ECONOMIC ECONOMIC INDICATORSINDICATORS

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

&&

GROSS NATIONAL PRODUCT GROSS NATIONAL PRODUCT (GNP)(GNP) MEASURING ECONOMIC

GROWTH

GDP – Associated GDP – Associated ConceptsConcepts

Intermediate GoodsIntermediate Goods Final GoodsFinal Goods Nominal GDPNominal GDP Real GDPReal GDP InflationInflation GDP per capitaGDP per capita GDP adjusted for PPP. GDP adjusted for PPP.

(Purchasing Power Parity)(Purchasing Power Parity)

UNDERSTANDING GDPUNDERSTANDING GDP

GDP – GROSS DOMESTIC PRODUCTGDP – GROSS DOMESTIC PRODUCT

What is GDP?What is GDP?

The total value of all The total value of all finalfinal goods and services goods and services

produced in an economy within one year or a specified produced in an economy within one year or a specified period of time.period of time.

The economic growth of a country is measured by the The economic growth of a country is measured by the increase or decrease in GDP. increase or decrease in GDP.

GDP – FINAL GOODSGDP – FINAL GOODS

What are What are final goodsfinal goods??

Final goods are complete products sold to Final goods are complete products sold to consumers. For example: a car you purchase from a consumers. For example: a car you purchase from a Holden is a final good. However, the accelerator Holden is a final good. However, the accelerator pedal in the car is an pedal in the car is an intermediate goodintermediate good. . The cost of producing intermediate goods are not included The cost of producing intermediate goods are not included in GDP calculations. in GDP calculations. Why???Why???

DIFFERENCES BETWEEN DIFFERENCES BETWEEN INTERMEDIATE AND FINAL GOODSINTERMEDIATE AND FINAL GOODS

Classify each of the following as either an Classify each of the following as either an intermediate or final good:intermediate or final good: Windscreen wiperWindscreen wiper Mobile phoneMobile phone Bulb in a TelevisionBulb in a Television Computer chipComputer chip StaplesStaples PizzaPizza Aircraft propeller Aircraft propeller

What is the total GDP of What is the total GDP of the United States?the United States?

The 2009/10 estimate for US GDP is 14.4 The 2009/10 estimate for US GDP is 14.4 trillion dollars or 14400 billion. trillion dollars or 14400 billion.

At GDP per capita (GDP expressed on per At GDP per capita (GDP expressed on per person basis), this was the equivalent to person basis), this was the equivalent to $48,000 for every person living in the USA.$48,000 for every person living in the USA.

Naturally, GDP per capita does Naturally, GDP per capita does not implynot imply, , every person has an income of $48,000. every person has an income of $48,000. Many people earn a lot less and a lot more Many people earn a lot less and a lot more in the United States. in the United States.

How does US GDP How does US GDP compare to the rest of compare to the rest of

the world? the world? The US is still the largest economy in the world The US is still the largest economy in the world

despite the GFC (global financial crisis)despite the GFC (global financial crisis) China recently overtook Japan (mid 2010), to China recently overtook Japan (mid 2010), to

become the world’s second largest economy.become the world’s second largest economy.

Country Rank (Order)(CIA World Fact Book)

Total GDP (trillions)at the official exchange rate

GDP per Capita

1. United States $14.4 trillion $48,000

2. China $4.7 trillion $6,600

3. Japan $4.6 trillion $32,600

4. Germany $3 trillion $34,900

5. France $2.9 trillion $32,700

6. United Kingdom

$2.7 trillioin $36,600

Based on GDP per capita, what Based on GDP per capita, what are the richest countries in the are the richest countries in the

world?world? 1 1 Liechtenstein $ 118,000 2007$ 118,000 2007 2 2 Qatar $ 103,500 2008 $ 103,500 2008 3 3 Luxembourg $ 81,100 2008 $ 81,100 2008 4 4 BermudaBermuda $ 69,900 2004 $ 69,900 2004 5. Kuwait5. Kuwait $ 57,400 2008 $ 57,400 2008 6 6 JerseyJersey $ 57,000 2005 $ 57,000 2005 7 7 NorwayNorway $ 55,200 2008 $ 55,200 2008 8 Brunei $53,100 2008 8 Brunei $53,100 2008 9. Singapore $52,000 2000 9. Singapore $52,000 2000 10 USA $48,000 2008 10 USA $48,000 2008

GROSS NATIONAL GROSS NATIONAL PRODUCT (GNP)PRODUCT (GNP)

Gross National Product is GDP +Gross National Product is GDP +

NetNet Foreign Income from Abroad. Foreign Income from Abroad.

