
Per Capita GDP


Per Capita GDP: GDP divided by the
population.
GDP figures are useful for obtaining an
estimate of the productive capabilities
of an economy but they do not
necessarily measure happiness or well
being.
5
Exhibit 1: GDP and Per Capita GDP,
Selected Countries, 2002
6
Self-Test


Give an example that illustrates the
difference between the U.S. GDP and
the U.S. GNP.
Suppose the GDP for a country is $0.
Does this mean that there was no
productive activity in the country?
Explain your answer.
7
The Expenditures Approach
to Computing GDP
Expenditures Approach:
 Consumption: the sum
of spending on durable
goods, non-durable
goods, and services.
 Investment: the sum
of purchases of newly
produced capital goods,
changes in business
inventories, and
purchases of new
residential housing.
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Expenditures in a RealWorld Economy


Government
Purchases: federal,
state, and local
government purchases
of goods and services
and gross investment
in highways, bridges,
and so on.
Net Exports: exports
minus imports.
9
Exhibit 2: The Expenditure Approach to
Computing GDP
10
Exhibit 3: Components of GDP
(Expenditure Approach)
11
Exhibit 4: Gross State Product (GSP),
2001. GSP is the state
equivalent of GDP
12
Exhibit 5: The Circular Flow: Total
Purchases (Expenditures) Equal Total
Income in a Simple Economy
13
The Income Approach to
Computing GDP


National Income: the
total income earned by
U.S. citizens and
businesses, no matter
where they reside or are
located.
Domestic Income: total
income earned by the
people and businesses
within a country’s borders.
14
Computing National
Income




Compensation of Employees: Wages, salaries,
employers’ contribution to social security and
employee benefit plans, plus the monetary value of
fringe benefits, tips, and paid vacations; plus
Proprietors’ Income: all forms of income earned by
self-employed individuals and the owners of
unincorporated business, including unincorporated
farmers; plus
Corporate Profits: include all income earned by the
stockholders of corporations; plus
Rental Income of Persons: income received by
individuals for the use of their non-monetary assets;
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plus
Computing National
Income Part


Net Interest: the interest income
received by U.S. households and
government minus the interest they
paid out.
National Income = Compensation of
employees + Proprietors’ Income +
Corporate Profits + Rental Income +
Net Interest
16
Exhibit 6: The Income Approach to
Computing GDP
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From National Income to GDP:
Making Some Adjustments
GDP = National Income
- income earned from the rest of the
world.
+ income earned by the rest of the
world.
+ indirect business taxes
+ capital consumption allowance
+ statistical discrepancy
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Other National Income
Accounting Measurements




Net Domestic Product = GDP – capital
consumption allowance
Personal Income = National income –
undistributed corporate profits – social
insurance taxes – corporate profits taxes +
transfer payments
Disposable Income = Personal Income –
personal taxes
Per Capita Macroeconomic
Measurements: divides these factors by
the population.
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Self-Test



Describe the expenditure approach to
computing GDP in a real-world economy.
Will GDP be smaller than the sum of
consumption, investment, and government
purchases if net exports are negative?
Explain your answer.
If GDP is $400 billion, and the country’s
population is 100 million, does it follow that
each individual in the country has $40,000
worth of goods and services?
20
Real GDP



Real GDP: GDP adjusted for price
changes.
Real GDP: equal to the sum of Base
year prices multiplied by current year
quantities.
Annual economic growth has occurred
if the Real GDP in one year is higher
than the previous year.
21
If You Know the Price Index and
GDP For A Year, You Can Compute
Real GDP
Real GDP =
GDP
x 100
Chain Weighted Price Index
22
What Does It Mean If Real GDP Is
Higher In One Year Than In Another
Year?
Nominal GDP can rise
from one year to the
next if:
 Prices rise and output
remains constant;
 Output rises and
prices remain
constant;
 Or prices and output
rise.
23
Real GDP, Economic Growth,
and Business Cycles
Economic
Growth: increases
in Real GDP.
24
Ups and downs of the
Business Cycle





Peak: at the peak of the business cycle,
Real GDP is at a temporary high.
Contraction: A decline in the real GDP. If
it falls for two consecutive quarters, it is
said to be in a recession.
Trough: The Low Point of the GDP, just
before it begins to turn up.
Recovery: When the GDP is rising from the
trough.
Expansion: when the real GDP expands
beyond the recovery
25
Exhibit 7: The Phases of the Business
Cycle
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Recession
Standard Definition:
two consecutive
quarter declines in Real
GDP.
NBER Definition: “ a
significant decline in
activity spread across
the economy, lasting
more than a few
months, visible in
industrial production,
employment, real
income, and
wholesale-retail trade.”
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Self-Test



Suppose GDP is $6 trillion in year 1 and
$6.2 trillion in year 2. What has caused the
rise in GDP?
Suppose Real GDP is $5.2 trillion in year 1
and $5.3 trillion in year 2. What has caused
a rise in the Real GDP?
Can an economy be faced with endless
business cycles and still have its Real GDP
grow over time? Explain your answer.
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Coming Up (Ch. 7): Aggregate
Demand and Aggregate Supply
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