What is GDP?

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What is GDP? What is not GDP? Why do we need to
know the GDP?
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GROSS DOMESTIC PRODUCT (GDP)

• The market value of all final goods and
  services produced in the economy in a given year.
• Take all final goods and services produced
• Multiply them times their respective prices
• Add up all the totals.

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GDP

• Two interconnected sides
• Output -- Firms produce output
• for example, a computer manufacturer produces
  new computers.
• Income -- When firms produce output, they also
  generate income wages rents interest
• profit.

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TOTAL MARKET VALUE

• Take the quantity of goods produced and multiply
  them by their respective prices and add up the
  totals.
• -- Example If an economy produced two cars at
  15,000 a car and three computers at 3,000 a
  computer, the total value of these goods and
  services would be
• ( 2 15,000 ) ( 3 3,000 ) 39,000

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FINAL GOODS AND SERVICES

• Those goods and services that are sold to
  ultimate or final purchasers.

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WHAT IS NOT INCLUDED IN GDP

• 1) Intermediate Products
• Tires on a Car. A part of the final product.
• 2) Secondhand Sales
• The sale of used goods.
• 3) The underground economy
• Services performed in the home, such as,
  cleaning, cooking and providing free child care
• Transactions which occur that are not reported to
  official authorities -- these may be legal or
  illegal
• IRS estimates that about 100 billion in income
  escapes federal taxes each year

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WHAT IS INCLUDED IN GDP

• GDPCIGXn (F)
• Consumption Expenditures
• Private Investment
• Government Purchases
• Net Exports Exports - Import

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WHO PURCHASES GOODS AND SERVICES ?

• GDP Consumption Private Government
  Net
• Expenditures Investment
  Purchases Exports
  Expenditures
• Purchases Consumers Firms Federal,
  state foreign and local
  sector governments exports
  minus
  imports
• 7,297 4,965 1,067 1,366
  - 101 billion billion
  billion billion billion
• Keynes Output-Expenditure Model GDPCIGF.
• Consider that the U.S. population is 255 million
  people, GDP per person is approximately 28,600.

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CONSUMPTION EXPENDITURES

• Durable Goods -- Those goods which last for a
  longer period of time, such as automobiles and
  refrigerators
• Nondurable goods -- Those goods which last for
  short periods of time, such as food
• Services -- Reflect work done in which people
  play a prominent role in delivery, such as a
  dentist filling a cavity.

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PRIVATE INVESTMENT EXPENDITURES

• Structures
• Spending on new plants and equipment during the
  year
• Newly produced housing
• Additions to the stock of inventories
• Gross Investment -- The total of new investment
• Depreciation -- The deterioration or wearing out
  of existing plants, equipment and housing
• Net investment -- Gross Investment minus
  depreciation.

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GOVERNMENT PURCHASES

• Purchases of newly produced goods and services by
  federal, state, and local governments
• It includes any goods the government purchases
  plus the wages and benefits of all government
  workers
• The majority of spending in this category
  actually comes from state and local governments.

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TRANSFER PAYMENTS

• Not included in the category of government
  purchases.
• Funds paid to individuals not associated with the
  production of goods and services It includes
  payments for
• social security
• welfare
• interest on government debt
• In 1995, approximately two-thirds of federal
  government expenditures were transfer payments.

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NET EXPORTS

• Purchases of foreign goods by consumers, firms
  and the government are subtracted when we
  calculate GDP because these goods were not
  produced in the U.S.
• We must add to GDP any goods produced in the U.S.
  and sold abroad.
• Trade Deficit -- Occurs when we buy more goods
  from abroad than we sell
• Trade Surplus -- Occurs when our exports exceed
  our imports

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REALITY PRINCIPLE

• What matters to people is the real value or
  purchasing power of money or income, not its face
  value.

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REAL GDP

• A measure of GDP that controls for price
  changes.

