Economics: Unit 2: Chapter 7: GDP, Real GDP, and Nominal GDP

GDP (Gross Domestic Product): The total value of all final goods and services produced within a country's border within a given year.

GNP (Gross National Product): The total value of all final goods and services produced by Americans in a given year.

What is included in GDP?

• Final goods and services
• Income earned
• Interest payments on corporate bonds
• Current production of final goods and services
• Unsold outputs (business inventories)

What is not included in GDP?

• Intermediate goods
• Transfer payments (public or private)
• Scholarships, social security
• Purchases of stocks and bonds
• Used or second handed sales (avoid double count)
• Non-market transactions
• Babysitting
• Illegal drugs
• Prostitution
• Doing your own house work or repairs
• Growing your own products for personal consumption

How do you calculate GDP?

                                 

Expenditure Approach	Income Approach
GDP=C+Ig+G+Xn	GDP=W+R+I+P+Statistical Adjustments
Used when calculating goods and services	Used for calculating factors of production

                        

C=Personal Consumption (anything you buy)	W=Wages (Compensation of employees , salary)
Ig= Gross Private Domestic Investment  ·        Factory Equipment ·        New construction of homes and businesses ·        Tools and machines	R= Rents (rental income)
G=Government Spending	I=Interest (interest income)
Xn= Net exports (exports-imports)	P=Payments (proprietors income)

Budget Deficit: The total amount of government borrows within a year. 

• Total government spending exceeds tax and fee revenue

• Equation: (Transfer Payments + Government Purchases - Government Tax and Fee Collection)

• If the answer is negative, it is a budget surplus
• If the answer is positive, it is a budget deficit

Trade = (exports - imports)

• If the answer is positive, it is a surplus
• If the answer is negative, it is a deficit

National Income Equations:

• (GDP - indirect business tax - depreciation - net foreign factor)

• (Compensation of employees + proprietors income + rental income + interest income + corporate profit)

Disposable Personal Income = (National Income - Household Taxes + Government Transfer Payments)

Net Domestic Product = (GDP - Depreciation) (Depreciation can also be called consumption of fixed capital)

Net National Product = (GNP - Depreciation) (Depreciation can also be called consumption of fixed capital)

GNP = (GDP + Net Foreign factor Payment)

Normal GDP: The value of output produced at current prices

• Nominal GDP = Price * Quantity

Real GDP: The real value of output produced at constant or based year prices.

• Real GDP = Price * Quantity

• Nominal GDP can increase year to year. If either output or prices increase, Real GDP can only increase if output increases.

Gross Private Domestic Investment = (Net private domestic investment + Depreciation) 

To measure economic growth, find RGDP.
To measure inflation, find NGDP.

Ex. In year 1, 10 computers are sold at $2000 each, and 15 televisions were sold at $500 each. In year 2, 17 computers were sold at $ 2200 each, and 20 televisions were sold at $550 each. 

Nominal GDP is (17*2200) + (20*550) = $48400

Real GDP is (17*2000)+(20*500) = $44000

GDP Deflator = ((Nominal GDP/Real GDP) *100)

• In base year, GDP is always equal to 100
• For year after the base year, GDP deflator is greater than 100
• For years before the base year, GDP deflator is less than 100