Macroeconomics

Measurement
Part 2: GDP and Real GDP
Gross Domestic Product (GDP)
 The total market value of all final goods and services
produced annually within a country’s borders.
 It is the sum of the prices (P) of all goods times the
quantities (Q) of those goods produced.
GDP = P1Q1 + P2Q2+……….PnQn
 It include only final goods and services.
 Final goods and services refer to goods and services
produced for final user whereas intermediate goods refer
to the goods produced by one firm for use in further
processing by another.
 The intermediate goods are excluded to avoid the double
counting.
 It take into account only current production.
GDP Cont…

 The value of final goods and services is calculated at the

current market prices.
 It does not matter who owned (foreign or Nepalese) the
resources, as long as the resources are located within
the country, the value of the output they produce is
included in Nepal’s GDP.
 Three types of final goods and services:
a. Consumer goods and services that are used to satisfy
immediate wants of people.
b. Capital goods consisting of fixed capital formation,
residential construction and inventories of finished and
unfinished goods, and
c. Goods and services produced by the government
GDP does not includes Cont…

 Certain non-market goods and services

 Underground activities, both legal and illegal
 Sales of used goods
 Financial transactions
 Capital gains
 Government transfer payment such as social security
benefits, pension, unemployment allowance, veteran’s
benefits etc.
 Leisure
GDP Cont…

 Per Capita GDP

 A country’s GDP divided by the population of that country is
called per capita GDP.
 GDP counts the goods and services, but not deduct the
air and water pollution.
 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 Cont…

 Either the consumers or producers pay for the purchase

of goods and services whether for consumption or
investment is called GDP at market price.
 The sum of price paid to all factors of production in form
of wages, profits, interest and rent for their contribution in
production, it is known as the GDP at factor cost or GDP
at basic Price.
 GDP at MP (GDPMP) = P1Q1 + P2Q2+……….PnQn
 GDP at FC (GDPFC) = GDP at MP – Net indirect taxes

Net indirect taxes = Indirect taxes - Subsidies

GDP at Current (Nominal) and
Constant Prices (Real)