M4L2 GDP and GNP

Resource

Market value the amount of money people have paid for goods and services they have received

Production process

the steps used in the making or manufacturing of a good or service

Gross national product (GNP)

the market value of all final goods produced by a country's permanent residents in a given period of time

Foreign nationals

people living in a country who do not have the right to permanent residency status

U.S. nationals people living in the country who have permanent resident status, either as a citizen born in the country or acquired citizenship from the government (naturalization)

Nominal gross domestic product (nom GDP)

measures output in terms of actual dollar amount

Real gross domestic product (real GDP)

measures output in terms of physical goods and services

Base year a specific year used as a means of comparison for goods and services produced

Physical output the actual amount of product or services produced over a specific period of time

GDP deflator the measure of the average price level relative to the base year

(nom GDP / real GDP) x 100

Investment spending

expenditures associated with business, other than for human resources (wages, benefits, etc.)

Lecture 1

GDP

GDP vs. GNP

the market value of all final goods and services produced within a country in a given period of time

the market value GDP is in terms of money ($)

of all legally transacted trades the government relies on reports to ensure that this includes all transactions does not cover goods and services on the black market (those transactions not reported to the government)

NB. the black market entails services as innocuous as mowing the lawn or not reporting all of a persons tips to something as illegal as prostitution or drug dealing. All the black market means is that there is no report of it to the government so it is an unknown market.

final goods and services purchased by households for consumption; they are not used as capital

final goods are used to avoid double counting

for example, a car frame that is sold is not included in GDP because it is not a final good, it is an intermediate good; when the car that the frame went to is sold, the price of the car is included in GDP and it is assumed that the price of the car frame is included in the overall price of the car

goods and services things and actions people do for money, e.g., haircuts, lawn care, etc.

produced only things made in the current year; secondhand transactions do not count

within a country all activity within the political borders of a country regardless of the nationalities of the actors

GDP within a country (all peoples) GNP only those countrys nationals, regardless of their

locations in the world

in a given period of time usually one year

nominal GDP the GDP as measured in terms of money

real GDP the GDP as measured in terms of the actual products and services produced; the amount of stuff were actually making

it seeks to hold constant the effects of changes in price to measure the amount of real goods and services produced

example of distinction

calculating nominal GDP

nom GDP 2000 = ($1.00 x 2) + ($2.00 x 3) = $2.00 + $6.00 nom GDP 2001 = ($1.50 x 4) + ($2.50 x 4) = $6.00 + $10.00 nom GDP 2002 = ($2.00 x 5) + ($3.00 x 5) = $10.00 + $15.00

calculating real GDP (holding price constant)

Using year 2000s prices as base price

real GDP 2001 = ($1.00 x 4) + ($2.00 x 4) = $4.00 + $8.00 real GDP 2002 = ($1.00 x 5) + ($2.00 x 5) = $5.00 + $10.00

real GDP is used to measure actual changes in production

Apples Bananas Year $ # $ # Nominal

GDP 2000 $1.00 2 $2.00 3 $8.00 2001 $1.50 4 $2.50 4 $16.00 2002 $2.00 5 $3.00 5 $25.00

Apples Bananas Year $ # $ # Real GDP

2000 $1.00 2 $2.00 3 $8.00 2001 $1.00 4 $2.00 4 $12.00 2002 $1.00 5 $2.00 5 $15.00

GDP deflator (nom GDP / real GDP) x 100

GDP deflator 2001 = ($16 / $12) x 100 = 1.33 x 100 GDP deflator 2002 = ($25 / $15) x 100 = 1.66 x 100

Year nom GDP real GDP GDP deflator 2001 $16.00 $12.00 133 2002 $25.00 $15.00 166

The GDP deflator is one of the methods to measure how much prices have gone up (inflation) or down (deflation), and how quickly the prices are changing over time

Since GDP deflator = (nom GDP / real GDP) x 100, then we can find the real GDP using the GDP deflator: real GDP = (nom GDP/ GDP deflator) x 100

Lecture 2

Expenditures Approach

All transactions involve a buyer (demand) and a seller (supply)

A buyer spends money in exchange for goods and services from the seller.

The seller receives income from the buyers expenditures.

Two ways to measure GDP

1. Add up all spending in an economy (expenditures approach)

2. Add up all income in an economy (income approach)

Spending = Income (remember the circular flow model)

Components of total spending in an economy (Y)

Component Variable Definition % of 1999 GDP

Households C Consumption/consumer spending 68%*

Businesses I Investment spending 17%

Government G Often acts as a policy

variable to either stimulate the economy or to rein it in

17%

Net exports Xn Exports imports = Xn -3%

*Consumer spending is usually around of GDP

Yn = C + I + G + Xn (nominal GDP = Consumer spending + Business investment + Government spending + Net exports)

Yr = Yn / GDP deflator real GPD = nominal GDP divided by the GDP deflator

1998 US GDP By sectors:

1.2% agriculture (grows stuff) 19.2% industry (makes stuff) 79.6% services (does stuff)

If there were only 100 people in the US, 1 person would grow all the food they ate, 19 people would make all the things they use, and 80 people would help others do things, producing nothing (of economic importance)