Gross Domestic Product (GDP) - Expenditure Approach and Calculation, Exams of Economics

Download Gross Domestic Product (GDP) - Expenditure Approach and Calculation and more Exams Economics in PDF only on Docsity! 1 Principles of Macroeconomics Economics 202 Ryan Herzog Chapter 6 - Measuring National Output and Income
The most basic economic measure is Gross Domestic Product
GDP is the market value of all final goods and services produced within a country in a given period of time
The goal is calculate final production over a given period
Two approaches to calculating GDP
Expenditure and Income approaches GDP – Expenditure Approach
The expenditure approach has two methods
Value Added
Adds the value at each stage of production  e.g. Starbucks coffee: count the value of the beans, milk, cup, and syrup  e.g. Oil: count drilling, refining, shipping, and final markup
Final Market Value
Counts the final sale of the product  e.g. Starbucks coffee: count the final sale of the coffee 2 GDP - Expenditure Approach
We will focus mostly on the final market value approach
What counts?
Accounts for items produced and sold in the market
Transaction needs to take place where payment exchanges hands GDP – Expenditure Approach
What does final mean?
Goods that go into the production process are not counted in GDP, these are called intermediate goods
this avoids double counting
GDP excludes the sales of old items, even if money trades hands GDP – Expenditure Approach
Intermediate goods versus value added
Value added is the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
We are counting value not actual goods used in the production process 5 Practice Questions? The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it sells all 25 cars.
a. The value of increased inventory will be counted as part of GDP in 2003, but the value of the cars sold in 2004 will not cause GDP to increase.
b. The value of the increased inventory will not affect 2003 GDP, but will be included in 2004 GDP.
c. The value of the increased inventory will be counted as 2003 GDP and the value of the cars sold in 2004 will increase 2004 GDP.
d. None of the above are correct.
Answer: A Practice Questions? Greg, a U.S. citizen, works only in Canada. The value added to production from his employment is
a. included in both U.S. GDP and U.S. GNP.
b. included only in U.S. GDP.
c. included only in U.S. GNP.
d. not included in either U.S. GDP or U.S. GNP.
Answer: C Calculating Expenditures
GDP is calculated by adding up the following
Household consumption
Government spending
Investment by firms and households
Exports
Imports 6 Consumption
Consumption
Spending by households on goods and services
Includes durable and non-durable goods
Does not include the purchases of new housing  This counts as investment
Counts services that are delivered in the current period Investment
Investment refers to purchases of new capital
Gross private domestic investment: spending on capital equipment, inventories, and structures
Includes household purchases on new housing
Purchasing stocks and bonds are not considered investment Investment
Business inventories
Products produced in a given year but not sold are counted in GDP under investment as business inventories.
GDP calculates final production not final sales, inventories are counted in the current period and are later deducted when they are sold
GDP = Final Sales + Changes in Business Inventories 7 Investment
Gross Investment – Counts all new investment purchases
Depreciation
GDP does not account for depreciation Gross Investment = Net Investment + Depreciation Government
GDP counts all purchases by government at the local, state, and federal levels
Includes both consumption and investment by the government
Excludes transfer payments from the government to households Net Exports
Net Exports = Exports – Imports
Exports are goods and services produced in the U.S. and shipped abroad
Imports are goods and services produced abroad and sold in the U.S. 10 GDP and Prices
When calculating GDP how do prices enter in?
Nominal GDP is measured using current prices, when a variable, GDP, is calculated using current prices it is considered nominal
Real GDP is measured using prices from a base year. Compares just production changes not price changes Calculating GDP
Nominal GDP
The market value, using current prices, of all goods and services produced in a given period
Real GDP
Two approach
Traditional
Fix Weighted Calculating Real GDP
Traditional Approach
Step 1: Pick a base year for prices
Step 2: Find the market value of GDP for all years using base year prices
Fixed Weight
Step 1: Calculate all price and quantity combinations
Step 2: Hold prices constant and calculate GDP growth (For all years)
Step 3: Take average of growth rates 11 Example – From Book GDP INGDP INGDP INGDP IN YEAR 2YEAR 1YEAR 2YEAR 1 Nominal GDP in year 2 Nominal GDP in year 1 $19.20$18.40$15.10$12.10Total 10.809.008.407.00.90.701210Good C 4.007.001.202.101.00.3047Good B $4.40$2.40$5.50$3.00$ .40$.50116Good A P2 X Q2P2 x Q1P1 x Q2P1 x Q1P2P1Q2Q1 PRICESPRICESPRICESPRICESYEAR 2YEAR 1YEAR 2YEAR 1 YEAR 2YEAR 2YEAR 1YEAR 1PRICE PER UNITPRODUCTION ININININ (8)(7)(6)(5)(4)(3)(2)(1) A Three-Good Economy Example – From Book
Nominal GDP
Year 1 = 12.10
Year 2 = 19.20
Notice that both prices and quantities have changed
Is growth due to price changes or output changes
Need to hold prices constant Example – From Book
Real GDP using Year 1 prices
Year 1 – 12.10
Year 2 – 15.10
Real GDP using Year 2 prices
Year 1 – 18.40
Year 2 – 19.20
Which one is correct? 12 Example – From Book
How to calculate growth rates:
Nominal GDP (column’s 5 and 8)
[(19.20 - 12.10) / 12.10] *100= 58.7%
Using Year 1 prices (column’s 5 and 6)
[(15.10 – 12.10) / 12.10]*100 = 24.8%
Using Year 2 prices (column’s 7 and 8)
[(19.20 – 18.40) / 18.40]*100 = 4.3% ( )2 1 1 *100X X X−   Example – From Book
Still which number is correct?
24.8% or 4.3%
Take average of two
(24.8 + 4.3)/2 = 14.55% GDP and Prices
From the previous example we can also calculate price growth
If we keep quantity constant we can calculate price changes
This is called the GDP Deflator