Measuring National Output and National Income. Gross Domestic Product (GDP) Calculating GDP. Gross National Product (GNP) Expenditure Approach

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1 Measurg National Output and National Income Chapter 7 Gross Domestic Product (GDP) GDP is the market value of all fal goods and services produced with a given period by factors of production located with a country. 1 2 Gross National Product (GNP) Calculatg GDP The total market value of all fal goods and services produced with a given period by factors of production owned by a country s residents, regardless of where the output is produced. The expenditure approach is a method of computg GDP that measures the amount spent on all fal goods durg a given period. The come approach is a method of computg GDP that measures the come - wages, rents and profits - received by all factors of production producg fal goods. 3 4 Expenditure Approach Consumption (C) GDP = C + I + G + (EX - IM) Consumption or personal consumption expenditures is the largest component of GDP. It is comprised of expenditures by consumers on: Durable goods: goods that last a relatively long time Semidurable goods: goods like clothg that last longer than nondurables but not as long as durables Nondurable goods: goods which are perishable Services: goods which do not volve the production of physical thgs

2 Investment (I) Investment or gross private vestment is comprised of private sector spendg on new capital. It has two components: Fixed capital formation which is the vestment durable capital assets, such as machery or housg. Change busess ventories which is simply the amount by which firms ventories change durg a period. Inventories are goods produced now to sell later. Gross Investment Versus Net Investment Depreciation is the amount by which an asset s value falls a given period. Gross vestment is the total value of all newly produced capital goods (plant, equipment, housg and ventory) produced a given period. Net vestment is simply gross vestment mus depreciation. Net domestic product is GDP mus depreciation 7 8 Government Purchases (G) Net Exports (EX-IM) Expenditures by federal, provcial and local governments for fal goods and services. Does not clude transfer payments (such as welfare payments or senior s benefits) or payment on the national debt, because they are not payments for goods or services. Net exports are the difference between exports (sales to foreigners of Canadian-produced goods and services) and imports (Canadian purchases of goods and services from abroad). The Figure can be positive or negative Income Approach Net Domestic Income A method of computg GDP that measures the comes - wages, rents, terest, and profits - received by all factors of production producg fal goods. Consists of three components: Net domestic come Depreciation (capital consumption) Indirect taxes less subsidies Net domestic come is the total come earned by the factors of production located a country. It is the sum of six items: Labour come is the wages, salaries and frge benefits paid to households by firms or government. Corporate profits are the come of corporate busesses (dividends and retaed earngs) Interest come is the difference between terest households receive and the terest they pay out

3 Net Domestic Income (Cont.) Depreciation Farm come is the come earned by farms Uncorporated busess come is come earned by uncorporated busesses (also cludes most rental come). Inventory valuation adjustment is the crease the value of ventories durg the year, subtracted the calculation of net domestic come because it is cluded profits, but does not correspond to new production. Depreciation is the decle value of capital assets as they wear out or become obsolete. Depreciation is added to the net domestic come when we calculate GDP by the come approach because come results the replacement of existg plants and equipment Indirect Taxes Less Subsidies Components of GDP by Income and Expenditure Approach (Figure 7.1) Indirect Taxes: sales taxes, custom duties, license fees, etc. Subsidies: payments made by the government for which it receives no goods or services return Net National Income Personal Income (PI) Net domestic come plus vestment come from nonresidents mus vestment come to nonresidents. The total come of households, calculated as net national come plus transfers to households less retaed earngs

4 Personal Disposable Income (PDI) Personal Savgs and the Savgs Rate Personal disposable come is simply personal come mus personal taxes. PDI = PI - personal come taxes Personal savg is the amount of disposable come that is left after total personal spendg a given period. Personal savg rate is the percentage of personal disposable come that is saved. If the personal savg rate is low, households are spendg a large amount relative to their comes; if it is high households are spendg cautiously Nomal GDP Real GDP Nomal GDP is GDP measured current dollars Current dollars: the current prices that one pays for goods and services Real GDP is a measure of GDP that removes the effects of price changes from changes nomal GDP. This allows us to measure real output growth by isolatg the effect of prices. A base year is the year which provides reference values. For example the calculation of real GDP, the year which provides the prices that are used to value the outputs of all other years Calculatg Real GDP - A Three-Good Economy (from Table 7.4) Production Price per Unit P1*Q1 P2*Q2 P1*Q2 Q1 Q2 P1 P2 Pizza $10 $20 $100 $300 $150 Sunglasses 5 6 $50 $60 $250 $360 $300 GDP Deflator The GDP deflator is the current dollar (nomal) GDP divided by constant dollar (real) GDP, converted to a percentage by multiplyg by 100. Also called the GDP implicit price deflator or the GDP price dex. GDP deflator = Nomal GDP/Real GDP * 100 T-Shirts $15 $14 $150 $140 $150 Total $500 $800 $

5 Consumer Price Index (CPI) Calculatg CPI (Table 7.5) The CPI is a price dex calculated every month usg the price of a standardized bundle of goods meant to represent the consumption of the average consumer. A fixed-weight price dex is a price dex calculated by pricg the same bundle of goods each period. CPI = $640/$500 * 100 = 128 CPI = $500/$500 * 100 = 100 Percentage change from to = ( )/100=28% Limitations of the GDP Concept Review Terms & Concepts Social Welfare Increases crime, poverty etc. not reflected GDP. Underground Economy The part of the economy which transactions take place and which come is generated that is not reported and therefore not counted GDP. Per Capita GDP/GNP A country s GDP or GNP divided by its population. 27 base year change busess ventories consumer price dex(cpi) corporate profits current dollars depreciation durable goods 28 expenditure approach farm come fal goods & services fixed capital formation fixed-weight price dex GDP deflator government purchases gross domestic product (GDP) gross vestment Review Terms & Concepts (cont.) Review Terms & Concepts (cont.) gross national product (GNP) gross private vestment come approach dex direct taxes terest come termediate goods 29 ventory valuation adjustment labour come national come and expenditure accounts net exports net vestment net National Income nomal GDP nondurable goods per capita GDP or GNP personal consumption expenditures personal disposable come personal come personal savg personal savg rate real GDP 30 semidurable goods services subsidies underground economy uncorporated busess come value added weight 45