Unit Two: GDP

Gross Domestic Product (GDP)

Total market value of all final goods and services produced within a country's borders within a given year

• What's not included: 
• Gross National Products
• Used or Second-hand Goods (trying to avoid double or multiple counting)
• Gifts/Transfer Payments
• Public: Welfare, Social Security
• Private: Scholarship
• No Output is Being Produced
• Recipients Contribute Nothing to Current Production 
• Stocks and Bonds
• Purely Financial Transactions
• No Current Production 
• Unreported Business Activities 
• Example: Tips
• Illegal Activities
• Examples: Drugs, Prostitution, etc. 
• Intermediate Goods - goods that require further processing before they are ready for final use
• Non-Market Activity 
• Examples: Volunteer Activity, Family Work, Babysitting

(Expenditure Approach to GDP): 

• Formula: C + Ig + G + Xn
• C = Personal Consumption Expenditures 
• Durable and Non-Durable Goods
• 67% of the Economy
• Ex: Saving More Money, Rent
• Ig = Gross Private Domestic Investment
• New Factory Equipment 
• Factory Equipment Maintenance 
• Construction of Housing
• Unsold Inventory of Products Build in a Year
• Ex: Business Inventories
• G = Government Spending 
• Xn = Net Exports
• (Exports - Imports)

Gross National Product (GNP) - sum of all goods and services produced by residents of a country during a given year

Expenditure Approach 

• Add up all the spending on final goods and services produced in a given 
• Formula: C + Ig + G + Xn 
• Based on Receipts 

Income Approach 

• Add up all the income that resulted from selling all final goods and services produced in a given year
• Formula: 
• W - Wages (Salary, Salary Supplements, Compensation of Employees)
• R - Rents (Rental Income)
• I - Interests (Interests Income)
• P - Profits (Proprietor's Income)
• + (plus)
• Statistical Adjustments 
• Based upon the verbalization of something 

• Whatever you get for the Expenditure Approach has to equal the Income Approach 

Trade Formula: (Exports - Imports)

• Positive: Surplus
• Negative: Deficit 

Budget Formula:
(Government Purchases of Goods and Services + Government Transfer Payments - Government Tax and Fee Collections)

• Positive: Deficit
• Negative: Surplus

National Income: 

Option 1:

(Compensation of Employees + Rental Income + Interest Income + Proprietor Income + Corporate Profits)

Option 2:

(GDP - Indirect Business Taxes - Depreciation (Consumption of Fixed Capital) - Net Foreign Factor Payments) 

Disposable Personal Income: 

National Income - Personal Household Taxes + Government Transfer Payments

Net Domestic Product: 

(GDP - Depreciation)

Net National Product:  

(GNP - Depreciation)

Gross National Product: 

 (GDP + Net Foreign Factor Payments)

Gross Private Domestic Investment (Ig):

(Net Private Domestic Investment + Depreciation) 

Nominal GDP:

• The value of output produced in current year prices. 

Formula: Price x Quantity 

• Use price and quantity for designated years

Real GDP:

• The value of output produced in constant base year (original year)
• Prices that is adjusted for inflation 

Formula: Price x Quantity 

• Use the price from the base year
• Use the quantities from the designated years