Unit 2: GDP (Real and Nominal)

• GDP (gross domestic product): The total market value of goods and services produced within a country's borders within a given year.
• GNP(gross national product): A measure of what its citizens produce and whether they produce these items within its borders.

What is not included in GDP:

1. Used or second hand goods.(Avoid double or multiple counting)
2. Gifts/ transfer payments. (Come in public or private)(No output being produced).

• Public: welfare and social security 
• Private: scholarship
• Contribute nothing to current production. 

     3. Stocks and bonds: Purely financial transactions. No output being produced. 

     4. Unreported business activity: (Tips)

     5. Illegal activities: (drugs, prostitution, etc…) 

     6. Intermediate goods: goods that requires further processing before they are ready for final use. (ex: big mac: cheese, buns, etc)

    7. Non-market activities: Anything you volunteer to do, or family work.

Expenditure Approach

GDP= C+Ig+G+Xn

C=personal consumption expenditures: purchase of finished goods and services. (67% of the economy spends their money here)

Ig= gross private domestic investment: (Covers new factory equipment. Factory equipment maintenance. Construction of housing. Unsold inventory of products built in a year

G= government spending. Govt. is buying finished goods and services

Xn= Net exports.  Exports-Imports.

Income Approach

- Add up all of the income that resulted from selling all final goods and services produced in a given year.

****WRIP (wille rest in peace)

• Wages (Salary supplement, compensation of employees)
• Rents (Rental Income)
• Interests (Interest Income)
• Profits (Proprietor's Income)

Nominal VS Real GDP

Nominal GDP-(current prices)

• The value of output (quantity) produced in current prices
• Formula: P X Q
• Can increase from year to year if either output or price increases. 

Real GDP-(constant base year prices)

• The value of output produced in constant base year prices that is adjusted for inflation. 
• Formula: P X Q
• Can increase from year to year if only output increases 

****In the base year, the current prices equal to constant prices

• Base year- Nominal GDP= Real GDP
• In Years after the base year nominal GDP WILL EXCEED real GDP
• In years before the base year real GDP will exceed nominal GDP

GDP deflator:

• A price index used to adjust from nominal to real GDP
• Formula: ((nominal GDP)/(real GDP)) x 100
• In the base year the GDP deflator will equal 100
• For years after the base year, GDP deflator will be greater than 100. 
• For years before the base year, GDP deflator is less than 100

- Inflation: a general rise in price level

- Inflation rate: ((new price index)-(Old price index))/(Old price index) X 100

-Consumer price index (CPI): measures the cost of a market basket of goods of a typical urban american family.

• (Cost of a market basket of goods in a given year)/ (Cost of a market basket of goods in the base year) X100

Other Formulas:

1. Trade:

• Export-Import
• If the number is negative, it is a deficit. 
• If the number is positive, it is a surplus 

     2. Budget: 

• (Government Purchases of Goods and Services) + (Government Transfer Payments)-(Government Tax and Fee Collections)
• If the number is negative, it is a surplus
• If the number is positive, it is a deficit 

    3. National Income: 

• Option 1: (Compensation of employees)+(Rental Income)+(Interest Income)+(Proprietors Income)+(Corporate Profits)
• Option 2: (GDP)-(Indirect Business Taxes)-(Depreciation or Consumption of fixed capital)-(Net Foreign Factor Payment)

    4. Disposable Personal Income (DPI):

• (National Income)-(Household Taxes)+(Government Transferred Payments)

    5. Net National Product: 

• (GNP)-(Depreciation)

    6. Net Domestic Product:

• (GDP)-(Depreciation)

    7. GNP:

• (GDP)+(Net Foreign Factor Payment)

    8. Gross Private Domestic Investment (Ig):

• (Net Private Domestic Investment)-(Depreciation)