measuring gdp

• GDP


  Gross domestic product, the market value of all final goods and services produced in a country in a given time period
• GDP definition


  • Market value
  • Final goods and services
  • Produced within a country
  • In a given time period
• Circular flow of expenditure and income

  1. Firms hire factors of production from households

  2. Households buy consumer goods and services

  3. Households save and pay taxes

  4. Firms buy capital goods from other firms

  5. Governments buy goods and services

  6. Rest of the world buys goods and services from us and sells us goods and services
• GDP


  • Equals aggregate expenditure (C + I + G + X - M)
  • Equals aggregate income (wages, interest, rent, and profit)
• Aggregate expenditure


  Total expenditure on final goods and services, equals the value of output of final goods and services, which is GDP
• Aggregate income


  Aggregate income earned from production of final goods, equals the total paid out for the use of resources
• How investment is financed

  1. Private saving

  2. Government budget surplus

  3. Borrowing from the rest of the world
• Gross vs net


  Gross means before accounting for the depreciation of capital, net means after accounting for depreciation
• Gross investment


  Total amount spent on purchases of new capital and on replacing depreciated capital
• Net investment


  Change in the stock of capital, equals gross investment minus depreciation
• Measuring GDP


  1. Expenditure approach: C + I + G + (X - M)

  2. Income approach: Compensation of employees + Net interest + Rental income + Corporate profits + Proprietors' income
• Real GDP


  Value of final goods and services produced in a given year when valued at constant prices
• Nominal GDP is the value of goods and services produced during a given year valued at the prices that prevailed in that same year
• GDP at factor cost

  Measure of U.S. GDP
• Measuring U.S. GDP


  1. Indirect taxes minus subsidies are added to get from factor cost to market prices

  2. Depreciation (or capital consumption) is added to get from net domestic product to gross domestic product
• Real GDP


  The value of final goods and services produced in a given year when valued at constant prices
• Calculating Real GDP


  1. Calculate nominal GDP, which is the value of goods and services produced during a given year valued at the prices that prevailed in that same year

  2. Value each year's output at the prices of a base year (base-year prices method)

  3. Use the prices of two adjacent years to calculate the real GDP growth rate (chain-weighted output index method)
• Calculating Real GDP - Base-year prices method

  • Expenditure on balls in 2003 valued at 2002 prices is $160
  • Expenditure on bats in 2003 valued at 2002 prices is $110
  • Real GDP in 2003 (base-year prices method) is $270
• Calculating Real GDP - Chain-weighted output index method

  1. Step 1: Value last year's production and this year's production at last year's prices and then calculate the growth rate

  2. Step 2: Value last year's production and this year's production at this year's prices and then calculate the growth rate

  3. Step 3: Calculate the average of the two growth rates

  4. Step 4: Repeat steps 1, 2, and 3 for each pair of adjacent years to link real GDP back to the base year's prices
• Real GDP in 2002 is $200

  Real GDP in 2003 is $250
• GDP deflator


  An average of the prices of the goods in GDP in the current year expressed as a percentage of the base year prices
• Calculating the GDP deflator

  • In 2002, the GDP deflator is ($200/$200) * 100 = 100

  In 2003, the GDP deflator is ($575/$250) * 100 = 230
• Nominal GDP increases


  Because production (real GDP) increases

  Because prices rise
• Economic growth rate


  The percentage change in the quantity of goods and services produced from one year to the next
• Real GDP as a measure of economic welfare

  • Quality improvements tend to be neglected, so the inflation rate is overstated and real GDP understated

  Does not include household production

  Omits the underground economy

  Health and life expectancy are not directly included

  Leisure time is not included

  Environmental damage is not deducted

  Political freedom and social justice are not included
• Comparing real GDP across countries

  • Real GDP of one country must be converted into the same currency units as the other country, using an exchange rate

  The same prices should be used to value the goods and services in the countries being compared, but often are not
• Using purchasing power parity prices leads to an estimate that per person GDP in the United States is (only) 12 times that in China
• Real GDP is used to measure business cycle fluctuations, but the changes in real GDP probably overstate the changes in total production and people's welfare caused by business cycles