Ch 6: Macroeconomic
Measurements, Part II GDP and
Real GDP
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
Gross Domestic Product
• GDP is the total market value of all final goods and
services produced annually within a country’s borders.
• Expenditure Approach: compute GDP by adding the
money spent by buyers on final goods and services.
What are final goods? What are intermediate goods?
What’s the difference?
• Income Approach: compute GDP by adding all wages
and all profits.
• Value-Added Approach: compute GDP by adding the
values added to a product at all stages of production.
GDP? GNP? What’s different?
• Gross National Product is the
total market value of all final
goods and services provided
annually by the citizens of a
country
• GDP measures all final
goods produced in a country,
whether by citizens or not.
GNP measures all final
goods produced by citizens
whether physically in that
country or not.
What GDP Omits
• Certain Nonmarket Goods
and services
• Underground Activities,
both legal and illegal
• Sale of Used Goods
• Financial Transactions
• Government Transfer
Payments.
• Leisure
• Not adjusted for “bads”
Total Market Value
• Total Market Value is
the monetary value of
goods and services at
today’s prices.
• Only final goods are
counted to protect
against the error of
over-counting.
GDP or Per Capita GDP
• Per Capita GDP is the 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.
Q&A
• 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.
Expenditures in a Real-World
Economy
Expenditures:
• Consumption includes
spending on durable goods,
spending on non-durable
goods, and spending on
services.
• Investment is the sum of
purchases of newly produced
capital goods, changes in
business inventories, and
purchase of new residential
housing.
Expenditures in a Real-World
Economy
• Government purchases
include federal, state, and
local government
purchases of goods and
services and gross
investment in highways,
bridges, and so on.
• Net Exports is the total
number of exports minus
the number of imports.
Computing GDP using the
Expenditure Approach
• Anything that is not sold is “bought” by the firm that
produces it.
• GDP=Consumption + Investment + Government Purchases
+ Net Exports
The Income Approach to Computing
GDP For A Real World Economy
• Domestic Income is the
total income earned by the
people and businesses
within a country’s borders.
• National Income is the
total income earned by
U.S. citizens and
businesses, no matter
where they are located.
Computing National Income
• Compensation of Employees: Wages, salaries, Social
Security benefits, and employee benefit plans plus the
monetary value of fringe benefits, tips, and paid
vacations
• Proprietors’ Income is all forms of income earned by
self-employed individuals and the owners of
unincorporated business, including unincorporated
farmers.
• Corporate Profits include all income earned by the
stockholders of corporations.
• Rental Income of Persons is the income received by
individuals for the use of their non-monetary assets.
Computing National Income Part 2
• 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
National Income to GDP
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
National GDP Making Some
Adjustments
• Remember that the National income excludes
foreign nationals and includes citizens abroad, but
the GDP has to adjust for both of these incomes.
• Indirect Business Taxes usually comprise excise
taxes, sales taxes, and property taxes.
• Capital Consumption Allowance or depreciation is
the cost to replace capital goods that break or wear
down
• Statistical discrepancies or pure computational
errors often occur
Other National Income
Accounting Measurements
• Net Domestic Product = GDP – Capital
consumption allowance
• Personal Income = National income –
Undistributed Corporate Profits – Social Security
Taxes – Corporate Profits Taxes + Transfer
Payments
• Disposable Income = Personal Income – Personal
Taxes
• Per Capita Macroeconomic Measurements Divides
these factors by the population.
Q&A
• 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?
Real GDP
• Real GDP is GDP adjusted for price
changes.
• Real GDP is equal to the change in 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.
If You Know the Price Index and
GDP For A Year, Can You Compute
Real GDP?
Real GDP =
GDP
x 100
Chain Weighted Price Index
What Does It Mean If Real GDP
Is Higher In One Year Than In
Another Year?
• 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.
Real GDP, Economic Growth,
and Business Cycles
Economic Growth has
occurred if Real GDP
in one year is higher
than Real GDP in the
previous year.
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
The Business Cycle
Recession
The NBER definition of a
recession is “ 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”.
Q&A
• Suppose GDP is $6,039 billion in year 1 and
$6,245 billion in year 2. What has caused the rise
in GDP?
• Suppose Real GDP is $5,233 billion in year 1 and
$5,267 billion 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.