PRINCIPLE OF ECONOMICS

PE-13 | GROUP 9
TABLE OF CONTENTS

What is GDP?

How GDP can be measured?

What is nominal GDP, real

GDP, and GDP deflator?

Is GDP a good measure of

economic well-being?
Principle of Economics

MACROECONOMICS
Study of economics as a whole

Why is average income high in some

countries and low in others?
Why do prices rise rapidly in some time
periods while they are more stable in
others?
Why do production and employment
expand in some years and contract in
others?
01 What is GDP ?
PRINCIPLE OF ECONOMICS
 01 WHAT IS GDP ?

For an economic as a whole, income

must equal expenditure because:
Every transaction has buyers and sellers.
Every dollar of spending by some buyer is the
dollar of income for some seller.

Gross domestic product (GDP): measure

of the income and expenditure of an
economy. It measures two things at
once:
The total income of everyone in the economy.
The total expenditure on the economy’s
output of goods and services.
The Circular-Flow Diagram
Markets:
Goods and services
Factors of production
Households:
Spend all of their income
Buy all goods and services
Firms:
Pay wages, rent, profit to
resource owners
=> GDP equals the total amount spent
by households in the market for goods
and services. It also equals the total
wages, rent, and profit paid by firms in
the markets for the factors of
production
 PRINCIPLE OF ECONOMICS

02

How GDP can

be measured ?
02 HOW GDP CAN BE MEASURED ?
1. “GDP is the market value…”
Market prices => reflect the value of
goods.
2. “...of All…”
All items produced in the economy
And sold legally in markets
Excluding most items
Produced and sold illicitly
Produced and consumed at
home.
Note:
Housing Services
For people who rent their
houses, the rent is
included in GDP
For people who own their
houses, estimated rental
value is included in GDP
(assume that if the owners
use their house for rent).
3. “...Final…” 4. “...Goods and
Final goods: goods purchased to the Services…”
consumers.
Tangible goods
Intermediate goods: goods purchased to
(food, clothing, car)
produce other goods for sale.
and intangible
=> Only value final goods. services (haircut,
Ex: housecleaning,
Lili purchases $5 strawberries to doctor visit)
decorate a cake sold in her bakery 5. “...Produced…”
for $15 => In this case,
strawberries are used to make a Goods and services currently
cake for sale. Therefore, it is produced
considered as intermediate goods Ex: Nike produced sneaker cost $100
and a cake is a final goods => $15 but did not sell it until 2022 => $100
will be included in the GDP. is recorded in 2021’s GDP not in
GDP of 2022.
 6. “...Within a country…”
Goods and services produced
domestically, regardless of the
nationality of the producers.

Ex:
If a Vietnamese owns a Pho
restaurant in the US, the Vietnamese
owner's income will be revealed in the
GDP of the US.
If Volvo builds a car factory in HCMC,
the production of the factory will be
included in the GDP of VietNam.
7. “...In a given period of time.”
A year or a quarter.
The government reports GDP for a quarter at an annual rate with seasonal
adjustment.
 PRINCIPLE OF ECONOMICS

03

What is
nominal GDP,
real GDP, and
GDP deflator?
03 REAL VS NOMINAL GDP

REAL GDP NOMINAL GDP

Production of goods Production of goods
and services and services
Valued at constant Valued at current
prices prices.
Designate one year as
base year
Not affected by
changes in prices
03 REAL VS NOMINAL GDP

To obtain a measure of the

amount produced that is not
affected by changes in prices,
we use real GDP, which is the
production of goods and
services valued at constant
prices. We calculate real GDP
by first designating 1 year as
a base year.
 03 GDP DEFLATOR

Base year: nominal GDP = real GDP => GDP Deflator = 100

Measures the change in nominal GDP from

the base year that cannot be attributable to a
change in real GDP
Can be used to take inflation out of nominal
GDP (“deflate” nominal GDP).
 PRINCIPLE OF ECONOMICS

04

Is GDP a Good
Measure of Economic
Well-Being?
04 IS GDP A GOOD MEASURE OF ECONOMIC WELL-BEING?

The single best measure of the economic well-being of a society.

Show income and expenditure of the average person in the economy.
Larger GDP
Good life, better healthcare
Better educational systems
Measure our ability to obtain many of the inputs into a worthwhile life
 IS GDP A GOOD MEASURE OF
04
ECONOMIC WELL-BEING?

However:
Excludes:
leisure.
the value of almost all activity that
takes place outside markets.
the quality of the environment.
Nothing about the distribution of
income.

=> GDP is a good measure of economic

=> GDP includes and what it leaves
out.
 PRINCIPLE OF ECONOMICS

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PE-13 | GROUP 9