GDPGDPMore GDPElias YannopoulosSeptember 7, 2012Elias Yannopoulos More GDPGDPFour Components of GDPConsumption (C) - Private spending on goods and servicesnot intended for use in future productionInvestment (I) - Private spending on tools, plants andequipment used to produce future outputIntermediate good vs investmentEx: Hair Salon, scissors vs shampooGovernment (G) - Spending by all levels of government onfinal goods and servicesNot transfersNet Exports (X) - Exports minus ImportsGDP = Y = C + I + G + XElias Yannopoulos More GDPGDPGrowth RatesGrowth Rate - percentage change in a variableGrowth Rate of X = %∆X =X2−X1X1× 100ExampleElias Yannopoulos More GDPGDPGDP ConceptsFlow vs StockFlow - amount per period of timeStock - amount at a particular moment in timeGDP is a flowNominal vs RealNominal - unadjusted for price changes/”in current dollars”Real - adjusted for price changes/”in constant dollars”Price Level - a measure of overall prices relative to a baseyearbase year = 100On line graphElias Yannopoulos More GDPGDPCalculating Real GDPSome NotationY = Real GDPP = Price LevelPY = Nominal GDPRealGDPt=NominalGDPtPriceLevelt× 100GDP in a non base year currencyYearSDollarsGDPt=NominalGDPtPriceLevelt× PriceLevelsExamples on boardElias Yannopoulos More GDPGDPIntermediate GoodsGDP only final goods otherwise the intermediate goods getcounted twiceOnce when the intermediate good is sold to be used inproduction and again when the final good is soldprice of a final good includes the costs of inputsTwo ways to avoid the double counting of intermediate goodsDirectly measure only final goods and services expenditureVery impractical because it involves tracking who each goo d issold to and what it is used forValue added approachValue Added - the increase in value that a firm contributesto a product or serviceValue of sales less the cost of intermediate goodsExample on BoardElias Yannopoulos More GDPGDPMore ConceptsExamples of things included/not included in GDPUsed car and car dealershipselling of a security of bondGross vs NetGross - Has not been adjusted by an offsetting flowNet - Result of offsetting flowsPart of GDP is replacing depleted capitalDepreciation - the decrease in an asset’s valueProduction used to replace depleted capital is not available forconsumptionNet Domestic Product (NDP) = GDP - DepreciationNDP uses net investment instead of gross investmentProblem is that depreciation is practically impossible tomeasureElias Yannopoulos More GDPGDPEven More ConceptsNational vs DomesticNational - Citizens of the nationDomestic - Within the borders of the nationGross National Product (GNP) - the market value of goodsand services produced by citizens and businesses of aneconomy in a yearGNP is much harder to track and measure than GDPElias Yannopoulos More GDPGDPAggregate IncomeAggregate Income - the total income earned by citizens andfirms of a countryFour Components of Aggregate IncomeCompensation of Employees - wages/salaries, benefits,taxes payed by firms for Social Security and unemploymentinsuranceLargest component of Aggregate IncomeRents - Rental income from property not owned by firmsRents from firm owned properties are counted in profitsInterest - Interest income private businesses pay tohouseholds because of money the businesses borrowed fromthe householdsInterest that businesses receive is counted in profitsInterest that households and government pay are not includedbecause they are assumed not to be from productionElias Yannopoulos More GDPGDPAggregate Income Cont.Profits - The remainder after employee compensation, rentsand interests have been paid outAccounting profits not Economic profitsDifference is Economic profits use opportunity costProduction is income to someoneAggregate Income ≡ Aggregate Productionin practicality the measurements may not be the sameEx: Domestic vs NationalAt an intro level we can ignore the complications and assumethey are equalEx: Calculating Aggregate IncomeElias Yannopoulos More
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