GDP and National Income - Assessing the Economy’s Performance o GDP is used in three different ways  Explore short-run fluctuations in the business cycle- What is happening this quarter or this month? Show and compare standards of living- Across countries (relative to each other)o U.S vs. Ghana  Explore long-fun economic growth - Trends over extended time - How much better off are we now compared to the beginning of America? Or even just 50 years ago? 5?- Gross Domestic Product (GDP): the market value of all final goods and services produced within a country in a given period of time o Market value Goods are valued at their market price so:- All goods measured in the same units (e.g., dollars in the U.S.)- Things that don’t have a market value are excludedo housework you do yourself is not includedo housework you hire someone else to do IS included o Final Final Goods: intended for the end user  Intermediate goods: used as components or ingredients in the production of other goods - Ex: lettuce from Sam’s club for a restaurant is not the end user, it is not afinal good GDP only includes Final Goods- they already embody the value of the of the intermediate goods used in their production - This is why intermediate goods are not counted, because otherwise the lettuce would get double counted, it would be counted once buying the lettuce as an intermediate and once as a final, so that is why we only count final goods, which in this case would be the salad.o Goods and services GDP includes tangible goods - DVDs, beer, mountain bikes Services: non tangible goods - Dry cleaning, concerts, cell phone service Anything that is productiveo Produced GDP includes currently produced goods, not goods produced in the past - 2012 car would not count towards 2013 GDPo How productive were we THIS year or THIS quartero A 2012 car in 2013 is being productive last year, not this year. o Within a country GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there. - Doesn’t matter who produces it or consumes it, if it was produced in theborders it is included in that country’s GDP o In a given period of time  Usually a year or a quarter- Avoiding Multiple Counting o Excludes financial transactions  Public transfer payments- welfare and social security  Private transfer payments- inheritances  Stocks (and bond) market transactions o Excludes secondhand sales  Used car market  Craigslist, E-bay, etc. o Excludes items produced in a previous year - Two Ways of Looking at GDP o Expenditures Approach- measuring output or spending  We are looking at the Product Market  All goods and services that are produced and consumed  Components- Consumption by households o Anytime you buy a good or service - Investmento That produce more goods and services in the future (not stocks and bonds)- Government Purchases o Not financial transactionso Buys airplanes, builds roads etc. - Net Exports  These components add up to GDP o Income Approach- Measures earnings We are looking at the Resource Market  All transaction s that occur to produce goods and services  Components- Wages- Rents- Interest - Profits o These components add up to THE SAME GDP - The Expenditures Approach: For the economy as a whole, income equals expenditure because every dollar a buyer spends is a dollar of income for the seller. - Personal Consumer Expenditures (C) o Total spending by households on goods and services o Note on housing costs: For renters- consumption includes rent payments  For homeowners- includes the opportunity cost of renting their own home (the implicit cost of their house)- Investment (Ig)o Total spending on goods that will be used in the future to produce more goods in the future (not stocks and bonds) o Includes spending on: Capital equipment (machinery and tools) NEW Construction (factories, office buildings, HOUSES) Inventories (goods produced but not yet sold) Money spend on research and development o Notes on investment  Inventories can increase or decrease GDP - If the amount of goods in inventory increase – additional goods and services were produced in a given year o Change will be added to GDP - If the amount of goods in inventory decreases – we sold some product that was previously produced (not produced this year, not part of GDP)o Change will be subtracted from GDP - Government Purchases (G)o All spending on goods and services purchased by the government at the Federal, State, and Local Levelso Excludes transfer payments! Citizens will use those payments for goods and services (wont double count) Not directly purchasing goods and services - Net Exports (Xn)o Exports- Imports = Net Exports o Exports represent foreign spending on the economy’s goods and services o Imports are counted in other portions of GDP (C,I, and G) o GDP=C + I + G + Xn - Imports - Nominal GDP versus Real GDPo GDP + price times quantity  From 6,000 to 10,000 We didn’t actually get more productive, we actually produced less than the year before, we just charged more for the goods o Inflation a general increase in the price level  Can distort economic variables like GDP, we have two versions of GDP: One is correct for inflation, the other is not - Nominal GDP: Values output using current prices o Not corrected for inflation o Comparing GDP today vs. today  USA vs. Ghana - Real GDP: values output using the prices of a base yearo Corrected for inflation o Comparing today vs. past, overtime  How much are you really making more than you were (x) years ago - Compute nominal GDP in each year: (current price, current quantities)o 2005: $10 x400 +$2.00 x1000=$6000o 2006: $ 11x500 + $ 2.50 x1100=$8,250o 2007: $ 12x600 + $3.00 x1200=$10,800- Compute Real GDP in each year, using 2005 as a base year (base year prices time current year quantity)o 2005: $10 x400 + $2.00 x1000= $6,000o 2006: $10 x500 + $2.00 x1100=$7,200o 2007: $10 x600 + $2.00 x1200= $8,400 o Review  Nominal GDP is measured using the current prices x current quantity- The change in nominal GDP reflects both prices and quantities  Real GDP is measured using constant prices from the base year- The change in real GDP is the amount that GDP would change if prices were constanto Hence, real GDP is corrected for inflation