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Gdp 1

Gdp 1

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Gross Domestic Product

Module-2

Gross Domestic Product
• GDP is the total market value of all final goods and services produced annually within a country’s borders. • Expenditure Approach: compute GDP by adding the money spent by buyers on final goods and services. What are final goods? What are intermediate goods? What’s the difference? • Income Approach: compute GDP by adding all wages and all profits. • Value-Added Approach: compute GDP by adding the values added to a product at all stages of production.

GDP? GNP? What’s different? • Gross National Product is the total market value of all final goods and services provided annually by the citizens of a country • GDP measures all final goods produced in a country. GNP measures all final goods produced by citizens whether physically in that country or not. GNP = GDP minus foreign investment . whether by citizens or not.

• Leisure • Not adjusted for “bads” . both legal and illegal • Sale of Used Goods • Financial Transactions • Government Transfer Payments.What GDP Omits • Certain Nonmarket Goods and services • Underground Activities.

.Total Market Value • Total Market Value is the monetary value of goods and services at today’s prices. • Only final goods are counted to protect against the error of over-counting.

• GDP figures are useful for obtaining an estimate of the productive capabilities of an economy but they do not necessarily measure happiness or well being. .GDP or Per Capita GDP • Per Capita GDP is the GDP divided by the population.

Does this mean that there was no productive activity in the country? Explain your answer. . • Suppose the GDP for a country is Rs 0.Q&A • Give an example that illustrates the difference between the Indian GDP and GNP.

spending on non-durable goods. and purchase of new residential housing. • Investment is the sum of purchases of newly produced capital goods. . changes in business inventories. and spending on services.Expenditures in a Real-World Economy Expenditures: • Consumption includes spending on durable goods.

state. and so on. • Net Exports is the total number of exports minus the number of imports. . bridges.Expenditures in a Real-World Economy • Government purchases include federal. and local government purchases of goods and services and gross investment in highways.

Computing GDP using the Expenditure Approach • Anything that is not sold is “bought” by the firm that produces it. • GDP=Consumption + Investment + Government Purchases + Net Exports .

• National Income is the total income earned by Indian citizens and businesses.The Income Approach to Computing GDP For A Real World Economy • Domestic Income is the total income earned by the people and businesses within a country’s borders. no matter where they are located. .

• Corporate Profits include all income earned by the stockholders of corporations. tips. and paid vacations • Proprietors’ Income is all forms of income earned by self-employed individuals and the owners of unincorporated business. and employee benefit plans plus the monetary value of fringe benefits. Social Security benefits. • Rental Income of Persons is the income received by individuals for the use of their non-monetary assets. .Computing National Income • Compensation of Employees: Wages. salaries. including unincorporated farmers.

S. households and government minus the interest they paid out. • National Income = Compensation of employees + Proprietors’ Income + Corporate Profits + Rental Income + Net Interest .Computing National Income Part 2 • Net Interest: the interest income received by U.

National Income to GDP GDP=National Income – Income earned from the rest of the world +Income earned by the rest of the world + Indirect business taxes + Capital consumption allowance + Statistical discrepancy .

and property taxes. • Capital Consumption Allowance or depreciation is the cost to replace capital goods that break or wear down • Statistical discrepancies or pure computational errors often occur . but the GDP has to adjust for both of these incomes. sales taxes.National GDP Making Some Adjustments • Remember that the National income excludes foreign nationals and includes citizens abroad. • Indirect Business Taxes usually comprise excise taxes.

.Other National Income Accounting Measurements • Net Domestic Product = GDP – Capital consumption allowance • Personal Income = National income – Undistributed Corporate Profits – Social Security Taxes – Corporate Profits Taxes + Transfer Payments • Disposable Income = Personal Income – Personal Taxes • Per Capita Macroeconomic Measurements Divides these factors by the population.

000 worth of goods and services? . investment.Q&A • Describe the expenditure approach to computing GDP in a real-world economy. • Will GDP be smaller than the sum of consumption. • If GDP is $400 billion. and the country’s population is 100 million. does it follow that each individual in the country has $40. and government purchases if net exports are negative? Explain your answer.

• Annual economic growth has occurred if the Real GDP in one year is higher than the previous year. • Real GDP is equal to the change in Base year prices multiplied by current year quantities. .Real GDP • Real GDP is GDP adjusted for price changes.

If You Know the Price Index and GDP For A Year. Can You Compute Real GDP? Real GDP = GDP x 100 Chain Weighted Price Index .

What Does It Mean If Real GDP Is Higher In One Year Than In Another Year? .• GDP can rise from one year to the next if: – Prices rise and output remains constant. – Output rises and prices remain constant. – Or prices and output rise.

Real GDP. and Business Cycles Economic Growth has occurred if Real GDP in one year is higher than Real GDP in the previous year. . Economic Growth.

If it falls for two consecutive quarters. • Contraction: A decline in the real GDP. • Expansion: when the real GDP expands beyond the recovery . • Trough: The Low Point of the GDP. just before it begins to turn up. it is said to be in a recession. Real GDP is at a temporary high.Ups and downs of the Business Cycle • Peak: at the peak of the business cycle. • Recovery: When the GDP is rising from the trough.

The Business Cycle .

real income. lasting more than a few months. visible in industrial production. and wholesale-retail trade”. employment.Recession The NBER definition of a recession is “ a significant decline in activity spread across the economy. .

267 billion in year 2.039 billion in year 1 and $6. . What has caused the rise in GDP? • Suppose Real GDP is $5. What has caused a rise in the Real GDP? • Can an economy be faced with endless business cycles and still have its Real GDP grow over time? Explain your answer.233 billion in year 1 and $5.245 billion in year 2.Q&A • Suppose GDP is $6.

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