#### Transcript GDP

GDP and Its Discontents
• Ebook: Peter Kennedy Macroeconomic
Essentials: Understanding Economics in the
News
Quantity Aggregates
• To understand the macroeconomy, we need to
measure it.
Chief measure of economy is the level of
production
• We need to combine the many goods produced or
consumed in an economy into one measure.
+
+
+
+
=?
All goods sold in an economy
share a common unit of
measure: the price at which
they are sold.
Sum up
the value
of goods
Gross Domestic Product (GDP)
• GDP is the sum of the value of new, final
goods produced within the domestic borders
of an economy.
Final goods are goods
sold to their end-users
GDP does not include:
• Intermediate goods which are sold from
one firm to another for immediate
transformation into other goods.
• financial transactions like buying stocks.
• purchases of used goods which have
been sold before.
• goods produced overseas by domestic
firms.
Three Methods for Calculating GDP
1. Production Method - The value added
created in all the sectors of the economy.
2. Expenditure Method - The sum of the
domestic spending on final goods (less
domestic demand satisfied by imports).
3. Income Method – The Wage, Rent,
Interest and Profit Income generated by
the domestic economy.
Production Method
• At the plant level, Value added =
Sales + Change in inventories
- materials, intermediate inputs and energy costs.
• Value added at the firm level is directly taxed
in the EU (VAT)
• GDP is the sum of VA across establishments.
• The value of a final good is equal to the value
added at each stage of production.
Hong Kong Census and Statistics
Landlord
Community Services
FIREBS
Transport & Communication
Construction
Utilities
20.00%
Manufacturing
25.00%
Mining
30.00%
Share of GDP
Agriculture and Fishing
Hong Kong Industries
15.00%
10.00%
5.00%
0.00%
2008
1980
Expenditure Method
C
+
I
+
G
+
Consumption
Consumer durables, nondurables, services
Investment
Structures (incl. Residential),
Equipment, and Inventory
Government Government Spending on
Consumption Goods, Services, and Salaries.
X EXports
Goods & Services Shipped
IM IMports
=
A + NX = (C + I + G) + (X – IM)
GDP
Japanese Expenditure
Fiscal Year
(Billion Yen)
2003
Items
Actual final consumption of households [C]
Government actual final consumption [G]
Gross domestic fixed capital formation [I]
Of which intangible fixed assets
Changes in inventories
Exports of goods and services [X]
(less) Imports of goods and services
332,970.6
38,578.9
120,238.8
10,810.2
270.0
60,375.7
(51,180.5)
66.43%
Gross domestic expenditure
501,253.5
100.00%
(cf) Incomes from the rest of the world
(less) Income to the rest of the world
Gross national income
12,787.4
4,001.1
510,039.8
7.70%
23.99%
2.16%
0.05%
12.04%
10.21%
Expenditure Categories in Hong Kong:
2008
Hong Kong Expenditure
250.00%
200.00%
150.00%
100.00%
50.00%
Hong Kong Census and Statistics
Im
po
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Ex
po
rts
In
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Fi
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nt
or
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s
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pt
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su
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tC
G
ov
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nm
Pe
rs
on
al
Co
ns
um
pt
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0.00%
Income Method
• Survey domestic residents and calculate
their wage income, interest income, rental
income plus the income of proprietors of
small firms plus the profits & depreciation
of the corporate sector.
– Subtract net international income flows.
• Not calculated for HK on an annual basis.
Income Method, Japan 2003
(1) Generation of Income Account
Calendar Year
(Billion Yen)
Items
Compensation of employees ,payable
(1) Wages and salaries
(2) Employers' social contributions
Taxes on production (less) Subsidies
Proprieters Income
Corporate Profits and Interest Payments
Depreciation
(regrouped) Value added ,gross/gross domestic product
2003
265,484.8 53.70%
223,445.0 45.20%
42,039.8
8.50%
36,562.4
7.40%
19,884.5
4.02%
71,160.3 14.39%
101,301.0 20.49%
494,393.0 100.00%
High Concept
Income =
Expenditure =
High Concept
• Value of a final good expenditure is equal
to value added at each stage of
• Value Added would be paid to workers,
creditors, or kept as profits. (Income =
GNP vs. GDP
GNP
Gross National Product
GDP
Gross Domestic Product
= income earned by
domestic residents
= income created within
national borders.
Compare Macau and the
Philippines GDP or GNP
• Macau produces a lot of profits paid to
overseas owners of casinos.
• Philippines workers earn a lot of income
overseas.
• Which is larger Philippines’ GDP or
Philippines GNP?
• Does Macau have greater GDP or GNP?
Comparing GDP levels across time
• GDP measures the value of the goods produced
by an economy by using the market price of
each good to assign it a value.
• Problem: Prices of goods in terms of money are
changing overtime making comparisons in
overall value difficult.
– Bias: Money prices are growing over time as money
supply grows.
• Solution: Choose a Base Year’s prices as a fixed
yardstick of value for different goods.
