Unit 2- Gross Domestic Product

Gross Domestic Product (GDP): Total market value of all final goods and services produced within a country's borders within a given year.

Gross National Product (GNP): Measure of what it's citizens produce and whether they produce these items within a country's borders.

How to find GDP
C= Personal Consumption Expenditures(67%)
     -Finished goods/services

Ig= Gross Private Domestic Investment(17%)
         1. Factory equipment maintenance
         2. New factory equipment
         3. Construction of housing
         4. Unsold inventory or products built in a year

G= Government purchases of goods and services (20%)

Xn= Net Exports (Exports - Imports)    (-4%)

GDP = C + Ig + G + Xn

Things not counted in GDP
1. Used or secondhand goods
        -To avoid double or multiple counting.
               Ex: Buying a car manufactured in 2017, in 2019

2. Gifts or transfer payments (public and private)
    Transfer payments: Transferring money from one person to another
         Public example: Social security/welfare
         Private example: Scholarships

3. Stocks or bonds
       -Purely financial transactions

4. Unreported business activities
          Ex: Tips

5. Illegal activities (underground/black market)

6. Non-market activities
          Ex: Babysitting, trade, bartering

7. Intermediate goods
         -To avoid double or multiple counting.
               Ex: Parts of a car

How to calculate GDP
Expenditure Approach: Add up all of the spending on final goods and services produced in a given year

GDP = C + Ig + G + Xn

Income Approach: Add up all of the income that resulted from selling all final goods and services produced in a given year.
-Comes from factors of production(FOP)

W= Wages
     Wages(s) can be referred to as:
        -Salaries
        -Compensation of Employees

R= Rents

I= Interests

P= Profits

GDP = W + R + I + P + Statistical Adjustments

Other formulas
Trade: Exports - Imports
     -If value of trade is positive, then it's a surplus.
     -If value of trade is negative, then it's a deficit.

Budget: (Government purchases of goods and services + Government transfer payments - Government tax and fee collection)
     -If value of budget is positive, then it's a deficit.
     -If value of budget is negative, then it's a surplus.

National Income
Two methods:
1) Compensation of employees + Rental income + Interest income +  Proprietor's income  + Corporate profits

2) GDP - Indirect business taxes - Depreciation - Net foreign factor payment

Disposable Personal Income: National income - Personal household taxes + Government transfer payments

GNP= GDP + Net foreign factor payment

Net National Product (NNP)= GNP - Depreciation

Net Domestic Product (NDP)= GDP - Depreciation

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

REMEMBER: Consumption of Fixed Capital is the same as Depreciation

Real vs Nominal GDP
Real GDP: Value of output produced in a constant/base year price.
    -Base year price x Quantity
    -Adjusted for inflation
    -Can increase from year to year only if output increases.

Nominal GDP- Value of output produced in current year prices.
    -Price x Quantity
    -Can increase from year to year if output or price increases.

• In the base year, the current price will be equal to constant price
• In years after the base year, nominal GDP will exceed real GDP
• In years before the base year, real GDP exceeds nominal GDP

Price Index- Measure inflation by tracking changes in the price of a market basket of goods and comparing it with the base year.

GDP Deflator: Price index used to adjust from nominal to real GDP
         Formula: (Nominal GDP / Real GDP) * 100

Consumer Price Index(CPI): Measures the cost of the market basket of a typical urban american family.
         Formula: = ((Price from year 2 - Price from year 1) / Price from year 1) * 100

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

Inflation Rate= ((New year - Old year) / Old year) * 100