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NOMINAL GDP

• GDP that is measured using current prices
• It can increase for one of two reasons
• Production of goods and services has increased
• The prices of the goods and services has increased

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GDP EXAMPLE

• YEAR 1 YEAR 2
• Production 10 computers 12
  computers
• Price 1,000 1,100
• Nominal GDP in year 1 is 10,000
• (10 1,000) 10,000
• Nominal GDP in year 2 is 13,200
• (12 1,100) 13,200
• Real GDP in year 1 is 10,000
• (10 1,000) 10,000
• Real GDP in year 2 is 12,000
• (12 1,000) 12,000

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Real GDP 1992
U.S. REAL GDP, 1930 - 1995
8,000
Source U.S. Department of Commerce
6,000
4,000
2,000
0
1930
1935
194 0
1945
1950
1955
1960
1965
1970
1975
1975
1980
1985
1990
YEAR
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U.S. REAL GDP

• The data for real GDP control for changes in
  prices and thus capture movements in real output
  only
• Real GDP has grown substantially over the period
  graphed
• This is what economists term economic growth
• sustained increases in real production of an
  economy over a period of time
• Differences in economic growth between countries
  and changes in economic growth over time are
  among the most important issues of macroeconomics

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GROSS NATIONAL PRODUCT GNP

• Add to GDP any income earned abroad by U.S. firms
  or residents
• Subtract any income earned in the United States
  by foreign firms or residents.

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NET NATIONAL PRODUCT

• Obtain GNP from GDP
• Subtract depreciation from GNP

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NATIONAL INCOME

• The income that flows to the private sector
• To get National Income, economists make
  adjustments to GDP
• -- obtain Net National Product
• add income earned abroad by U.S. firms
  or residents
• subtract income earned in the U.S. by
  foreign firms or residents
• subtract depreciation
• -- subtract indirect taxes, which are sales or
  excise taxes on products.

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FROM GDP TO NATIONAL INCOME
Gross Domestic Product 7,297 Plus
net income earned from abroad Gross National
Product 7,281 minus
depreciation Net National
Product 6,452 minus indirect
taxes (and other adjustments)
National Income 5,845 Source Economic
Report of the President (Washington, DC U.S.
Government Printing Office, 1996)
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COMPOSITION OF U.S. NATIONAL INCOME
National Income 5,845 Compensation
of employees 4,233 Corporate
profits 614 Rental income
118 Proprietors income
480 Net Interest 400 Source
Economic Report of the President Washington, DC
Government Printing Office, 1996
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VALUE ADDED

• Value added of a firm is the sum of all income
  (wages, profits, rents, and interest) that it
  generates
• By adding up the value added for all firms in the
  economy (plus nonprofit and governmental
  organizations), national income can be
  calculated
• Value added for a typical firm is measured by
  starting with its total sales and subtracting the
  value of any inputs it purchases from other
  firms.

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CONSUMER PRICE INDEX (CPI)

• Widely used by government and private sector to
  measure changes in prices facing consumers
• Measures changes in fixed basket of goods, a
  collection of items chosen to represent the
  purchasing pattern of a typical consumer
• Find out how much basket of goods costs in a base
  year, then how much it costs in other years
• CPI ( cost in todays prices / cost in base
  year ) 100
• Each month Bureau of Labor Statistics sends its
  employees out to sample over 90,000 specific
  items around the country to compile the CPI.

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PERSONAL INCOME

• The total payments that flow directly into the
  hands of households
• Personal income national income transfer
  payments - profits retained by firms
• The amount of personal income that households
  keep after paying taxes is called personal
  disposable income.

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UNEMPLOYED
Those people who are looking for work but do
not currently have jobs.
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UNEMPLOYMENT DATA, 1995
U.S. Civilian Population over 16 years of age (
198,584,000 )
Source Economic Report of the President
(Washington, DC U.S. Government Printing
Office, 1996
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UNEMPLOYMENT DATA, 1995
U.S. Civilian Population over 16 years of age (
198,584,000 )
Labor Force ( 132,304,000 )
Not in labor force ( 66,280,000 )
Source Economic Report of the President
(Washington, DC U.S. Government Printing
Office, 1996
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UNEMPLOYMENT DATA, 1995
U.S. Civilian Population over 16 years of age (
198,584,000 )
Labor Force ( 132,304,000 )
Not in labor force ( 66,280,000 )
Employed ( 124,900,000 )
Unemployed ( 7,404,000 )
Source Economic Report of the President
(Washington, DC U.S. Government Printing
Office, 1996
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UNEMPLOYMENT STATISTICS

• Population represented are all over 16 years of
  age
• population is divided into two groups
• those in labor force
• those not in labor force
• labor force is divided into two groups
• employed
• unemployed

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UNDEREMPLOYED

• Workers who hold a part-time job but prefer to
  work full time
• Workers who hold jobs far below their
  capabilities