Real GDP: Yt
• GDP aka Nominal GDP aka Current Dollar
GDP is the weighted sum of the number of
goods produced using their current prices
as the weight.
• Real GDP aka Constant Dollar GDP aka
GDP adjusted for inflation is the weighted
sum of the number of goods produces
using the Base Year prices as yardsticks.
Real GDP: Yt
• GDP aka Nominal GDP aka Current Dollar
GDP is the weighted sum of the number of
goods produced using their current prices
as the weight.
• Real GDP aka Constant Dollar GDP aka
GDP adjusted for inflation is the weighted
sum of the number of goods produces
using the Base Year prices as yardsticks.
Real GDP vs. Nominal GDP
St. Louis Federal Reserve
USA
16000.0
14000.0
10000.0
8000.0
6000.0
4000.0
2000.0
0.0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Billion US\$
12000.0
Nominal GDP
Real GDP
GDP vs. GNP: Hong Kong
Hong Kong
1,800,000
1,600,000
1,400,000
Mill. HK\$
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1961
1966
1971
1976
1981
Nominal GDP
1986
1991
Real GDP
1996
2001
Solved Problem
Real GDP: 2005 (2004 Base Year)
2005
P
Kitkat
M&Ms
Nominal GDP
Real GDP
Q
2004
P
Q
8
150
6
135
10
150
4
135
Real GDP vs. Nominal GDP
St. Louis Federal Reserve
USA
16000.0
14000.0
10000.0
8000.0
6000.0
4000.0
2000.0
0.0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Billion US\$
12000.0
Nominal GDP
Real GDP
GDP vs. GNP: Hong Kong
Hong Kong
1,800,000
1,600,000
1,400,000
Mill. HK\$
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
1961
1966
1971
1976
1981
Nominal GDP
1986
1991
Real GDP
1996
2001
Comparing GDP across
Countries
• When you compare income in two different
countries, each country’s GDP per capita is
measured in local currency. You need to
measure both with common yardstick to
compare.
• Typically, the common yardstick will be
US\$. GDP can be converted to US\$ by
Exchange Rate Method (divide national
GDP by the exchange rate) or PPP Method
(divide national GDP by PPP).
PPP vs. Exchange Rate
Conversion
• Exchange rates are easily available so
exchange rate is a “quick and dirty” comparison.
– Measures how many US dollars someone could buy
with average income.
• However, money goes farther in some countries
as many types of goods are relatively cheap
(especially developing countries).
– PPP conversion measures how much the goods
purchased by the average person would cost in the
US. Better measure of living standards.
World Bank Conversion Factors
Price Indices: Pt
• Two most commonly used price indices
are GDP Deflator and Consumer Price
Index (CPI)
• The GDP deflator is the ratio of nominal
GDP to Real GDP (multiplied by 100).
Nominal GDP
P  GDP Deflator 
100
Real GDP
GDP
P
100
Y
Consumer Price Index
• The CPI is the price of a representative
market basket of goods relative to the price of
that same basket during a benchmark/base
year (multiplied by 100).
Cost of Market Basket in year t
CPI t 
100
Cost of Market Basket in Base year
International Comparisons Project
• Researchers at U. of Pennsylvania periodically
choose a representative world market basket
and go to different countries to collect prices of
• For a country, we calculate PPP = Purchasing
Power Parity as the price of the market basket
relative to price of the market basket in US.
• For any country, the exchange rate, St, is the
number of domestic dollars per US\$.
Penn World Tables
Depreciation
• Part of the Investment that is being done will
only go to replacing depreciated capital.
• When Hurricane Katrina hits, repair of
infrastructure counts as GDP even though that
only replaces what is lost.
• Net DP
• Conceivably, since only consumer spending
generates benefit to household welfare, maybe
consumption itself is a better measure.
National Resource Depletion
• Selling of mineral extraction and other
non-renewable resources increases
income but this also runs down wealth.
• Example: Nauru and Phosphates
https://www.cia.gov/library/publications/theworld-factbook/geos/nr.html
Environmental Quality
• Clean air and water are important for
welfare but not measurable as a market
good (ie. GDP is a market good).
• Possible Solution: Estimate of
environmental quality.
Inputed Services of Non-Market
Capital
• Welfare generated by renting housing
included in GDP, but what if you own your
own home?
• Statistical agencies include imputed value
of homes by checking rental rates but not
cars, TV’s etc.
• Is rental market parallel to purchase
market?
Housework
• If you pay someone to do housework or
watch your kids, then it will be counted in
GDP. If you do it yourself, it will not be.
• Big shift from household production to
market production of housing services in
recent years (helpers, daycare,
kindergarten, tutors, etc.)
• This shift would increase GDP without
more goods being produced.
Income Distribution
• GDP per Capita is a measure of the
income for the average person
• But if one person has \$1,000,000 and
another person has 0, the average is
\$500,000.
• This is a quite different economy than one
in which two people both have \$500,000.
Health/Crime
• Life expectancy and infant mortality are
key indicators of living standard.