is very usefull

1. Gross Domestic Product
BBA(Hons)
5th M

2. Measuring a Nation’s Income
• Microeconomics
 Microeconomics is the study of how individual
households and firms make decisions and how
they interact with one another in markets.
• Macroeconomics
 Macroeconomics is the study of the economy as a
whole.
 Its goal is to explain the economic changes that
affect many households, firms, and markets at
once.

3. Measuring a Nation’s Income
• Macroeconomics answers questions like the
following:
 Why is average income high in some countries and
low in others?
 Why do prices rise rapidly in some time periods
while they are more stable in others?
 Why do production and employment expand in
some years and contract in others?

4. THE ECONOMY’S INCOME AND
EXPENDITURE
• When judging whether the economy is doing
well or poorly, it is natural to look at the total
income that everyone in the economy is
earning.
• For an economy as a whole, income must
equal expenditure because:
 Every transaction has a buyer and a seller.
 Every dollar of spending by some buyer is a dollar
of income for some seller.

5. Gross Domestic Product (GDP)
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• It is the total market value of all final goods
and services produced within a country in a
given period of time.
• GDP does not include the value of
intermediate goods. Intermediate goods are
goods used in the production of final goods
and services

6. Figure 1 The Circular-Flow Diagram
Spending
Goods and
services
bought
Revenue
Goods
and services
sold
Labor, land,
and capital
Income
= Flow of inputs
and outputs
= Flow of dollars
Factors of
production
Wages, rent,
and profit
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
•Buy and consume
goods and services
•Own and sell factors
of production
HOUSEHOLDS
•Households sell
•Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
•Firms sell
•Households buy
MARKETS
FOR
GOODS AND SERVICES

7. THE COMPONENTS OF GDP
• GDP includes all items produced in the
economy and sold legally in markets.
• What Is Not Counted in GDP?
 GDP excludes most items that are produced and
consumed at home and that never enter the
marketplace.
 It excludes items produced and sold illicitly, such
as illegal drugs.

8. THE COMPONENTS OF GDP
• GDP (Y) is the sum of the following:
 Consumption (C)
 Investment (I)
 Government Purchases (G)
 Net Exports (NX)
Y = C + I + G + NX

9. THE COMPONENTS OF GDP
• Consumption (C):
 The spending by households on goods and
services, with the exception of purchases of new
housing.
• Investment (I):
 The spending on capital equipment, inventories,
and structures, including new housing.

10. THE COMPONENTS OF GDP
• Government Purchases (G):
 The spending on goods and services by local,
state, and federal governments.
 Does not include transfer payments because they
are not made in exchange for currently produced
goods or services.
• Net Exports (NX):
 Exports minus imports.

11. Calculating GDP
• The Expenditure Approach
 The expenditure approach totals annual
expenditures on four categories of final goods or
services.
 Consumer Goods and Services
 Business Goods and Services
 Government Goods and Services
 Net Exports or imports of Goods and services

12. Calculating GDP
• The Income Approach
 The income approach calculates GDP by adding up
all the incomes in the economy.
• Consumer goods include durable goods, goods
that last for a relatively long time like
refrigerators, and nondurable goods, or goods
that last a short period of time, like food and
light bulbs

13. REAL VERSUS NOMINAL GDP
• Nominal GDP values the production of goods
and services at current prices.
• Real GDP values the production of goods and
services at constant prices.
• An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.

14. GDP DEFLATOR
• The GDP deflator is a measure of the price
level calculated as the ratio of nominal GDP to
real GDP times 100.
• It tells us the rise in nominal GDP that is
attributable to a rise in prices rather than a
rise in the quantities produced.

15. GDP DEFLATOR
• The GDP deflator is calculated as follows:
GDP deflator =
Nominal GDP
Real GDP
100

16. GDP DEFLATOR
• Converting Nominal GDP to Real GDP
 Nominal GDP is converted to real GDP as follows:
Real GDP
Nominal GDP
GDP deflator
20XX
20XX
20XX
 100

17. GDP AND ECONOMIC WELL-BEING
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the happiness
or quality of life, however.

18. GDP AND ECONOMIC WELL-BEING
• Some things that contribute to well-being are
not included in GDP.
 The value of leisure.
 The value of a clean environment.
 The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.

19. Limitation of GDP
• GDP does not take into account certain economic
activities, such as:
Nonmarket Activities
o GDP does not measure goods and services that
people make or do themselves, such as caring for
children, mowing lawns, or cooking dinner.
Negative Externalities
o Unintended economic side effects, such as
pollution, have a monetary value that is often not
reflected in GDP.

20. Limitation of GDP
The Underground Economy
o There is much economic activity which, although
income is generated, never reported to the
government. Examples include black market
transactions and "under the table" wages.
Quality of Life
o Although GDP is often used as a quality of life
measurement, there are factors not covered by it.
These include leisure time, pleasant surroundings,
and personal safety

21. Factors Influencing GDP
Aggregate Supply
• Aggregate supply is the
total amount of goods and
services in the economy
available at all possible
price levels.
• As price levels rise,
aggregate supply rises and
real GDP increases.
Aggregate Demand
• Aggregate demand is the
amount of goods and
services that will be
purchased at all possible
price levels.
• Lower price levels will
increase aggregate
demand as consumers’
purchasing power
increases.
Aggregate Supply/Aggregate
Demand Equilibrium
By combining
aggregate supply
curves and aggregate
demand curves,
equilibrium for the
macroeconomy can be
determined.

22. Growth Rate of GDP
• The GDP growth rate measures how fast the
economy is growing.
• It does this by comparing one quarter of the
country's economic output (Gross Domestic
Product) to the last.
• The GDP growth rate is driven by the four
components of GDP.

23. Growth Rate of GDP
• GDP growth is personal consumption, which
includes retail sales. GDP growth is also driven
by business investment, which includes
construction and inventory levels.
• Government spending is another driver of
growth, and is sometimes necessary to
jumpstart the economy after a recession.

24. Growth Rate of GDP
• Last, but not least, are exports and imports.
Exports drive growth, but increases in imports
have a negative impact.

25. Per Capita GDP
• A measure of the total output of a country that takes
the gross domestic product (GDP) and divides it by
the number of people in the country.
• The per capita GDP is especially useful when
comparing one country to another because it shows
the relative performance of the countries.

26. Growth and Development
• Economic growth is the increase of a nation’s
real output (GDP).
• Results from:
 Greater quantities of natural resources, human
resources, and capital,
 Improvements in the quality of resources, and
 Technological advances that boost productivity.

27. Growth and Development
• Economic development is the process by
which a nation enhances its standard of living
over time.
• The economic standard of living is often
defined as GDP per capita.