Measurements, Part II:
GDP And Real GDP
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GDP (Gross Domestic Product)
 GDP:
the total market value of all the final goods and services
produced annually within a country’s borders.
Final good:
a good in the hands of its final user
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GDP (Gross Domestic Product)
(continued)
 Three ways to compute GDP:
1. The expenditure approach.
2. The income approach.
3. The value added approach.
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GDP (Gross Domestic Product)
(continued)
 Expenditure approach:
add the amount of money spent by buyers on final goods and
services.
 Income approach:
simply find the sum of all wages and profits.
 Value added approach:
find the sum of the values added at all the stages of
production.
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What GDP Omits
Some exchanges that take place in an economy are not included
in GDP. Such as:
- Certain nonmarket goods and services.
- Underground activities, both legal and illegal.
- Sales of used goods.
- Financial transactions.
- Government transfer payments.
- Leisure
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Per Capita GDP
 If we divide a country’s GDP by the population in the
country, we get per capita GDP.
Example:
If a country has a GDP of $ 5 trillion and its population is
200 million, GDP per capita is $ 25000
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The Expenditure Approach Computing
GDP For A Real Word Economy
 Expenditure in a real word economy:
- Often talk four sectors of the economy, such as:
-- household sector.
-- business sector.
-- government sector.
-- foreign sector.
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The Expenditure Approach Computing GDP For A
Real Word Economy (continued)
 The expenditures of the sectors are called, respectively:
1. Consumption (C).
2. Gross private domestic investment, or investment (I).
3. Government consumption expenditures and gross
investment, or simply government purchases (G).
4. Net export (NX).
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The Expenditure Approach Computing GDP For A
Real Word Economy (continued)
 Consumption (C) includes:
1. Spending on durable goods.
2. Spending on nondurable goods.
3. Spending on services
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The Expenditure Approach Computing GDP For A
Real Word Economy (continued)
 Investment (I):
is the sum of (1) the purchase of newly produced capital
goods, (2) changes in business inventories (inventory
investment), and (3) the purchases of new residential
housing.
Investment = fixed investment + inventory investment
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The Expenditure Approach Computing GDP For A
Real Word Economy (continued)
 Government purchases (G):
include federal, state, and local government purchases of
goods and gross investment such as in highways, bridges, and
so on.
 Net export (NX)
NX = EX – IM
EX: exports
IM: imports
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The Expenditure Approach Computing GDP For A
Real Word Economy (continued)
 GDP = C + I + G + (EX – IM)
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The Income Approach To Computing
GDP For A Real World Economy
 Computing national income:
- National income, is the sum of five components:
1. Compensation of employees.
2. Proprietors’ income.
3. Corporate profits.
4. Rental income of persons.
5. Net interest
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The Income Approach To Computing GDP
For A Real World Economy (continued)
National Income = Compensation of employees +
Proprietors’ income +
Corporate profits +
Rental income +
Net interest
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The Income Approach To Computing GDP
For A Real World Economy (continued)
From National Income To GDP: Making Some Adjustment
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
They are:
1. Net Domestic Product (NDP).
NDP = GDP – Capital Consumption Allowance
Capital Consumption Allowance:
the estimated amount of capital goods used up in production
through natural wear, obsolescence, and accidental
destruction.
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Other National Income Accounting
Measurements (continued)
They are:
2. Personal Income.
Personal Income = National Income –
Undistributed Corporate Profits –
Social Insurance Taxes –
Corporate Profits Taxes +
Transfer Payments
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