For example, GNP for the US would beFor example, GNP for the US would be

GDP + (plus)GDP + (plus)

US company/individual income from overseas US company/individual income from overseas

– – (minus) .(minus) .

Foreign company/individual income from the Foreign company/individual income from the USUS

Which is greater GDP or Which is greater GDP or GNP?GNP?

When Americans receive more income When Americans receive more income from their overseas investments than from their overseas investments than foreigners receive from their investments foreigners receive from their investments in the United States, American GNP will in the United States, American GNP will be somewhat larger than GDP in that be somewhat larger than GDP in that year. If Americans receive less income year. If Americans receive less income from their overseas investments than from their overseas investments than foreigners receive from their US foreigners receive from their US investments, on the other hand, American investments, on the other hand, American GNP will be somewhat smaller than GDP. GNP will be somewhat smaller than GDP.

What is US GNP?What is US GNP? The United States, stopped using The United States, stopped using

GNP statistics in its national GNP statistics in its national accounts in 1992, although these accounts in 1992, although these figures are still collected by figures are still collected by statistical agencies. statistical agencies.

US GNP and GDP have been similar US GNP and GDP have been similar for a number of years. for a number of years.

However, for many countries their However, for many countries their GNP is significantly less than their GNP is significantly less than their GDP. GDP.

What was the increase in US GNP from 1947 to 2009?

GDP – A VITAL ECONOMIC GDP – A VITAL ECONOMIC INDICATORINDICATOR

Why is GDP a very important economic indicator?Why is GDP a very important economic indicator? It helps to measure the size of a country’s It helps to measure the size of a country’s

economy relative to other countries.economy relative to other countries. All government spending can be expressed as a All government spending can be expressed as a

percentage of GDP for global comparison percentage of GDP for global comparison purposes. purposes.

GDP can be expressed on a per capita (person GDP can be expressed on a per capita (person basis) – to further assist our understanding of basis) – to further assist our understanding of global differences between nations & regions.global differences between nations & regions.

GDP – A VITAL ECONOMIC GDP – A VITAL ECONOMIC INDICATORINDICATOR

Countries can be classified into different Countries can be classified into different income groups based on GDP figures.income groups based on GDP figures.

For example the high income, middle For example the high income, middle income, and low income countries.income, and low income countries.

GDP figures are used in all reference GDP figures are used in all reference books, and business/ economic journals.books, and business/ economic journals.

GDP – A MEASURE OF GDP – A MEASURE OF ECONOMIC GROWTH ECONOMIC GROWTH

A country’s growth rate is determined by A country’s growth rate is determined by the percentage increase or decrease in the percentage increase or decrease in GDP. GDP.

For example if GDP was $10 billion in For example if GDP was $10 billion in 2007 and increased to $10.5 billion in 2007 and increased to $10.5 billion in 2008, the growth rate for the country 2008, the growth rate for the country would be 5% per annum. However it is would be 5% per annum. However it is necessary to distinguish between Real necessary to distinguish between Real and Nominal GDP. (future slides) and Nominal GDP. (future slides)

What is a recession?What is a recession?Negative GDP GrowthNegative GDP Growth

Two quarters of negative economic growth. Two quarters of negative economic growth.

or 6 months of negative economic growth. or 6 months of negative economic growth.

What does negative economic growth mean?What does negative economic growth mean?

GDP went backwards (declined from the GDP went backwards (declined from the previous previous

period)period)

Expansion:Expansion: increase in GDP / economic increase in GDP / economic growthgrowth

ContractionContraction: decrease in GDP / economic : decrease in GDP / economic growthgrowth

Economic Growth RatesEconomic Growth RatesHigh Income Advanced High Income Advanced

EconomiesEconomiesCountry GDP Growth Rates

Economist Magazine Prediction Full Year 2010August 12th 2010.

Singapore 12.3%

South Korea 5.9%

Canada 3.5%

Australia 3.1%

Japan 3.2.% (mainly export led growth, very weak domestic demand)

United States 3%

Germany 1.9%

France 1.4%

Britain 1.4%

Greece -4.4% (negative)

Economic Growth RatesEconomic Growth RatesDeveloping Countries Developing Countries

Country GDP Growth RatesEconomist Magazine Prediction Full Year 2010August 12th 2010.

