GDP M A C R O E C O N O M I C S

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1 GDP M A C R O E C O N O M I C S

2 Gross Domestic Product GDP The market value of all final goods and services produced within a country during a given period of time. Breaking down the definition: 1. Market Value production is measured in dollar terms. 2. Final G&S a product purchased by a final user. Excludes intermediate goods to avoid double counting. 3. Current Production only production that occurs during a specified time period is included (i.e. mo, quarter, year). It is a measurement of national output.

3 What Is Not Counted Pure financial transactions Public transfer payments Underreported legal activities Illegal activities Household production

4 GDP and National Income GDP is an approximate measurement of National Income, since production turns into income. For 2010, GDP was $14,527 trillion and National Income was $12,840 trillion. NI = GDP - Capital Consumption Adjustment - Indirect Business Taxes- Business Transfer Payments + Net Foreign Factor Income + Government Subsidies less Current Surplus of Government Enterprises - Statistical Discrepancy Lets assume that GDP = Y, therefore GDP/capita = income per person.

5 Why Are We Interested in GDP? Typically as GDP grows, especially GDP/capita, the well being of humans also increases. There is a strong connection between economic growth and happiness, health, longevity, infant mortality, education, and opportunity.

6 GDP/Capita As of the second quarter in 2013, GDP/capita = $53,082 in current prices. This included average income of infants and retired people. GDP/worker = $107,199 $115,613, excluding the unemployed As of July 2013, median household income was $52,113 and the mean household income for second quarter of 2013 is $114, Additional information on income distribution

7 Shortcomings as a Measure of Well-Being The value of leisure is not included. Pollution and other negative effects of production are not adjusted for. Crime and other social ills are not adjusted for. GDP measures the size of the pie, but is silent on how it is divided.

8 Does Growth Equal Progress? While GDP, especially GDP/capita is a basic measurement of progress, it is not without criticism. It says nothing about equality, hours worked, personal debt, pension coverage, poverty rates, incarceration rates, environmental impact, CO2 emission, etc.

9 How to Calculate GDP Three methods used to calculate GDP Expenditure Approach Adds up the market value of all domestic expenditures made on final goods and services. Value Added or Production Approach Add up the value of goods at each stage of production in the economy. Income Approach Adds up all the income in the economy; labor, capital, land, and entrepreneurs. We will focus on the expenditure approach, but all three empirical estimations yield similar results.

10 Components of GDP: Expenditure Approach (C) Consumption: expenditure by HHs on final goods and services. (I) Investment: expenditure by firms on new capital along with new housing. (G) Government purchases: expenditure by governments on final goods and services. (Nx) Net exports: (exports imports)

11 Components of GDP In 2012, real GDP was $15,470.7*. Household expenditures were $10,517.6 (68%) with $6,982.7 on services. Investment spending was 2,436.0 (15.7%). Government expenditures on goods and services totaled $2,963.1 ( 19.2%) with $1,742.8 coming from state and local governments. Net exports accounted for (-2.7%) *Numbers are in billions Source: bea.gov

12 Components of GDP: Expenditure Approach In theory, the spending on final goods and services should equal the value of what is produced. GDP = C + I + G + Nx Example: C = $2,000, I = $500, G = $600, and Nx = -$100 GDP =?

13 Real GDP

14 Consumer Oriented Economy Real personal expenditures as a percent of real GDP

15 Investment as a Percentage of GDP

16 Gov t Spending as a Percentage of GDP.

17 Total Gov t Spending as a Percentage of GDP

18 Other Measurements of Total Production GNP Gross National Product A measurement of total production by all national residents. National Income GDP that takes into consideration depreciation and other factors. Personal Income HH income minus corporate profits plus transfer payments. Disposable income Personal income minus taxes

19 Other Measurements of National Well-Being HDI Human development index, which takes into consideration life expectancy, adult literacy rates, and income per person. As of 2012, Norway had the highest HDI while the USA came in third. GPI includes things like the value of volunteer and household production minus the cost of pollution and crime. No new data since World Happiness Report measures life satisfaction and emotional happiness. As of 2013, Denmark ranked first while the USA came in at 17 th.

20 Real v Nominal Since GPD uses market values to measure total production, we must be careful about interpretations over time due to inflation. Nominal GDP The value of final goods and services evaluated at current prices. Real GDP The value of final goods and services evaluated at a base-year price.

21 Real vs. Nominal GDP Assume a two good economy; pizza and cars Year 1 Year 2 P Q P Q Pizza Pizza Car 1, Car 2, Calculate the Real and Nominal GDP for Year 2, using Year 1 as the base year.

22 Growth Rate Calculating (straight line) growth rate GR = X new Xold X old * 100 From the previous example, the nominal growth rate would equal 22,000 11,000 11,000 * 100 = 100; The economy doubled! The real growth rate would equal 11,000 11,000 11,000 * 100 = 0; In real terms, the economy did not grow.

23 GDP Implicit Price Deflator GDP deflator A measurement of the price level (i.e. inflation), calculated by: GDP Deflator = Nominal GDP Real GDP * 100 Real GDP uses prices for an arbitrary base year. The arbitrary base year is 2009 = 100. E.g. If the GDP deflator is for April 2013, then prices increased by 6.3% since On average, the 2009 dollar could buy (6.3/100) or 6.3% more than the April 2013 dollar. The GDP deflator in 1960 was 17.5 On average, the 1960 dollar could buy (100/17.5) or 5.7 times as many goods as the 2009 dollar.

24 GDP Implicit Price Deflator GDP deflator 2011 = 15,534 15,052 GDP deflator 2012 = 16,245 15,471 * 100 = 103 * 100 = 105 Inflation rate between the years of * 100 = 1.9% Nominal GDP 15,534 billion 16,245 billion Real GDP 15,052 billion 15,471 billion

25 GDP Deflator

26 GDP Deflator Percentage Change from Year Ago

27 BEA Press Release Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.