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ECON203 Principles of Macroeconomics

Week 3Topic: Measuring GDP

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Lesson ObjectivesLesson Objectives

To learn about

After studying these topics you should be able to:• Explain and interpret the main macroeconomic

indicator GDP

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NOMINAL GROSS DOMESTIC NOMINAL GROSS DOMESTIC PRODUCT (GDP) PRODUCT (GDP)

Nominal GDP (or GDP) is the market value of all final goods and services produced in a country in a given time period by resources located in the that country, regardless of who owns those resources.

It is money value of the output. It is measure to assess the status of a economy.This definition has four parts:

Market value Final goods and services Produced within a country In a given time period

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NOMINAL GROSS DOMESTIC NOMINAL GROSS DOMESTIC PRODUCT (GDP) PRODUCT (GDP)

Market value of a good or a service = the price at which the item is traded in the market × its quantity.

A final good or a service is something produced for its final user and not as a component of another good or a service to avoid double counting.

Examples: Clothes, Television, Mobile set, etc.An intermediate good or a service is something produced to use to produce a final good or service.

Examples: Paint, Steel, wood etc.

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NOMINAL GROSS DOMESTIC NOMINAL GROSS DOMESTIC PRODUCT (GDP) PRODUCT (GDP)

GDP does not count the value of everything that is produced. It includes only items that are traded in the market.

• It does not include the value of goods and services that people produce for their own use (such as Cleaning house by any family members but not paid) and non-productive transactions (such as sales of second-hand goods). It also does not include the purchase of stocks and bonds.

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NOMINAL GROSS DOMESTIC NOMINAL GROSS DOMESTIC PRODUCT (GDP) PRODUCT (GDP)

GDP measures the value of production during a given period of time. This period is either a quarter or a year. – if this period is a quarter, it is call the quarterly

GDP data . These data are used to track the short- run evolution of the economy.

– if this period is a year, it is call the annual GDP data. These data are used to examine the long- term trends.

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NOMINAL GROSS DOMESTIC NOMINAL GROSS DOMESTIC PRODUCT (GDP) PRODUCT (GDP)

There are two approaches are commonly using to measure GDP. These are

The expenditure approachThe income Approach

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NOMINAL GROSS DOMESTIC NOMINAL GROSS DOMESTIC PRODUCT (GDP) PRODUCT (GDP)

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GDP-EXPENDITURE GDP-EXPENDITURE APPROACH APPROACH

Total expenditure on final goods and services equals the value of output of final goods and services, which is GDPFour groups buy the final goods and services produced, these are:Households (Expenditures-consumption expenditures)Firms (Expenditures-Investment)Government (Expenditures-Government expenditures)The Rest of the world (Net export of goods and services)

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GDP-EXPENDITURE GDP-EXPENDITURE APPROACHAPPROACH

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GDP-EXPENDITURE GDP-EXPENDITURE APPROACHAPPROACH

Investment (I) is the purchase of new capital goods (durable goods produced by one firm and bought by another) by firms and government and addition to inventory.

Government Expenditure on Goods and Services (G) is the expenditure by all levels of government such as Federal, State, and local spend on public services provided to its citizens. Example: Spending on defence, judicial and education system. Yet, it excludes government transfers like social security and unemployment

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GDP-EXPENDITURE GDP-EXPENDITURE APPROACHAPPROACH

Net Exports of Goods and Services (X-M) is the value of exports minus the value of imports.

• Exports of Goods and Services are items that the firms in the country produce and sell to the rest of the world.

• Imports of Goods and Services are items that households , firms ,and the government in the country buy from the rest of the world.

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GDP-EXPENDITURE GDP-EXPENDITURE APPROACHAPPROACH

So The Total Expenditure of four groups as follows.

GDP = Total/Aggregate Expenditure = C + I + G + (X-M)= C + I + G + NX

NX refers to net exports that could be either positive or negative

The expenditure approach measures GDP as the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports.

GDP = C + I + G + (X M)

GDP-EXPENDITURE GDP-EXPENDITURE APPROACHAPPROACH

GDP measures by the expenditure approach for 2010 is follows:

GDP = $10,285 + $1,842 + $2,991 $539

= $14,579 billion

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GDP-EXPENDITURE GDP-EXPENDITURE APPROACHAPPROACH

Which (if any) of the following transactions would be included in Saudi Arabia’s measure of GDP?

1. Mohammed Abdullah spends SAR 2,000 buying shares2. Talal Mohammed buys an old car at auction by SAR20,0003. Khaled is a university student and receives an allowance of

SAR150 from his father each week4. Khaled spends his SAR150 allowance on petrol and soft

drinks5. Changes in stocks of furniture valued at SAR2 million6. Lettuces grown in my vegetable garden but not selling7. Timber purchased by the furniture manufacturer8. Nizar purchase of a Saudi Airline ticket

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GDP is the Sums or aggregates of all the income earned by resource suppliers in the economy.So, Total Income Y is equal wages that labor earns + interest that capital earns + rent that land earns + profits that entrepreneurship earns. We can also say that GDP is the sum of total households income.

GDP: INCOME GDP: INCOME APPROACHAPPROACH

–The National Income and Expenditure Accounts divide incomes into two broad categories:

1. Compensation of employees 2. Net operating surplus

–Compensation of employees is the payments for labor services. The sum of net wages plus taxes withheld plus social security and pension fund contributions.–Net operating surplus is the sum of other factor incomes. It includes net interest, rental income, corporate profits, and proprietor’s income.

GDP: INCOME APPROACHGDP: INCOME APPROACH

The sum of all factor incomes is net domestic income at factor cost.Two adjustments must be made to get GDP:1.Indirect taxes minus subsidies are added to get net domestic income from factor cost.2.Depreciation is added to get from net domestic income to gross domestic income.Table 4.2 on the next slide shows the income approach with data for 2010.

GDP: INCOME APPROACHGDP: INCOME APPROACH

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Limitation of GDP Limitation of GDP CalculationCalculation

• Some production is not included in GDP– With some minor exceptions, GDP includes

only those products that are sold in markets– Ignores “do-it-yourself” household production

an economy in which householders are largely self-sufficient will understate GDP

– Ignores the underground economy• All market activity that goes unreported because it’s illegal

or those involved want to evade taxes

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Now it’s over for Now it’s over for today. Do you have today. Do you have any question?any question?