GDP (01/30/17)

GDP

(Gross Domestic Product)

It is the total value of all final of goods and services produced within a countries borders within a given year.

GNP

(Gross National Product)

It is the total value of all final goods and services profuced by Americans in a given year.

Formula for GDP

(Expenditure approach)

C+IG+G+Xn

Consumption(C)-  spending 67% of economy. It includes the purchase of final goods and services.

IG(Gross private domestic investment)- 18% of the economy.
- New factory equipment
- Factory equipment maintenance
- Construction of Housing
-Unsold inventury of products

G(Government spending - 17% of the economy. Government purchasing goods and services

Ex: School District buys school buses.

Xn(net exports):( Exports - Imports) - 2% of the economy.

Expenditure approach to GDP
C+Ig+G+Xn( Exports -Income)

Income approach to GDP
W~ Wages( compensation of employees/salaries)
R~ Rents
I ~ Interest
P ~ Profits
+
Statistical Adjustment

IMPORTANT FORMULAS:

Budget Surplus(-) / Deficit(+): government purchases + government transfer payment - government taxes and fee collection

Trade Surplus(+) / Deficit(-): exports - imports

National income: (1)compensation of employees + rental income + interest income + proprietors income + corporate income
(2)GDP - indirect business taxes- depreciation - net foreign factor payment

Disposable Personal Income: national income - personal(household) taxes + government transfer payments

Net Domestic Product: GDP - depreciation

Net National Product: GNP - depreciation

GNP: GDP + net foreign factor payment

Gross Investment: net investment + depreciation 

Depreciation- consumption of final capital. It is the wear and tear of capital equipment.

Nominal vs Real 

     GDP

Nominal GDP - it is the value of output produced in current prices. It can increase from year if either output or price increase.

Real GDP - it is the value of output produced in constant base year prices. It only increases if output increases.

In the base year real GDP and nominal GDP are equal. In years after the base year nominal GDP will exceed the real GDP. In years before the base year real GDP will exceed nominal year.

Example:

Earliest year = base year (if not given)

Nominal GDP 2012 = $15,000 x 10 = $150,000

                                 = $20,000 x 10 = $200,000

                                 = $150,00 + $200,000 = $350,000

Real GDP 2012 = $350,000

Nominal GDP 2012 = $16,000 x 10 = $160,000

                                 = $21,000 x 10 = $210,000

                                 = $160,00 + $210,000 = $370,000

Real GDP 2012 = $350,000

GDP Deflator

It is the price index used to adjust from Nominal to Real GDP.

Formula

Nominal GDP / Real GDP x 100

• In the base year GDP deflator will always equal 100.

• For years after the base year GDP deflator is greater than 100.

• For years before the base year GDP deflator is less than 100.

Practice!!