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PaulSchneiderman,Ph.D.

,ProfessorofFinance&Economics,Southern
NewHampshireUniversity
2008SouthWestern

InThisLecture..
GrossDomesticProduct
Expenditures
ComputingGDP
MeasurementsOtherThanGDP
RealGDP
EconomicGrowthandBusinessCycles

GrossDomesticProduct
(GDP)
Thetotalmarketvalueofallfinalgoods
andservicesproducedannuallywithina
countrysborders.

WaystoComputeGDP
ExpenditureApproach
Addtheamountofmoneyspentby
buyersof finalgoodsandservices*
Avoid doublecounting.
Donotcount intermediategoods**
*Goodsinthehandsoftheirfinalusers.
**Goodsthatareinputsfortheproductionoffinal
goods.

WaystoComputeGDP
IncomeandValueadded
Approaches
IncomeApproach addthesumofall
incomesearned(wages,interest,rents,and
profits)inproducinggoodsandservices
ValueaddedApproach addthevalue
addedateachstageofproductionofall
goodsandservices

WhatsNotIncludedinGDP
Certainnonmarketgoodsand
servicessuchaschoresperformedat
homebyfamilymembers.

WhatsNot
Includedin
GDP
Underground
activities, both legal
and illegal

WhatsNotIncludedinGDP
Salesofused
goods
Financial
transactionssuch
astradingof
stocksandbonds

WhatsNotIncludedinGDP

Governmenttransferpaymentssuchas
socialsecurity
Leisuretime

GDPandBads
GDPcountsthegoods
andservices,butit
doesnotnetoutthe
airandwater
pollution.
Thus,someeconomists
arguethatGDP
overstatesouroverall
economicwelfare.

GDPPerCapita

SelfTestQuestions
Identifyandexplainthethreeapproaches
tocomputingGDP.
SupposetheGDPforacountryis$0.Does
thismeanthattherewasnoproductive
activityinthecountry?Explainyour
answer.

GDP ExpenditureApproach
4Sectors
HouseholdSector Consumption
BusinessSector Investment
GovernmentSector GovernmentPurchases
ForeignSector NetExports
GDP= C+ I+ G+ (X M)

Consumption
Thesumofhouseholdspendingon:
Durablegoods
Nondurablegoods
Services

DurableGoods
Durablegoodsaregoodsthatareexpected
tolastformorethanthreeyears,suchas
refrigerators,ovens,orcars.

NondurableGoods
Nondurablegoodsaregoodsthatarenot
expectedtolastformorethanthreeyears,
suchasfood.

Services
Servicesareintangibleitemssuchaslawn
care,carrepair,andentertainment.

Investment
Thesumofallpurchasesof:
Newlyproducedcapitalgoods
Businesspurchasesofcapitalgoods,
suchasmachineryandfactories
Changesinbusinessinventories
Changesinthestockofunsoldgoods.
Purchasesofnewresidentialhousing

GovernmentPurchases
Includes:
Governmentpurchasesofgoodsand
servicesandgrossinvestmentin
highways,bridges,andsoon.
Excludes:
Governmenttransfer paymentstopersons
thatarenotmadeinreturnforgoodsand
servicescurrentlysupplied.

NetExports
Exports (X) Totalforeignspendingon
domesticgoods
Less
Imports(M) Totaldomesticspendingon
foreigngoods

ExpenditureApproach

GDP IncomeApproach
1. Purchases(expenditures)madeinproduct
marketsflowtobusinessfirms.
2. Businessfirmsthenusethesemoniestobuy
resourcesinresourcemarkets.
3. Thesemoniesflowtotheowners(suppliers)of
land,labor,capital,andentrepreneurship.
4. Thesumoftheseresourcepaymentsistotal
income,whichflowstohouseholds.Inthis
simpleeconomytotalpurchases(expenditures)
equaltotalincome.
5. Becausetotalpurchases(expenditures)equal
GDPandtotalpurchasesequaltotalincome,it
followsthatGDPequalstotalincome.

NationalIncome
TotalincomeearnedbyU.S.citizensand
businesses,nomatterwheretheyresideor
arelocated.
Nationalincomeisthesumofthepayments
toresources(land,labor,capital,and
entrepreneurship).

ComputingNationalIncome
Nationalincome=
Compensationofemployees
+Proprietors income
+Corporateprofits
+Rentalincome
+Netinterest

COMPENSATIONOF
EMPLOYEES
Compensationofemployeesconsistsof
wagesandsalariespaidtoemployeesplus
employers contributionstoSocial
Securityandemployeebenefitplansplus
themonetaryvalueoffringebenefits,tips,
andpaidvacations.

PROPRIETORS INCOME
Proprietors incomeincludesallformsof
incomeearnedbyselfemployed
individualsandtheownersof
unincorporatedbusinesses,including
unincorporatedfarmers.

CORPORATEPROFITS
Corporateprofitsincludealltheincome
earnedbythestockholdersof
corporations.

RENTALINCOME(OF
PERSONS)
Rentalincomeistheincomereceivedby
individualsfortheuseoftheirnon
monetaryassets(land,houses,offices).
Italsoincludesreturnstoindividuals
whoholdcopyrightsandpatents.
Finally,itincludesanimputedvalueto
owneroccupiedhouses.

NETINTEREST
Netinterestistheinterestincomereceived
byU.S.householdsandgovernment
minustheinteresttheypaidout.

FromNItoGDP
GDP=
Nationalincome
Incomeearnedfromtherestoftheworld
+Incomeearnedbytherestoftheworld
+Indirectbusinesstaxes
+Capitalconsumptionallowance
+Statisticaldiscrepancy

GDP=IncomeApproach

NetDomesticProduct
NDPmeasuresthetotalvalueofnewgoods
availableintheeconomyinagivenyearafter
wornoutcapitalgoodshavebeenreplaced.
Netdomesticproduct(NDP) =
GDP Capitalconsumptionallowance*
*Theestimatedamountofcapitalgoodsusedup
inproductionthroughnaturalwear,
obsolescence,andaccidentaldestruction.

PersonalandDisposableIncome
Personalincome =
Nationalincome
Undistributedcorporateprofits
Socialinsurancetaxes
Corporateprofitstaxes
+Transferpayments
Disposableincome =
Personalincome
Personaltaxes

SelfTestQuestions
Describetheexpenditureapproachto
computingGDPinarealworldeconomy.
WillGDPbesmallerthanthesumof
consumption,investment,andgovernment
purchasesifnetexportsarenegative?
Explainyouranswer.
IfGDPis$400billionandthecountrys
populationis100million,doesitfollowthat
eachindividualinthecountryhas$40,000
worthofgoodsandservices?

RealGDP
Thevalueoftheentireoutputproduced
annuallywithinacountrysborders,
adjustedforpricechanges(inflation).

EconomicGrowth
EconomicGrowthismeasuredbyincreases
inRealGDP.

BusinessCycle
Recurrentswings(upanddown)in
RealGDP.

SelfTestQuestions
SupposeGDPis$6trillioninyear1and
$6.2trillioninyear2.Whathascausedthe
riseinGDP?
SupposeRealGDPis$5.2trillioninyear1
and$5.3trillioninyear2.Whathas
causedtheriseinRealGDP?
Cananeconomybefacedwithendless
businesscyclesandstillhaveitsRealGDP
growovertime?Explainyouranswer.