Lecture 7

• GDP

  Gross domestic product - The market value of all the final goods and services produced within a country in a given time period

  
• What is produced for GDP

  • Final goods and services - Goods and services produced for their final user and not as a component of another good or service
  • Intermediate goods and services - Goods and services produced by one firm, bought by another firm, and used as a component of a final good or service
  • GDP includes only those items that are traded in markets
• Where GDP is produced

  • Within a country
• When GDP is produced

  • During a given time period
• Components of total expenditure

  • Consumption expenditure (C)
  • Investment (I)
  • Government expenditure on goods and services (G)
  • Net exports of goods and services (NX)

  
• Total expenditure

  The total amount received by producers of final goods and services
• Total expenditure = C + I + G + NX
• Factors of production that earn income

  • Labor earns wages
  • Capital earns interest
  • Land earns rent
  • Entrepreneurship earns profits
• Expenditure equals income (Y = C + I + G + NX)
• The value of production equals income equals expenditure
• Expenditures not included in GDP: Used goods, financial assets

  
• Approaches to measuring GDP

  • Expenditure approach
  • Income approach

  
• Expenditure approach

  Measures GDP using data on consumption expenditure, investment, government expenditure on goods and services, and net exports

  
• Income approach

  Measures GDP by summing the incomes that firms pay households for the factors of production they hire

  
• Components of income approach

  • Wage income (compensation of employees)
  • Interest, rent, and profit income (net operating surplus)
• Net domestic product at factor cost is not GDP - need to adjust for indirect taxes/subsidies and depreciation

  
• There is a statistical discrepancy between the expenditure and income approaches to measuring GDP

  
• Nominal GDP

  The value of the final goods and services produced in a given year expressed in the prices of that same year
• Real GDP

  The value of the final goods and services produced in a given year expressed in the prices of the base year
• Real GDP removes the influence of price changes from the nominal GDP numbers
• Calculating real GDP

  1. Multiply the quantities produced in the current year by the prices in the base year

  2. Sum the expenditures to find real GDP

  
• Uses of real GDP

  • To compare the standard of living over time
  • To track the course of the business cycle
  • To compare the standard of living among countries
• Potential GDP

  The value of real GDP when all the economy's factors of production are fully employed

  
• Real GDP fluctuates around potential GDP
• Business cycle

  Periodic, but irregular, up- and down-movement of total production and other measures of economic activity
• Stages of the business cycle

  • Expansion
  • Peak
  • Recession
  • Trough
• Recession is a period in which real GDP growth rate is negative for at least six months
• Purchasing power parity

  A common currency and common set of prices used to compare living standards across countries
• Goods and services omitted from GDP

  • Household production
  • Underground production
  • Leisure time
  • Environment quality
• GDP omits household production, underground production, leisure time, and environmental quality