The Gross Domestic Product. September 20, 2009

Transcription

1 The Gross Domestic Product September 20, 2009

2 Definition 1 GDP: the value of goods and services produced in the domestic economy over a given period of time. Domestic Economy: factors of production (human and nonhuman) located on domestic soil as distinct from National Economy: factors of production (human and nonhuman) owned by citizens replace domestic with national in definition above and get GNP

3 Value: a measurement criterion e.g., measured in dollars at current market prices (the nominal GDP) properly, value-added only (intermediate goods and services excluded) Time: a measurement criterion e.g., per month, per quarter, per annum In a nutshell: GDP is a measure of the flow of goods and services produced (output, for short) flow as distinct from stock (think of your bathtub)

4 Definition 2 Capital: an existing stock of goods sometimes called physical capital (as distinguished from financial capital or human capital) a factor of production; or inventory Definition 3 Capital consumption: the value of capital destroyed in the process of production or storage also referred to as capital depreciation the term gross in GDP refers to production gross of capital consumption

5 Output is frequently classified as either consumption or investment... Definition 4 Consumer goods and services: output that is destroyed for the purpose of augmenting current material living standards Definition 5 Investment goods and services: output that is used to augment the future stock of capital since capital is a factor or production, and since investment augments future capital, it follows that investment today expands future production consumer goods augment material living standards in current period; investment in future periods (suggests an intertemporal trade-off)

6 How the GDP is Calculated Expenditure Approach: total spending on all domestically-produced final goods and services Basic idea is that all production is sold Therefore, to compute the value of production, just count up the value of sales Note: unsold goods are counted as a purchases of inventory (investment)

7 Note: many goods and services are not sold; so expenditure is sometimes imputed; e.g., expenditure on shelter provided by owner-occupied housing expenditure on government-produced services that are provided for free If ( ) is quantity of output produced during period and ( ) is price; then expenditure-based GDP is X ( ) ( )

8 Dividing GDE by Sectors and Product Classes No unique way of doing this, but traditionally Sectors: [1] Household, [2] Business, [3] Government, [4] Foreign Product classes: [1] Consumption, [2] Investment Traditional (but not the most logical) way to decompose GDE is [ ] note: imports ( ) subtracted off because all include expenditure on imports

9 Income Approach: total income generated by all domestic factors of production Basic idea is that every expenditure constitutes income for someone on the othersideofthetransaction Therefore, to compute the value of production, just count up the income that is derived from its production and sale If ( ) is quantity of domestic input used in production at date and ( ) is input price, then income-based GDP is X ( ) ( )

10 Note: income does not include taxes or transfers Note: income measure sometimes used to impute expenditure; e.g., if ( ) is shelter from owner-occupied home, then use observed rental price ( ) on similar unit to impute expenditure ( ) ( ) if ( ) is government worker providing a free service and ( ) is wage, then assume that ( ) ( ) is the value of what is produced and purchased

11 The Income-Expenditure Identity Let Then using the fact that we have where (net exports) Note: this is not theory; it is simply accounting In particular, while the identity is true (by definition), it does not imply any causal relationship between the measured variables

12 NominalvsRealGDP Nominal GDP isgdpmeasuredincurrentprices(statedinunitsofcurrency); e.g., X ( ) ( ) Real GDP is GDP measured in base-year prices (stated in units of currency); e.g., X ( ) ( ) where is an arbitrary base-year GDP deflator (a measure of the price-level) is

13 Real Per Capita GDP Since GDP is equivalent to income, a measure of average income Used as a broad measure of material living standards (consumption is arguably a better measure) Use caution in making cross-country comparisons measured GDP in LDC understated (home production not counted in GDP)

14 Data Large and persistent differences in real per capita GDP across countries Output tends to grow over time (roughly 2% per annum over the last 100 years in developed economies) Some LDCs display rapid periods of growth for decades (recently, China and India); while others lag behind (Zimbabwe, N. Korea) Pattern of development is uneven, especially in short-run (business cycles) Some disagreement on long-term (growth) patterns; much more disagreement on short-term (business cycle) patterns