China 9.9%

India 8%

Brazil 7.8%

Argentina 6.8%

Vietnam 6.4%

Indonesia 5.6%

Chile 5.2%

Colombia 4.6%

Mexico 4.6%

South Africa 2.8%

Venezuela -5.5% (negative growth)

Nominal GDP vs Real Nominal GDP vs Real GDPGDP

Nominal GDPNominal GDP GDP which is GDP which is notnot adjusted for inflation. adjusted for inflation. As a consequence nominal GDP figures As a consequence nominal GDP figures

are distorted by inflation and are not are distorted by inflation and are not accurate.accurate.

Real GDPReal GDP GDP which is adjusted for inflation.GDP which is adjusted for inflation. As consequences these GDP figures are As consequences these GDP figures are

more accurate, than nominal figures. more accurate, than nominal figures.

NOMINAL & REAL GDPNOMINAL & REAL GDP

Case Study ExampleCase Study Example In economy XYZ GDP increased from $10 billion in In economy XYZ GDP increased from $10 billion in

2007 to $10.5 billion in 2008. Therefore our 2007 to $10.5 billion in 2008. Therefore our growth rate was 5% per annum. We can call this growth rate was 5% per annum. We can call this figure the figure the nominal increase in GDP or the nominal increase in GDP or the nominal growth rate. nominal growth rate. However, what if the However, what if the inflation rate for this same period was 3%. inflation rate for this same period was 3%. Therefore 3% of our increase in GDP was not due Therefore 3% of our increase in GDP was not due to real growth, but rather to an increase in prices. to real growth, but rather to an increase in prices. Real GDP or the real growth rateReal GDP or the real growth rate is only 2% per is only 2% per annum. annum.

Real GDP Basic ExercisesReal GDP Basic Exercises(Calculations)(Calculations)

Waxland EconomyWaxland Economy

Waxland had a total GDP of $550 billion at the Waxland had a total GDP of $550 billion at the

end of 2007. At the end of 2008, GDP was end of 2007. At the end of 2008, GDP was

calculated to be $660 billion. However, the calculated to be $660 billion. However, the

inflation rate during 2008 was 15%. inflation rate during 2008 was 15%. Calculate the Calculate the

real GDP growth rate for 2008 in dollar andreal GDP growth rate for 2008 in dollar and

percentage terms. percentage terms.

Waxland Economy Waxland Economy (Proposed Solution to (Proposed Solution to

Question)Question)

Real GDP ExercisesReal GDP Exercises

Swaziland EconomySwaziland Economy

Swaziland had a total GDP of $850 billion at Swaziland had a total GDP of $850 billion at the the

end of 2007. At the end of 2008, GDP was end of 2007. At the end of 2008, GDP was

calculated to be $910 billion. However, the calculated to be $910 billion. However, the

inflation rate during 2008 was 5%. Calculate inflation rate during 2008 was 5%. Calculate the the

real GDP growth rate for 2008 in percentage real GDP growth rate for 2008 in percentage

terms. terms.

Swaziland Economy Swaziland Economy (Proposed Solution to (Proposed Solution to

Question)Question)

GDP – PURCASHING GDP – PURCASHING POWER PARITY (PPP)POWER PARITY (PPP)

Internet ActivityInternet Activity: :

The GDP figures provided in slide 7 related The GDP figures provided in slide 7 related to GDP at the official exchange rate. to GDP at the official exchange rate.

However, GDP at Purchasing Power Parity is However, GDP at Purchasing Power Parity is considered more accurate by many considered more accurate by many commentators.commentators.

What do they mean by PPP?What do they mean by PPP?Go the following website:Go the following website: https://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.htmlhttps://www.cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html

Click on Economy – GDP (Purchasing Power Click on Economy – GDP (Purchasing Power Parity) Parity)

GDP PPP – DefinitionGDP PPP – DefinitionCIA FactbookCIA Factbook

GDP PPP RankingsGDP PPP Rankings

What countries are in different What countries are in different position when using GDP at position when using GDP at purchasing power parity?purchasing power parity?

Why do you think this is the case?Why do you think this is the case?

850,000850,000 750,000750,000 10% inflation10% inflation 75,00075,000 +750,000+750,000 825,000825,000 25,000 Growth25,000 Growth 825/850825/850 2.94% Growth2.94% Growth

(850-750)/750=13.33%(850-750)/750=13.33% 13.33%-10%=3.33%13.33%-10%=3.33% 3.33%*750=24.9753.33%*750=24.975