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Gross Domestic Product

The Circular Flow Model

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor

Firms

Households

Goods / Services Product Markets Revenue

Goods / Services Consumer spending

Gross Domestic Product

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor

Gross Domestic Product: The total market value of all final goods and services produced Firms Households within a nation in a given period of time.

Goods / Services Product Markets GDP Revenue

Goods / Services Consumer spending

total market value

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor

total market value


The money value of goods and services at Firms Households todays prices. Also known as current or nominal GDP. Goods / Goods / Services Services Product Markets GDP Revenue Consumer spending

final goods and services

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor

final goods and services


Firms In the hands of the end user. Households Avoids double counting. Goods / Services Product Markets GDP Revenue Consumer spending Goods / Services

within a nation

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor within a nation

Production within the geographic confines Firms Households of a country.

Goods / Services Product Markets GDP Revenue

Goods / Services Consumer spending

Gross Domestic Product

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor

Gross Domestic Product: The total market value of all final goods and services produced Firms Households within a nation in a given period of time.

Goods / Services Product Markets GDP Revenue

Goods / Services Consumer spending

Calculating GDP The Expenditure Approach

Consumption Spending

Business expenses Factor Markets

Income

The Components of GDP

Labor

GDP = C

Labor

Firms

Households

Goods / Services Product Markets GDP Revenue

Goods / Services Consumer spending

Investment Spending

Business expenses

Income Factor Markets GDP =C+ I Labor

The Components of GDP

Labor

Loans Firms Investment spending Goods / Services Financial Markets

Save Households

Goods / Services Product Markets GDP Consumer spending

Revenue

Government Spending

Business expenses

Income

The Components of GDP

Labor

GDP = C + I + G

Factor Markets Labor

Firms Investment spending Goods / Services Revenue

Financial Markets Govt. Govt spending Product Markets GDP

Households

Goods / Services Consumer spending

Net Exports

Firms

Households
Govt. Govt. spending Product Markets GDP Goods / Services

The Components of GDP

Investment spending Goods / Services Revenue

X-M
Exports (+) Imports (-)

Consumer spending

GDP = C + I + G + (X - M)

Summary

Firms

Households

The Components of GDP

Govt.

Product Markets GDP

X-M
Exports (+) Imports (-)

GDP = C + I + G + (X - M)

Measuring GDP The Income Approach

The Income Approach

The income approach adds all incomes earned by households.

The income approach and the expenditure approach yield identical GDP measures.

Business expenses Factor Markets

Income Labor

Gross Domestic Product

Labor

Firms

Households

Goods / Services Product Markets Revenue

Goods / Services Consumer spending

Expenditures

Income
Compensation + Rents + Profits + Net interest + Depreciation + Indirect Business Taxes

The Income Approach

Consumption

= GDP =
Investment

+
Government

+
Net exports

Other National Accounts

Other National Accounts

Other National Accounts


Net Domestic Product National Income

Personal Income Disposable Income

Net Domestic Product

Net Domestic Product

Net Domestic Product = GDP - depreciation

A truer picture of net new production.

Business expenses Factor Markets

Income Labor

The Components of GDP

Labor NDP

(-) Depreciation

Firms

Govt.

Households

Goods / Services GDP Product Markets Revenue

Goods / Services Consumer spending

National Income

National Income

NI = NDP - indirect business taxes

ex. sales taxes Not income payments to households

The total income earned by households.

(-) Indirect Business business expenses

taxes

NI Factor Markets

Income Labor

The Components of GDP

Labor NDP

(-) Depreciation

Firms

Govt.

Households

Goods / Services GDP Product Markets Revenue

Goods / Services Consumer spending

Personal Income

Personal Income = NI Stockholders may not receive all available corporate profits. - corporate profits - soc. sec. contributions Payroll taxes + transfer payments + net interest + dividends

Social security A portion is paid as payments from govt. corporate taxes, retained earnings Personal Income measures:

Personal Income

the total money actually received by households. the amount of income available for consumption, saving, and paying taxes.

(-) Indirect Business business expenses

taxes

The Components of GDP

Labor NDP

(-) Soc. Sec. taxes (+) Transer Income NI payments Factor Markets (-) Corporate taxes (+) Net Interest Labor

PI

(-) Depreciation

Firms

Govt.

Households

Goods / Services GDP Product Markets Revenue

Goods / Services Consumer spending

Disposable Income

Disposable Income = PI - Personal taxes

Disposable Income

Income taxes Property taxes Inheritance taxes Disposable Income measures the amount that households have left to spend or save after paying taxes.

(-) Indirect Business business expenses

taxes

The Components of GDP

Labor NDP

(-) Soc. Sec. taxes (+) Transer Income NI payments Factor Markets (-) Corporate taxes (+) Net Interest Labor

PI
(-) Personal taxes

(-) Depreciation

Firms

Govt.

Households DI

Goods / Services GDP Product Markets Revenue

Goods / Services Consumer spending

National Income (NI):

income earned by households

Summay

Personal Income (PI):

income received by households

Disposable Income (DI): after-tax income


available for spending and saving

Changing Nominal GDP to Real GDP

Recall the definition of GDP. . .


Real vs . Nominal GDP

Gross Domestic Product: The total


market value of all final goods and

services produced within a nation


in a given period of time.

Note: GDP = P x y

Suppose GDP rises from one year to the next:

Real vs . Nominal GDP

1.

GDP = P

Production increases, prices remain constant.

2.

GDP = P

Price increases, production remains constant.

3.

GDP = P

Price increases, production increases.

Definitions: Real GDP vs. Nominal GDP

Real vs . Nominal GDP

REAL GDP: production valued at constant prices.

NOMINAL GDP: production valued at current prices.

Real GDP or Nominal GDP ?

Suppose GDP rises from one year to the next:

Real vs . Nominal GDP

1.

GDP = P

Real

Production increases, prices remain constant.

2.

GDP = P

Nominal

Prices increases, production remains constant.

3.

GDP = P

Nominal

Prices increases, production increases.

Real vs . Nominal GDP

Objective: Economists want a measure of GDP that is not distorted by price changes.

Why?

Example

Determine Real GDP for 1998 based on 1997 prices:

Real vs . Nominal GDP

Nominal GDP 1997

Nominal GDP 1998

GDP = P

GDP = P

Rs10.00 = 5

Rs18.00 = 6

Real GDP 1998 = P 1997 x y 1998 Rs15.00 =

Real vs . Nominal GDP

Compare:

Nominal GDP 1998 = Rs.18.00


Real GDP 1998 = Rs.15.00

Nominal GDP is ...

Real vs . Nominal GDP

overstated during periods of rising prices

. . . and . . .

understated during periods of falling prices.

The End

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