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UNIT 2 - GDP, Real GDP and Nominal GDP

                                                   GDP, Real GDP and Nominal GDP
Gross Domestic Product
  • Total market value of all final goods and services produced within a country's borders, within a given year
  • GDP = C + Ig + G + Xn (Expenditure approach)
  • C: Personal Consumption Expenditures (67%)
  *Durable and nondurable
Ig: Gross private domestic investment
   *New factory equipment
   * Factory equipment maintenance
   * Construction of housing
   *Unsold inventory of products built in a year
G: Gov't pending
Xn: Net exports
    *Exports - Imports
 
  Does NOT include
   *Used or second-hand goods (voids double or multiple counting)
        ex: used car only counted from an original user
   *Gift/Transfer Payments
  • Public (Welfare, Social Security) or private (Scholarship)
  • No output is being produced
  • Recipients contribute nothing to current production
    *Stock + Bond
  • No current production
     *Unreported Business Activities
  • Tips
     *Illegal Activities
  • Drugs, prostitution…
     *Intermediate goods
  • Goods that require further processing before they are ready for final use (ex: tires, alternator…)
     *Non-Market Activity
  • Volunteering
  • Family work
GNP (Gross National Product)
  • Sum of all goods and services produced by residents of a country during a given year
  • Ex: American-owned shoe manufacturer in Italy

Nominal GDP - value of output (quantity) produced in current year prices
                - can increase from year to year if either output or price increase
Real GDP - value of output produced in constant base year prices that is adjusted for inflation
                 - can increase from year to year only if output increases
                  Standard Rate: 2-3%
 
In the base year, nominal GDP will be = real GDP
In years after base yr. nominal GDP will > real GDP
In years before base yr. real GDP> nominal GDP   
Formula: Price x Quantity
GDP Deflator - price index used to adjust from nominal to real GDP
                 Nominal GDP
              ----------------------  X 100
                    Real GDP
       *In base yr. GDP Deflator will = 100
       *Yrs. After base year, GDP Deflator > 100
       *Yrs. Before base year GDP Deflator <100

                                  Base yr. 1                             yr. 4                                 

 
Price
Quantity
Price
Quantity
Computers
$2000
10
$2200
17
TVs
$500
15
$550
2
  Nominal GDP:
     Computers - $2200 x 17 = $37,400
       TV -               $550 x 20 = $11,000
                                                 --------------
                                                    48, 400
Real GDP:
    Computers - $2000 x 17 = $34,000
    TV -                $500 x 20 =   $10,000
                                                 --------------
                                                  $44,000
Expenditure Approach
  • Add up all the spending on final goods and services produced in a given year
  • C + Ig + G + Xn
  • Receipt (can be proven) 
Income Approach
  • Add up all income that resulted from selling all final goods and services produced in a given year
  • WRIP + Statistical Adjustment
 
Wages (Salary, salary supplements, employee compensation)
Rent (Rental Income)
Interest (interest income NO stock + Bond)
Profit ( Proprietor's income) 
  • Based on verbalization
Whatever you get for expenditure approach has to = the income approach.
Trade - exports - imports
  • (+) Surplus
  • (-) Deficit
Budget - gov't purchases of goods and services + gov't transfer payment  - gov't tax and fee collections
  • (+) Deficit
  • (-) Surplus
National Income
Option 1: compensation of employees (CE) + Rental income + interest income + Proprietor Income + Corporate Profit
Option 2: GDP - indirect business taxes - Depreciation(consumption of fixed capital) - Net foreign factor payment
DPI (disposable personal income)
  • National income - personal household taxes + gov't transfer payments
Net Domestic Product
           *GDP - Depreciation
          Net National Product
*GNP - Depreciation
GNP
GDP + Net Foreign Factor Payment
Gross Private Domestic Investment (Ig)
*Net private domestic investment + Depreciation
 

 
 
       

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