Unit 2: Topic 2- Gross Domestic Product (GDP)

Gross Domestic Product (GDP)- Total market value of all final goods and services produced within a countries border within a given year.

Gross National Product (GNP)- A measure of what a citizens produce whether they produce these items within it's borders.

What's the difference?

GDP- total market value
final goods and services
within a year
within a countries border

GNP- (ex.) working in Dubai, an american citizen would not be on Dubai's GDP.

What's not included in GDP?

1. Used or "second-hand" goods- trying to avoid double or multiple accounting. (If you buy a a 2005 car in 2018 then only the value of 2005 is valid)
2. Intermediate Goods- these are goods that require further processing before they are ready for final use. (a big mac- the bun, the cheese, the lettuce are all intermediate goods. Things put together to make a product.)
3. Gifts (transfer payment)- public or private. (public- welfare social security, private- scholarship) transfer of money. No output produced. The recipients do not contribute to current production. NO PRODUCTION
4. Unreported Business Activity ("tips")- If you get a tip and don't clock it then no proof to effect the GDP.
5. Illegal Activities- Drugs, prostitution, human trafficking. 
6. Stocks and Bonds- not include in GDP, purely transaction. no output being produced.
7. Non Market Activity- volunteer and family work. (babysitting not an official job)

FORMULA FOR GDP

(Expenditures Approach) GDP= C+Ig+G+Xn
C- Personal Consumption Expenditures- (67% of economy) purchase of finished goods and services. does not include houses. (ex. going to the mall and buying a purse)
I- Gross Private Domestic Investment- new factory equipment, construction of housing, unsold inventory of products built in a year, factory equipment maintenance.
G- Government Spending- Government purchases of goods and services.
Xn- Net Export- (Export- Imports) Export- make money, Imports give money

Formulas for trade and budget

Trade: (exports-imports)

Surplus: positive

Deficit: negative

Budget: government purchases of goods and services + government transferred payments - government tax and fee collections

Budget Deficit = total amount of money that the government borrows in a given year (because total government spending exceeds tax and fee revenue.)

Deficit: positive

Surplus: negative

National Income

Option 1: compensation of employees+ rent + prop income + interest income + corp profit

Option 2: expenditure approach to GDP - indirect business taxes - depreciation (consumption of fixed capitals) - net foreign factor payment

Disposable Personal Income (DPI): national income - household taxes + government transferred payments

Net Domestic Product: GDP- Depreciation

Net National Product: GDP- Depreciation

Gross Private Domestic Investment: Net Private Domestic Investment + Depreciation

Real vs. Nominal GDP

Nominal GDP = value of output produced in current prices. (PxQ)

Real GDP = Value of output produced in constant base year prices (first original year that is being indicated) that is adjusted for inflation. (Base year PxQ)

Nominal GDP can increase from year to year.

Real GDP can increase from year to year only if output increases. (output is quantity)

In the base year the current price is going to be equal to the base year price. (Real GDP = Normal GDP)

In years after the base year, Nominal GDP exceeds real GDP.

In years before the base year, Real GDP exceeds Nominal GDP.

Real GDP: 2-3%

GDP Deflator: nominal/ real x 100

Price index that is used to adjust from Nominal to Real GDP. 

in the base year, the GDP deflator will = 100.

after the base year = greater than 100.

before the base year = less than 100.

Inflation Rate: ((new-old)/old x 100)

CPI: (price of market basket in the particular year/ price of the same market basket in the base year) x 100