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SELECTED U.S. UNEMPLOYMENT STATISTICS,
UNEMPLOYMENT RATES FOR DECEMBER 1995
Total 5.6 Male, 20 years
over 4.8 Female, 20 years
over 4.7 Both Sexes, 16 -
19 18.0 White 4.9
African American 10.2
White, 16 - 19 15.4 African
American, 16 - 19 35.0 Married
Men 3.2 Married Women
3.8 Women maintaining families
6.8 Source Bureau of Labor Statistics,
Employment and Earnings
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UNEMPLOYMENT

• Frictional unemployment occurs naturally in the
  labor market as workers search for jobs
• Structural unemployment arises from a mismatch of
  skills and jobs
• Cyclical unemployment rises and falls with
  economic fluctuations it can be either positive
  (in a recession) or negative (in a boom).

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UNEMPLOYMENT (cont.)

• Seasonal unemployment changes in seasonal demand
  for workers. Ex. Christmas
• Technological unemployment arises from new
  technology that need less workers to complete the
  same job. Ex. Automotive Industry

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FULL EMPLOYMENT

• Corresponds to zero cyclical unemployment
• When the economy is at full employment, the only
  unemployment is frictional and structural.

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RECESSION

• A period when economic growth is negative (real
  GDP falls) for two consecutive quarters
• A quarter is three consecutive months during the
  year
• A recession is a period when real GDP falls for
  at least six months

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RECESSION

• Peak
• The date at which a recession starts
• Trough
• The date at which output starts to increase again
• Since World War II, the United States has
  experienced nine recessions.

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NINE POSTWAR RECESSIONS

• Peak Trough Percent Decline in real GDP
• November 1948 October 1949 1.5
• July 1953 May 1954 3.2
• August 1957 April 1958 3.3
• April 1960 February 1961 1.2
• December 1969 November 1970 1.0
• November 1973 March 1975 4.9
• January 1980 July 1980 2.5
• July 1981 November 1982 3.0
• July 1990 March 1991 1.4

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DEPRESSION

• A common term for a severe recession
• In the United States, the Great Depression refers
  to the 1929 - 1933 period, in which real GDP fell
  by over 33
• It created the most severe economic dislocations
  that the United States has experienced in the
  twentieth century
• Banks closed, businesses failed, and many people
  lost their life savings
• Unemployment rose sharply
• In 1933, over 25 of the people looking for work
  failed to find jobs

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CAUSES OF RECESSION

• Changes in technology
• Disruptions to the financial system
• Increases in prices of key commodities
• (Deliberate or inadvertent) government policies

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CHAIN-TYPE PRICE INDEX FOR GDP

• An index that measures the average of the prices
  of the goods and services that are contained in
  the GDP
• Starting in 1996, a chain-type price index for
  GDP replaced the GDP deflator as the principle
  index reported by the U.S. Department of Commerce

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CHAIN-TYPE PRICE INDEX

• It has a value of 100 in a given year, called the
  base year
• The important information in the value of the
  index for any other year is contained in its
  relation to the base year
• If a chin-type price index for GDP in one year is
  105, it means that prices have increased by 5
  since the base year
• ( 105 - 100 ) / 100
• By using a chain price index, we see how the
  overall level of prices changes from one year to
  the next over a long period of time

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CHAIN PRICE INDEX EXAMPLE

• YEAR OUTPUT PRICE
• 1 10 1,000
• 2 12 1,100
• If year 1 is chosen as the base year, the price
  index for GDP will be 100
• The price of the single good in the economy,
  computers, rose by a factor of 1.1
• ( 1,100 / 1,000 1.1 )
• The price index for year 2 is equal to the value
  of the index in year 1 (100) times the factor by
  which prices increased (1.1) 100 1.1 110

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Sources R.J. Gordon, Macroeconomics, New York,
(Harper Collins, 1993) U.S. Department of
Commerce
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INFLATION

• The percentage rate of change in price level
  increase
• If GDP in year 1 is 100 and GDP in year 2 is 110,
  inflation rate is 10

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Source U.S. Department of Commerce Based on
Chain-type Price Index
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CLASSICAL ECONOMICS

• The study of the economy when it operates at or
  near full employment.

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KEYNESIAN ECONOMICS

• The study of business cycles and economic
  fluctuations that we develop.