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Baal Er Assignment

The document discusses Gross Domestic Product (GDP) as a measure of national output and income, highlighting its definition, key concepts, and methods of measurement including the expenditure, income, and product approaches. It differentiates between nominal and real GDP, introduces Gross National Product (GNP), and outlines various income measures such as National Income and Disposable Income. Additionally, it addresses the limitations of GDP as a measure of welfare, noting that it does not account for factors like leisure and environmental quality.

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5 views

Baal Er Assignment

The document discusses Gross Domestic Product (GDP) as a measure of national output and income, highlighting its definition, key concepts, and methods of measurement including the expenditure, income, and product approaches. It differentiates between nominal and real GDP, introduces Gross National Product (GNP), and outlines various income measures such as National Income and Disposable Income. Additionally, it addresses the limitations of GDP as a measure of welfare, noting that it does not account for factors like leisure and environmental quality.

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srabonc39
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© © All Rights Reserved
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Chapter Summary: Measuring National

Output and National Income.


Gross Domestic Product (GDP):
GDP is the market value of all final goods and
services produced within a given period of time
by factors of production located within a
country.
GDP 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.
Income and Expenditure of an Economy
An economy’s income is the same as its
expenditure because every dollar of spending
by some buyer is a dollar of income for some
seller. So, for an economy as a whole income
must equal expenditure.
Key Concepts of GDP:
 Excludes items produced and sold
illicitly and items produced and
consumed at home that never enter the
marketplace
 To avoid double counting, GDP includes
only final goods and services and not the
intermediate goods.
 Goods are valued at market prices.
 It includes both tangible goods(food,
clothing, cars) and intangible
services(haircuts, housecleaning).
 It includes goods and services currently
produced not transactions involving
goods produced in the past.
 It measures the value of production
within the geographic confines of a
country.
3. Methods of Measuring GDP
 Expenditure Approach: Adds up all
spending on final goods and services.
o Consumption (C): Spending by
households on goods and services.
 Durable Goods: Goods that last a
relatively long time, such as cars and
household appliances.
 Nondurable Goods: Goods that
are used up fairly quickly, such as
food and clothing
 Services: Things that do not
involve the production of physical
things, such as legal services,
medical services, and education.

o Investment (I): Total investment in


capital by the private sector in a given
time. There are 3 kinds of investment:
 Residential investment:
Expenditures by households and
firms on new houses and apartment
buildings.
 Nonresidential investment:
Expenditures by firms for machines,
tools, plants, and so on.
 Change in business inventories:
The amount by which firms’
inventories change during a period.
o Government Spending (G): Expenditures
on goods and services by state, federal
and local governments.
o Net Exports (NX): Exports minus

imports.
o Formula: GDP=C+I+G+NX

 Income Approach: Summing all incomes


earned in the economy: wages, rents,
interest, and profits.
 Product Approach/Value-Added
Approach: Adding up the market value of
all final goods and services.
4. Nominal vs. Real GDP
Nominal GDP
 Definition: The market value of all final
goods and services produced in an economy
during a specific period, measured using
current prices (prices at the time of
production).
Real GDP
 Definition: The market value of all final
goods and services produced in an economy
during a specific period, measured using
constant prices (prices from a base year).
 GDP Deflator: GDP deflator is a measure
of the price level calculated as the ratio of
nominal GDP to real GDP times 100.
 Formula: GDP deflator= (Nominal
GDP/Real GDP)*100

Gross National Product (GNP): The total


market value of all final goods and services
produced within a given period by factors of
production owned by a country’s citizens,
regardless of where the output is produced.
GDP Versus GNP
Gross National Product (GNP): Output
produced by a nation’s factors of production no
matter where it takes place
• GDP is geographically focused, including only
output produced within a nation’s borders
regardless of whose factors are used.
 Net National Product (NNP): Gross
national product minus depreciation; a
nation’s total product minus what is required
to maintain the value of its capital stock.
 National Income (NI): Total income earned
by factors of production.
 Personal Income (PI): Income received by
households before taxes.
 Disposable Income (DI): PI after taxes,
indicating the amount available for consumption
or saving.
7. GDP as a Measure of Welfare: Limitations
Higher GDP per person indicates a higher
standard of living. GDP is not a perfect measure
of the happiness or quality of life, however.
Some things that contribute to well-being are
not included in GDP.
 The value of leisure.
 The value of a clean environment.
 The value of almost all activity that takes
place outside of markets, such as the value
of the time parents spend with their children
and the value of volunteer work.

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