ECON 2105 1st Edition Lecture 5 Outline of Last Lecture I. Why we measure GDP?II. What does GDP measure?a. Formal Definition:b. Goods and Services c. Final Goods and Services d. Domestic Soile. Newly produced III. What does GDP not measure?IV. What is in? What is out?V. How to measure GDP?VI. Expenditure Approacha. How is GDP constructed?VII. Product ApproachOutline of Current Lecture VIII. Income Approach IX. Calculating GDP X. Economic Concepts XI. Module 11- Interpreting Real Gross Domestic Product Current Lecture Gross value added by sector in 2013, Q2 Gross domestic product 16633.4Business 12533 Nonfarm 12307.5 Farm 225.5These 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.Households and institutions 2067.1 Households 1167.3 Nonprofit institutions serving households 3 899.7General government 2033.3 Federal 668.3 State and local 1365 Gross domestic product 16633.4 VIII. Income Approach What is produced is also a measure of incomeIf you pay $1 for something that $1 has to end up in someone’s pocket as - Wages/ salary- compensation for workers who make production- Profits- compensation for self employed- Rents- compensation for land owners- Interest- compensation for debt owners- Dividends- compensation for equity owners 2013 the 1st quarter GDP by type of Income Compensation of employees, paid 8744.7 Wages and salaries 7037.5 To persons 7023.2 To the rest of the world 14.4 Supplements to wages and salaries 1707.2Taxes on production and imports 1140.7Net operating surplus 4248.2Consumption of fixed capital 2603.8IX. Calculating GDP Only include expenditures for goods that are “produced” (all approaches should get the same GDP numbers) Ex:- If I give $10 to a movie theater to watch a movie, it is counted as expenditure.- If I give $10 to my nephew for a birthday present, it is not included as expenditure.- If I give $10 to the ATM machine to put in my savings account it is not included asexpenditure. Ex: part of GDP?? - Hamburger buns bought by McDonalds Corp. for making Big Macs- (not final user) NO (intermediate good) - Buy used textbook- NO - New pair of jeans- YES - Buy Google stock- neither good or service NO - New BMW- profit made my dealer ye, but most of it is part of German GDP (mustknow where it is manufactured) - Newly purchased $10000 US Treasury Bill- No, not service or good- Cup of coffee from Starbucks- Yes Practice:Consider a new car produced by General Motors (GM). The retail value, or market price, is $25,000, the wholesale value is $20,000, and the total cost of production at GM is $15,000. Imagine that the $25,000 paid for the car is distributed as follows:- $2,000 commission to the salesperson- $3,000 profit to the dealer- $5,000 wages to assembly-line workers- $10,000 payments to suppliers of steel, plastics, components, and other parts (cost of intermediate good) - $2,000 profit retained for GM- $3,000 dividends (interest) paid to GM stockholders.- The value added by the Dealer= $5000 (25000-20000) - The value added by GM= $10000 (20000-10000) (sales price- cost of intermediate good) X. Economic Concepts- Stock: a share in the ownership of a company held by a shareholder. These stockscan pay dividends (shares of profit).- Bond: borrowing in the form of an IOU that pays interest.- Government transfer: payment by the government to individuals for which no good or service is provided in return (Social Security). - Disposable income: total household income minus taxes; available to spend on consumption or to save.- Private savings: disposable income minus consumer spending (disposable income that is not spent on consumption).- Financial markets: the banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing. - Government borrowing: the total amount of funds borrowed by federal, state, and local governments in the financial markets.- Final goods and services: goods and services sold to the final, or end, user.- Intermediate goods and services: goods and services (bought from one firm by another firm) that are inputs for production of final goods and services.XI. Module 11- Interpreting Real Gross Domestic Product In which year did the economy do better? - GDP in 2011: $15,500 billion - GDP in 2012: $17,700 billion - GDP= P*Q (P*Q= market value) - If GDP rises what are the possibilities? o No change in production but prices are highero No change in price but quantity is going up (VERY GOOD) o Or both price and quantity is going up o Price are going up very high but quantity is going down only by a small amountEx: assume economy has only 6 goods, calculate GDPGoods2011 Quantity (a)2011 prices (b)2012 Quantity (c)2012 prices (d)At current prices 2011(a)*(b)At current prices 2012 (c) *(d)Tomatoes1,000 $2 800 $1 $2,000 $800 Laptop 5$100 10 $80 $500 $800 Car 15$500 10$1,000 $7,500 $10,000 Bread 5,000 $1 5,000 $1 $5,000 $5,000 Board Marker400 $1 500 $2 $400$1,000 CD Player20 $5 25 $4 $100 $100 Percentage growth in Nominal GDP - The growth rate of GDP tells us how rapidly the country’s production is rising or falling over time. - Here is the formula for growth rate:2012for rategrowth GDP100GDPGDPGDP201120112012Growth rate of NGDP from 2011 to 2012 is 14.19%- Nominal variables, such as nominal GDP, have not been adjusted for changes in prices.- Real variables, such as real GDP, have been adjusted for changes in prices.- Economists usually are more interested in real GDP because increases in real GDP reflectincreases in the standard of living.- Real GDP: the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year. (reference year) - Nominal GDP: the value of all final goods and services produced in the economy during agiven year, calculated using the prices current in the year in which the output is produced.Ex: - Assume that base year=2011- How much would GDP have gone up if prices had not changed?- To answer this question, we need to find the value of output in year 2012 expressed in year 2011 prices.Goods2011 Quantity(a)2011 Prices(b)2012 Quantity(c)2012 prices (d)At constantprices in 2011 (a)*(b)At constant prices in 2012