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# PSU ECON 104 - The different Aspects of GDP

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Econ 104 1st Edition Lecture 7 Outline of Last Lecture I. Expenditure Approach to Calculation GDPII. Fun Facts about GDPIII. Income Approach to Calculating GDPIV. Production Approach to calculating GDPOutline of Current Lecture II. Real vs Nominal GDPIII. Gross Domestic Product:IV. Product approach V. Example of Percent Change REAL from previous year VI. Example of how to Calculate GDP deflatorCurrent LectureI. Real vs Nominal GDPa. When we have real and nominal calculated we can find inflation between two yearsb. Looks simple but you can do a lotII. Gross Domestic Product: the market value of all final goods and services produced in a country over a period of timea. Measured in 3 waysi. Product Approachii. Income Approach III. Product approach a. Quantity of all goods produced X price of those goodsb. If someone tells you GDP is up by 5%i. With nominal GDP there is a problem1. Is quantity produced or price up?? Or both??These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. Typically GDP going up is a good thing, but this could just mean inflationb. To calculate real GDP use base year prices for each year instead of current year pricesi. The base year selected by the US Department of Commerce is 20091. Why is the real GDP falling a. Because all the prices are now higher than they were in 2009i. Prices are always rising (typically)b. Meaning in 2009:i. Nominal GDP = Real GDPii. Better way to tell which way GDP is going iii. Percent change of Real GDP1. (New-old)/old X 100c. Real GDP will increase only when quantity produced increasesIV. Example of Percent Change REAL from previous year a. Negative growth is recession Year Nominal GDP using Current Prices \$ in trillionsReal GDP using 2009 Prices \$ in trillionPercent Change REAL GDP from previous year2009 14,417 14,417 -2.8%2010 14,958 14,779 +2.5%2011 15,533 15,052 + 1.8%2012 16,244 15,470 +2.8%2013 16,799 15,761 +1.8%I. Notice that 2009 prices, although the base year are not the same numbersa. This is because it counts for inflationI. How to do the percent change real from previous reala. (new-old)/old X 100i. Only use 2009 (base year) pricesb. 2010: (14,779-14,417)/14, 417 X 100 = 2.5%II. How do we measure the growth in prices (inflation) from one year to the nexta. GDP deflator or Price Level (P) or Price Indexb. P=(NGDP/RGDP)X100i. NGDP = nominal GDPii. RGDP = real GDPiii. NGDP and RGDP are from the same yearc. Price Level = A measure of the average level of prices of goods and services in the economyIII. Example of how to Calculate GDP deflatora. Use data from the previous table (used for calculating percent change in Real GDP)i. (NGDP/RGDP)X100ii. P2012 = (16,244/15470) X 100 = 105iii. P2013 = (16799/15761) = 107iv. % Change 2012 to 2013 = (107-105)/105 X 100 = 1.9%1. Inflation Rate for 2013 is 1.9%2. Π = inflationI. Calculate GDP by Income methoda. GDP by Income Method= National Income + GDPi. National Income = Net interest + Compensation of Wages + Profits + Rental Income + Indirect Business Taxesb. Example of a GDP by Income Methodi. Net Interest: 1500ii. Depreciation: 800iii. Net Interest Compensation: 4000iv. Profits: 1000v. Rental Income: 100vi. Indirect Business Taxes: 600vii. Income Taxes: 900viii. Social Security Payments: 1000ix. GDP= 1500 + 4000 + 1000 + 100 + 600 + 1500 =

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