Chapter 7 Gross Domestic Product GDP the market value of all final goods and services produced within a country during a specific period usually a year Market Value Goods are weighted according to the purchase price of the good and service Product 5 apples 5 oranges Price 5 cents 10 cents Contribution to GDP 0 25 0 50 0 75 The dollar is the common measure for the value of the good service produced Goods that are worth more add more to GDP Total spending on all goods and services produced during the year is summed to obtain annual GDP Final Goods and Services Final goods services goods and services purchased by their ultimate user Intermediate goods services Goods purchased for resale or for use in producing another good or service EX If you buy bread and make sandwiches to sell The bread does not get counted into the GDP only final products get counted into GDP Avoid double counting we don t count intermediate goods because their value is contained within the final good EX Cannot count all the apples when making apple juice because then you are double counting count 2 apples and 3 apples juices EX Producer Farmer Wheat Miller Flour Baker Bread Grocer Revenue 0 30 0 65 0 90 1 00 X Cost 0 30 065 0 90 X Value Added 0 30 0 35 0 25 0 10 1 00 GDP EX Are tires and intermediate good or a final good Depends tires bought buy car manufacture are intermediate but if you buy a tire separately like a tire swing or to replace a busted tire then it is a final good Produced Only goods and services that are produced are included in the GDP transfers are not EX Not counted 100 graduation gift jut transferred from grandma to you Welfare payment Social Security and unemployment did not have to produce anything to get that money Financial Transactions Buying Stock note sales commission would be counted in GDP But what you pay the stockbroker for his her services is included in GDP With in a Country GDP counts only goods and services produced with the geographic borders of a country EX Production of a Japanese car factory in the U S is included in the U S GDP EX Production of an U S Nike Shoe factory in Indonesia is not included in U S GDP even if U S owns factory in Indonesia it does not count to U S GDP because it is being produced in Indonesia During a Specific Period Only goods produced in 2014 are included in the figure for 2014 GDP EX How will a house produced in 2003 and resold in 2013 affect 2013 s GDP None at all unless you added something to the house to make it worth more difference is added to 2013 s GDP and the only the sales commission that the realtor makes will be added to 2013 s GDP 2 Ways to measure GDP 1 Expenditure Approach Y C I G NX Y GDP C Consumption Household spending on goods and services during the current period Consists of o Durable goods microwave refrigerator washing machine ect o Nondurable goods food toilet paper paper towel plastic bags ect o Services Doctor lawyer landscaper ect Consumption is the largest component of GDP I Private Investment Production or construction of capital goods that provide future service Consists of o Fixed Investment new conveyer belt to help enhance production o Inventory Investment Ending Inventory Beginning Inventory Inventory Investment EX 1 000 fixed inventory 800 300 Inventory Investment 1 500 Investment depreciation Net Investment G Government Consumption and Gross Investment Included spending on o Goods and Services o Capital goods missals aircrafts highways Does not include transfer payments Government expenditures are counted at cost not value to tax payers EX The government hires a police officer and pays him 30 000 a year that gets included in the Government Expenditures GDP NX Net Exports X Exports M Imports Net Export Exports domestically produced goods and services sold abroad Imports foreign produced goods and services purchased domestically Clothing sporting goods 2 Resource cost income approach GDP Expenditure approach GDP Resource cost income approach o Employee Compensation 54 9 income you make for working for someone o Proprietors income 7 1 income you make for working for yourself o Rent 2 4 o Corporate profits 12 4 o Interest income 3 9 o Indirect business taxes 7 7 o Depreciation 12 9 o Net Income of Foreigners 1 3 o GDP Gross National Product GNP total market value of all final goods and services produced by the citizens of a country o Counts the income Americans earn abroad o Ignores the income foreigners earn in the U S o EX Toyota factory run by japs in the U S will increase Japans GNP and the Nike Factory in Indonesia run by U S citizens will increase U S GNP If Nike opens a factory in Oregon run by U S citizens both U S GDP and GNP will increase Adjusting for price changes o Nominal Values values expressed in current dollars o Real Values values that have been adjusted for the effects of inflation EX Movies Avatar was 1 then when adjusted for inflation because back in the day movie tickets were cheaper Gone with the Wind was 1 and Avatar was 14 EX Gas prices seem higher now then back in the day but that is because the price that gas used to be has not been adjusted for inflation EX Year Cost of Coke 1930s 2014 0 05 1 25 0 30 7 50 Cokes in an hour 6 6 What is a Price Index o Price Index measures the cost of purchasing a market basket of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period o PI cost of bundle in current year cost of same bundle in base year EX Beer and liquor Beer Liquor Total 10 5 PI 130 100 1 3 2 key Price indexes Quantity 2014 Total Price in 2014 3 00 20 00 Price in 2000 2 00 16 00 2000 Total 20 00 80 00 100 00 30 00 100 00 130 00 o Consumer Price Index CPI Indicator of general level prices Compares the cost of a typical market basket in a specific period to the cost of the same basket in a different period o Boarder than CPI includes capital goods and other goods purchased by businesses and government EX CPI Beer Liquor Toothpaste Birth Control Trash Bags GDP Deflator Beer Liquor Toothpaste Birth Control Trash Bags Highways Missals Fork lifters Which should we use o Depends How do rising prices affect households USE CPI If we want an economy wide measure of inflation USE GDP DEFLATOR Calculating real values o To calculate real values you need to know 1 Nominal values 2 Price index for the current year and the year you are comparing to EX Real GDP Nominal GDP of 2013 400 Nominal GDP of 2008 100 PI of 2008 1 PI of 2013 …
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