Economics: Public & Private Choice | Part 3: Core Economics | Chapter 7: Taking the Nation’s Economic Pulse
1. GDP-- A measure of Output
A. Gross Domestic Product (GDP) - The market value of all final goods & services produced within a country
during a specific period.
B. What Counts toward GDP?
1. Only final goods & services count
a. Intermediate Goods - Goods purchased for resale or for use in producing another good or
service.
b. Final Market Goods & Services - Goods & services purchased by their ultimate user
c. Sale at intermediate stages of production are not counted by GDP because the value of the
intermediate good is embodied within the final user good
d.
2. Only transactions involving production count
3. Only production within the country is counted
4. Only goods produced during the current period are counted
C. Dollars are the Common Denominator for GDP
1. Each good produced increases output by the amount the purchaser pays for the good. The total
spending on all goods & services produced during the year is then summed, in dollar terms, to obtain
the annual GDP.
2. GDP as a Measure of Both Output & Income
A. The GDP of an economy can be reached by totaling the expenditures on goods & services produced during
the year
B. GDP can be calculated by summing the income payments to the resources suppliers of the things used to
produce those goods & services.
C. The dollar flow of expenditures on final goods = the dollar flow of income (and direct cost) from final goods
D. Thus, GDP is a measure of both(1) the market value of the output produced and (2) the income generated by
those who produced the output. This highlights a very important point: Increases in output & growth of
income are linked. An expansion in output- that is, the additional production of goods & services that people
value-- is the source of higher income levels.
Economics: Public & Private Choice | Part 3: Core Economics | Chapter 7: Taking the Nation’s Economic Pulse
E.
F. Deriving GDP by the Expenditure Approach
1. When derived by the expenditure approach, GDP has 4 components: (1) personal consumption
expenditures, (2) gross private domestic investment, (3) government consumption & gross investment,
& (4) net export to foreigners
2.
3. Consumption purchases
a. Personal Consumption - Household spending on consumer goods & services during the current
period. Consumption is a flow concept.
4. Gross Private Investment
a. Private Investment - the flow of private-sector expenditure on durable assets (fixed investment)
plus the addition to inventories (inventory investment) during a period. These expenditures
enhance our ability to provide consumer benefits in the future.
b. Depreciation - The estimated amount of physical capital (for example, machines & buildings)
that is worn out or used up producing goods during a period.
c. Inventory Investment - Changes in the stock of unsold goods & raw materials held during a
period.
5. Government Consumption & Gross Investment
6. Net Exports
a. Net Exports - Exports minus imports
b. Exports - Goods & services produced domestically but sold to foreigners
Economics: Public & Private Choice | Part 3: Core Economics | Chapter 7: Taking the Nation’s Economic Pulse
c. Imports - Goods & services produced by foreigners but purchased by domestic consumers,
businesses, & governments.
d. Net exports= total exports- total imports
G. Deriving GDP by the Resource Cost-Income Approach
1. Indirect Business Taxes
a. Indirect Business Taxes - Taxes that increase a business firm's cost of production and, therefore,
the prices charged to consumers. Examples are sales, excise, & property taxes.
2. Depreciation
3. Net Income of Foreigners
a. National Income - The total income earned by a country's nationals (citizens) during a period. It
is the sum of employee compensation, self-employment income, rents, interest, & corporate
profits.
b. Gross National Product (GNP) - The total market value of all final goods & services produced by
the citizens of a country. It is equal to GDP minus the net income of foreigners.
c. Income of Foreigners - The income that foreigners earned by contributing labor & capital
resources to the production of goods within the borders of a country minus the
income of nationals of the country earned abroad.
H. The Relative Size of GDP Components
1.
3. Adjusting for Price Changes & Deriving Real GDP
A. Nominal Values - Values expressed in current dollars
B. Real Values - Values that have been adjusted for the effects of inflation
C. Two Key Price Indexes: The Consumer Price Index & the GDP Deflator
1. Consumer Price Index (CPI) - An indicator of the general levels of prices. It attempts to compare the
cost of purchasing the market basket bought by a typical consumer during a specific period with the
cost of purchasing the same market basket during an earlier period.
2. The CPI is designed to measure the impact of price changes on the cost of the typical bundle of goods
purchased by households.
3. GDP Deflator - A price index that reveals the cost during the current period of purchasing the items
included in GDP relative to the cost during a base year (currently 2000). Unlike the consumer price
index (CPI), the GDP deflator also measures the prices of capital goods & other goods & services
Economics: Public & Private Choice | Part 3: Core Economics | Chapter 7: Taking the Nation’s Economic Pulse
purchased by businesses and governments. Because of this, it is thought to be a more accurate
measure of changes in the general level of prices than the CPI.
4. The GDP deflator is a broader price index than the CPI. It is designed to measure the change in the
average price of the market basket of goods included in GDP.
5. Inflation - An increase in the general level of prices of goods & services. The purchasing power of the
monetary unit, such as the dollar, declines when inflation is present.
6.
G.
D. Using the GDP Deflator to Derive Real GDP
1. Nominal GDP - GDP expressed at current prices. It is often called money GDP.
2. Real GDP - GDP adjusted for changes in the price level.
3.
D.
E. Data on both money GDP & price changes are essential for meaningful output comparisons between 2
time periods.
4. Problems with GDP as a Measuring Rod
A. Nonmarket Production
Economics: Public & Private Choice | Part 3: Core Economics | Chapter 7: Taking the Nation’s Economic Pulse
B. Underground Economy
1. Underground Economy - Unreported barter & cash transactions that take place outside recorded
market channels. Some are otherwise legal activities undertaken to evade taxes. Others involve illegal
activities, such as trafficking drugs & prostitution.
C. Leisure & Human Costs
D. Quality Variation & the Introduction of New Goods
E. Harmful Side Effects & Economic "Bads"
5. Differences in GDP Over Time
A.
6. The Great Contribution of GDP
A. GDP was designed to measure the value of the goods & services produced during a given time period. In
spite of its limitations, real GDP is a reasonably precise measure of the rate of output & the year-to-year
changes in that output.