Chapter 18 Eye on

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GDP and the Standard of Living
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EYE ONS
Business Cycle GDP Consumption
expenditure GNP Depreciation Real
GDP Disposable personal income Real
GDP/person Intermediate good or service Nominal
GDP Final good or service Standard of
living GDP deflator Statistical
discrepancy Govt expenditure on goods
services Investment Exports of goods
services Imports of goods services Net domestic
product at factor cost Net exports of goods
services
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Is a Computer Program an Intermediate Good or a
Final Good?

• When American Airlines buys a new reservations
  software package, is that expenditure an
  expenditure on a final good or an intermediate
  good?
• Before 1999, the national income accountants
  counted the purchase of software as expenditure
  on an intermediate goodand it was excluded from
  GDP.
• Since 1999, the national income accountants have
  classified the purchase of new software as
  investmentand is now included in GDP.

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Is a Computer Program an Intermediate Good or a
Final Good?

• How big of a deal is this?
• When the Bureau of Economic Analysis (BEA)
  recalculated the 1996 GDP, the estimate of GDP in
  1996 increased by 115 billiona lot of money.
• In 1996, GDP was 7,662 billion, so the increase
  of 115 billion is 1.5 percent of GDP.
• This example shows how the BEA works to measure
  GDP as accurately as possible.

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Making GDP Personal

• Where in the National Income and Product Accounts
  do your transactions appear? How can you use
  information about GDP in your life?
• Your Contribution to GDP
• Your own economic transactions show up in the
  National Income and Product Accounts on both the
  expenditure side and the income side.
• Most of your expenditure is part of Consumption
  Expenditure.
• If you were to buy a new home, that expenditure
  would appear as part of Investment.

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Making GDP Personal

• Because you buy goods produced in another
  country, expenditure on these goods shows up as
  part of Imports.
• If you have a job, your income appears in
  Compensation of Employees.
• Because the GDP measure of the value of
  production includes only market transactions,
  some of your own production of goods and services
  is most likely not counted in GDP.
• What are the nonmarket goods and services that
  you produce? How would you go about valuing them?

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Making GDP Personal

• Making Sense of the Numbers
• To use the GDP numbers in a news report, you must
  first check whether the reporter is referring to
  nominal GDP or real GDP.
• Using U.S. real GDP per person, check how your
  income compares with the average income in the
  United States.
• When you see GDP numbers for other countries,
  compare your income with that of a person in
  France, or Canada, or China.

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DEFINITION

• GDP
• The market value
• of all the final goods and services
• produced within a country
• in a given time period.
• Does GDP count the value of everything produced?
• Does GDP count the market value of a new home?
• Does GDP count purchases of Stocks and Bonds?

VALUE Produced WHAT Produced WHERE Produced WHEN
Produced
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DEFINITION

• Total Expenditure CIGNX
• Also, the total amount received by the producers
  of final goods and services
• C Consumption
• nondurables (food), durables (DVD), services
  (haircut), rent (apts/houses)
• I Investment
• new capital goods (machines), additions to
  inventory, new home purchases
• G Government
• Anything purchased by any level of government
• NX Net Exports
• export goods import goods

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Market Flows
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DEFINITION

• Total Income (Y) CSNT
• Expenditure Income
• (b/c firms pay out everything they receive as
  income to the factors of production
• Y Total Income
• wages, interest, rent, profit EARNED FROM labor,
  capital, land, entr.
• C Consumption
• food, housing, vacations, Walmart, etc.
• S Savings
• amount of income NOT SPENT on taxes or
  consumption goods
• NT Net Taxes
• taxes paid cash benefits received from
  government

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GDP - EXPENDITURE APPROACH

• Does not include
• Intermediate goods
• Used goods

• Financial Assets (loans not assets)

Values Goods at MARKET PRICE
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GDP INCOME APPROACH

• Income from ALL factors of production
• Wages, interest, rent, profit

Values Goods at FACTOR COST
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GDP INCOME APPROACH

• Indirect taxes (sales tax) make MKT price gt FTR
  cost MUST ADD
• Subsidies make FTR cost gt MKT price MUST
  SUBTRACT

Values Goods at FACTOR COST
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GDP INCOME APPROACH

• GDP Exp GDP Inc Statistical Discrepancy
• Tips are missed in income but caught in
  expenditure when spent
• Most income is reported through IRS but
  expenditures are typically estimated

Values Goods at FACTOR COST Expenditure Approach
WINS!
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GNP

• GNP GDP Net Factor Income from Abroad

DISPOSABLE PERSONAL INCOME
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GDP NOMINAL vs REAL
X

WHY?
X

X

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REAL GDP PER PERSON

• Real GDP per person Real GDP / population
• Value of goods services a person can enjoy
• Long-Term trend?
• Short-Term fluctuations?

• Doubles every 30 yrs
• Business cycle

WHAT DOES Real GDP PER PERSON MEASURE?

• Standard of living ?
• Cost of living ?

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GDP NOMINAL vs REAL
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2001 verse 2008
Edition 5
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When Did the Recession Begin?
Edition 5
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STANDARD OF LIVING ltgt COST OF LIVING

• Omitted from GDP
• Household Production
• Underground Production
• Leisure Time
• Environment Quality

Decreasing 80s, 90s
Increases overtime
OTHER INFLUENCES on STANDARD OF LIVING

• Health and Life Expectancy
• Political Freedom and Social Justice
• Thus, . . .
• HDI Human Development Index

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The Human Development Index

• The figure shows the relationship between real
  GDP per person and the Human Development Index
  (HDI).
• Each dot represents a country.
• The small Africa country of Sierra Leone has the
  lowest HDI and the second lowest real GDP per
  person.

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The Human Development Index
The United States has the third highest real GDP
per person but has the eighth highest HDI. Why is
the United States not ranked higher on the
HDI? Because the people who live in seven
countries live longer, have better access to
health care and education than do Americans.
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FORMULAS
Expenditure Approach GDP C I G NX
(Consumption, Investment, Government, Net
Exports)
Net Exports Exports - Imports
Savings Y C - NT
Income Approach GDP W I R P Indirect
taxes Subsidies Depreciation GDP Net
domestic product at factor cost Indirect taxes
Subsidies Depreciation Net Domestic Product at
Factor Cost Wages Interest Rent Profit
Total Income Y C S NT (Consumption
Savings Net Taxes)
Income Expenditure
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Edition 5
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Edition 5