Measuring GDP & Economic Growth, Macroeconomics, GDP Chapter

1. Measuring GDP and Economic
Growth

2. Gross Domestic Product
GDP Defined:
GDP or gross domestic product, is the market
value of all final goods and services produced
within a country in a given time period.

3. THE MEASUREMENT OF
GROSS DOMESTIC PRODUCT
 “GDP is the Market Value . . .”
 Output is valued at market prices.
 “. . . Of All Final . . .”
 It records only the value of final goods, not
intermediate goods (the value is counted only
once).
 Hallmark Card: Paper is an intermediate good.
 “. . . Goods and Services . . . “
 It includes both tangible goods (food, clothing,
cars) and intangible services (haircuts,
housecleaning, doctor visits).

4. THE MEASUREMENT OF
GROSS DOMESTIC PRODUCT
 “. . . Produced . . .”
 It includes goods and services currently
produced, not transactions involving goods
produced in the past.
 “ . . . Within a Country . . .”
 It measures the value of production within the
geographic confines of a country.

5. THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
 “. . . In a Given Period of Time.”
 It measures the value of production that takes
place within a specific interval of time, usually a
year or a quarter.
 GDP includes all items produced in the
economy and sold legally in markets.

6. Measuring Country’s GDP
Two approaches to measure GDP:
 The expenditure approach
 The income approach

7. Measuring GDP
The Expenditure Approach
The expenditure approach measures GDP as
the sum of consumption expenditure, investment,
government expenditures on goods and services,
and net exports.
GDP = C + I + G + X  M

8. Components of Expenditure approach
Personal consumption expenditures (C) includes purchases for durable
consumer goods, which are goods that have an expected lifetime exceeding
1 year, such as automobiles, household appliances, and electronic
equipment; nondurable consumer goods are goods with an expected lifetime
of 1 year or less, such as food and toiletries, and consumer expenditures
for services, such as for doctors, dentists etc. Used goods are not included in
the calculation of GDP.
Gross private domestic investment (I) includes all final purchases of
machinery, equipment, and tools by businesses; all construction; plus
changes in inventories. Investment includes residential construction, since
residential buildings can be rented out, even if they are occupied by owners.
Owner occupied residences have an imputed rent, which is added to GDP,
even though the homes are not actually rented out. The treatment of
inventories depends on if the goods are stored or if they spoil. If the goods
are stored, their value is included in GDP. If they spoil, GDP remains
unchanged. When the goods are finally sold out of inventory, they are
considered used goods (and are not counted).

9. Components of Expenditure approach
 Government purchases include goods and services
that the government uses to provide public services
and expenditures for social capital, such as for
schools and highways. Government purchases
include purchases made by all government entities,
including federal, state, and local governments.
However, it does not include transfer payments, such
as the payment of Social Security or welfare benefits.
 Net exports is simply equal to exports minus imports,
which is often represented by the symbol X. Note that
when the value of imports exceeds the value of
exports, then net exports is negative, and is
subtracted from the GDP.

10. The expenditure Approach

11. Measuring GDP
The Income Approach
The income approach measures GDP by
summing the incomes that firms pay
households for the services of the factors of
production they hire—wages for labor, interest
for capital, rent for land, and profit for
entrepreneurship.

12. The Income approach to measure
GDP
The National Income and Product Accounts divide
incomes into two big categories:
1. Compensation of employees
2. Net operating surplus
Compensation of employees is the payment for
labor services. It includes net wages and salaries
(called “take-home pay”) that workers receive plus
taxes withheld on earnings plus fringe benefits such
as Social Security and pension fund contributions.
Net operating surplus is the sum of all other factor
incomes. It has four components: net interest,
rental income, corporate profits, and proprietors’
income.

13. The Income approach to measure
GDP
 Net interest is the interest households receive on loans they make
minus the interest households pay on their own borrowing.
 Rental income is the payment for the use of land and other rented
resources.
 Corporate profits are the profits of corporations, some of which are
paid to households in the form of dividends and some of which are
retained by corporations as undistributed profits. They are all
income.
 Proprietors’ income is the income earned by the owner-operator of
a business, which includes compensation for the owner’s labor, the
use of the owner’s capital, and profit.
 Adding all of these will give us Net domestic income at factor
cost.
 Indirect taxes less subsidies will allow us to calculate Net domestic
income at market prices
 Finally adding Depreciation and Statistical discrepancy will give us
GDP using income approach

14. Income and Expenditure approach
to measure GDP

15. Nominal and Real GDP
 This increase in GDP is a combination of an
increase in production and a rise in prices.
 To isolate the increase in production from the
rise in prices, we distinguish between real
GDP and nominal GDP.

16. Nominal and Real GDP


17. Rules for Computing GDP

18. Measuring Economic Growth
We use real GDP to calculate the economic
growth rate.
The economic growth rate is the percentage
change in the quantity of goods and services
produced from one year to the next.
We measure economic growth so we can make:
 Economic welfare comparisons
 International comparisons
 Business cycle forecasts

19. Do GDP really measure Economic
Growth?
Real GDP is not a perfect measure of economic
welfare for seven reasons:
1. Quality improvements tend to be neglected in
calculating real GDP, so the inflation rate is
overestimated and real GDP is underestimated.
2. Real GDP does not include household
production—productive activities done in and
around the house by members of the household.

20. Measuring Economic Growth
3. Real GDP, as measured, omits the
underground economy, which is illegal economic
activity or legal economic activity that goes
unreported for tax avoidance reasons.
4. Health and life expectancy are not directly
included in real GDP.
5. Leisure time, a valuable component of an
individual’s welfare, is not included in real GDP.
6. Environmental damage is not deducted from
real GDP.
7. Political freedom and social justice are not
included in real GDP.