GDP

Introduction Microeconomics is the study of how individual

households and firms make decisions and how they

interact with one another in markets.

Macroeconomics is the study of the economy as a whole.

Its goal is to explain the economic changes that affect

many households, firms, and markets at once.

Definitions‘ For GDP

GDP is equal to the total expenditures for all final goods

and services produced within the country in a year.

GDP is equal to the sum of the value added at every

stage of production (the intermediate stages) by all the

industries within a country, plus taxes less subsidies on

products, in the period.

Definitions‘ For GDP

GDP is equal to the sum of the income generated by

production in the country in the period—that is,

compensation of employees, taxes on production and

imports less subsidies, and gross operating surplus (or

profits).

Some Important Points“Gross" means that depreciation of capital stock is not

subtracted out of GDP. If net investment (which is

gross investment minus depreciation) is substituted for

gross investment in the equation above, then the

formula for NET DOMESTIC PRODUCT is obtained.

Consumption and investment in this equation are

expenditure on final goods and services.

Some Important Points

It doesn’t Matter whether production is done by

domestic companies or foreign companies but

production has to be done within countries territory

only.

Calculating GDPCommonly the Expenditure Method is used for measuring and

quantifying GDP

Formula:

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

OR

GDP = consumption + gross investment

+ government spending

+ (exports – imports)

Diagrammatic Representation

Consumption

Gross Investment

Government Spending

(Export - Import)

GDP

Components of GDPGDP = C + I + G + (X-M)

WHERE:

C = Consumption

I = Investment

G = Government Expense

X = Export

I = Import

Components of GDP C : consumption Includes :: Personal expenditures mainly

consists of food, households, medical expenses, rent, etc. For

example, if you live in rental home then renovation spending

would be measured as Consumption.

Components of GDPI : investments by business or households in capital.

Example, If you spend money to renovate your hotel so that

occupancy rates increase, that is private investment. Includes:

Construction of a new mine, Purchase of machinery or

equipment for factory, Purchase of software, Expenditure on

new houses, Buying goods and services.

NOTE:: Investments on financial products like insurance,

mutual fund is not included in Investments.

Components of GDP

Total government expenditures on final goods and

services Includes :: Investment expenditure by the

government. Purchase of weapons for the military, Salaries of

public servants. Example: if a government agency is

converting the hotel into an office for civil servants the

renovation spending would be measured as part of public

sector spending (G). 

Components of GDPX:Gross Exports Includes :: All goods and services

produced for overseas consumption. Example, If a domestic

producer is paid to make the software for a foreign hotel, the

payment would be counted in gross export. 

 

M:Gross imports Includes :: Any goods or services

imported for consumption Example, If the renovation of hotel

involves the purchase of a electronics from abroad, that spending

would be counted in gross imports.  

MeasurementGDP is measured by national statistical agency.

In India-Ministry of statistics and programmed implementation.

In Russia-federal service of state statistics

In US- bureau of economic analysis.

Comparing GDP Across Time

GDP can grow due to:

1) Economy producing more

2) Prices having risen

Calculating GDP and Real GDP in a Simple Economy

Nominal GDP

Nominal GDP, is the value of all final output

produced in an economy during a given year,

calculated using the prices current in the year

which the output is produced.

Keeping it Real

Comparing output over time is best done

with real outputreal output which is nominal output

adjusted for inflation.

Real GDP is the value of the final goods and

services produced calculated using the prices

of some base year.

Nominal Vs. Real

Nominal GDPNominal GDP is GDP calculated at existing

prices.

Real GDPReal GDP is nominal GDP adjusted for

inflation.

Real GDPReal GDP is important to society because it

measures what is really produced.

Real vs. Nominal GDP

Shortcomings of GDP as a Measure of National Economic Well-being

Production that is excluded

Household production

Illegal production

The underground economy

Treatment of leisure time

Human cost and benefits

GDP gives us a ballpark idea of how much we produce, not

necessarily how well off we are.

Why GDP is Important?

The gross domestic product (GDP) is one the primary

indicators used to gauge the health of a country's economy.

It represents the total dollar value of all goods and services

produced over a specific time period - you can think of it

as the size of the economy. Usually, GDP is expressed as a

comparison to the previous quarter or year. For example, if

the year-to-year GDP is up 3%, this is thought to mean

that the economy has grown by 3% over the last year.

Why GDP is Important?

As one can imagine, economic production and growth,

what GDP represents, has a large impact on nearly

everyone within that economy. For example, when the

economy is healthy, you will typically see low

unemployment and wage increases as businesses demand

labor to meet the growing economy.

World’s largest Economies-2011

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