ECO 201 Ch 7 Macroeconomic Measurements GDP and Real GDP 1 Gross Domestic Product gross domestic product GDP the total market value of all final goods and services produced annually within a country s borders a Calculating GDP GDP PQ b Final Goods and Intermediate Goods final good a good in the hands of its final user Example orange juice c What GDP Omits intermediate good a good that is an input to the production of a final good Example oranges used to make orange juice double counting counting a good more than once when computing GDP Example counting both the oranges and the orange juice oranges would be counted twice Certain Non Market Goods and Services Hiring a maid IS included in GDP Doing your own housework is NOT included in GDP Farm family consuming goods produced on their own farm is estimated and this imputed value IS part of GDP Underground Activities Both Legal and Illegal Illegal activities such as drug sales prostitution are NOT included in GDP Legal transactions that are paid for in cash and not recorded as part of tax evasion or other reasons are NOT included in GDP illegal gambling and illegal Sales of Used Goods GDP only measures current production production during the current year therefore sales of used goods are NOT included in GDP Financial Transactions Trading of stocks and bonds is NOT counted in GDP Government Transfer Payment transfer payment a payment to a person that is not made in return for goods and services currently supplied Example Social Security veteran s benefits Leisure Leisure time is a good in much the same way that cars house and shoes are goods but is NOT counted in GDP because it is too difficult to quantify d GDP is Not Adjusted for Bads Generated in the Production of Goods Bads are anything from which individuals receive disutility or dissatisfaction Example Air or water pollution generated from producing cars or furniture GDP counts the goods and services but it does not deduct the air and water pollution Some economists argue that GDP overstates our overall economic welfare e Per Capita GDP per capita GDP divides a country s GDP by the population f Is Either GDP or Per Capita GDP a measure of Happiness or Well Being GDP figures are useful for obtaining an estimate of the productive capabilities of an economy but they do not necessarily measure happiness or wellbeing 1 ECO 201 Ch 7 Macroeconomic Measurements GDP and Real GDP 2 The Expenditure Approach to Computing GDP for a Real World Economy In a large economy GDP cannot simply multiply the price of each good produced by the quantity of it expenditure approach used to measure GDP in a large economy the sum of all spending on final goods and services in usually 4 sectors of the economy household business government and foreign Sectors of the Economy Spending is Called Household Business Government Foreign Consumption C Investment I Government Purchases G Net Exports NX Consumption includes component of GDP Investment is the sum of Consumption in the US usually accounts for 70 of GDP making is the largest spending Durable Goods goods expected to last for more than 3 years such as major appliances Nondurable Goods goods not expected to last for more than 3 years such as food Services intangible items such as lawn care car repair and entertainment Government Purchases Purchases of newly produced capital goods Purchases of new residential housing These two are also referred to as fixed investment business purchases of capital goods such as machinery and factories and purchases of new residential housing Changes in business inventories inventory investment changes in the stock of unsold goods government purchases federal state and local government purchases of goods and services and gross investment in highways bridges and so on Does not include government transfers payments to persons that are not made in return for currently supplied goods and services Social Security welfare Net Exports imports total domestic US spending on foreign goods exports total foreign spending on domestic US goods net exports exports minus imports can be positive or negative a Computing GDP Using the Expenditure Approach Expenditure approach is the total of the purchases of final goods and services items that are produced but not sold are considered bought by the company that produced them b Common Misconceptions About Increases in GDP GDP C I G EX IM Are all increases in GDP good for the economy Example If Investment rises and no other components change then GDP will rise Investments can rise for 3 reasons Firms purchase newly produced capital goods Individuals produce new residential housing Firms inventory rises for 2 reasons 1 Planned Inventory Investments firms deliberately produce more units to 2 Unplanned Inventory Investments consumers don t buy as many units which increase inventory are then added to inventory Comparing the two types of inventory increases the first one is superior as far as health and strength of the economy are concerned 2 ECO 201 Ch 7 Macroeconomic Measurements GDP and Real GDP 3 The Income Approach to Computing GDP for a Real World Economy Two steps are involved in computing GDP using the income approach First compute national income Second adjust national income for certain things The end result is GDP a Computing National Income national income total income earned by US citizens and businesses no matter where they reside or are located the sum of the payments to resources land labor capital and entrepreneurship Compensation of Employees Total of wages and salaries employers contributions to Social Security and employee benefit plans the monetary value of fringe benefits tips and paid vacations The compensation of employees is the largest component of national income Proprietors Income Corporate Profits All forms of income earned by self employed individuals and the including farmers owners of unincorporated businesses includes value of food grown and consumed on the farm All the income earned by the stockholders of corporations Some profits are paid to stockholders as dividends some are kept within the firm as retained earnings and some are used to pay corporate profits taxes The portion of corporate profits used to pay corporate income earned by profits households even though households do not receive the income counted as taxes is Rental Income of Persons Income received by individuals for the use of their nonmonetary assets land houses offices Includes returns to