lecture 17 (gdp std of living)

8/10/2019 Lecture 17 (GDP Std of Living)

1/46

GDP and the Standardof Living

CHAPTER

21


2/46

21.1 GDP, INCOME, AND EXPENDITURE

GDP & GNP DefinedGross Domestic Product (GDP)

The market value of all the final goods and services

produced within a country in a given time period.

Value Produced

Use market prices to value production.

Gross National Product (GNP)

The market value of all the final goods and servicesproduced anywhere in the world in a given timeperiod by the factors of production supplied by theresidents of the country.


3/46


What Produced

Final good or service is a good or service that is

produced for its final user and not as a component ofanother good or service.

Intermediate good or service is a good or servicethat is produced by one firm, bought by another firm,

and used as a component of a final good or service.GDP includes only those items that are traded inmarkets.


4/46


Where Produced

Within a country

When Produced During a given time period.


5/46


Circular Flows in the Economy

Consumption expenditure is the expenditure by

households on consumption goods and services.

Investment is the purchase of new capital goods

(tools, instruments, machines, buildings, and other

constructions) and additions to inventories.


6/46


Government expenditure on goods and services

is the expenditure by all levels of government on goods

and services.

Net exports of goods and services is the value of

exports of goods and services minus the value of

imports of goods and services.


7/46


Exports of goods and services are the items that

firms in Malaysia produce and sell to the rest of the

world.

Imports of goods and services are the items that

households, firms, and governments in Malaysia buy

from the rest of the world.


8/46


Total expenditure is the total amount received by

producers of final goods and services.

Consumption expenditure: CInvestment: I

Government expenditure on goods and services: G

Net exports: NX

Total expenditure = C+ I+ G + NX


9/46


Income

Labor earns wages.

Capital earns interest.

Land earns rent.

Entrepreneurship earns profits.

Households receive these incomes.


10/46


Expenditure Equals Income

Because firms pay out everything they receive as

incomes to the factors of production, total expenditureequals total income.

That is:

Y= C+I+ G + NX

The value of production equals income equals

expenditure.


11/46


Figure 21.1

shows the

circular flow

of incomeand

expenditure.

The table

shows theU.S. data

for 2007.


12/46

21.2 MEASURING GDP

The Expenditure Approach

Measures GDP by using data on consumptionexpenditure, investment, government expenditure on

goods and services, and net exports.Table 21.1 on the next slide shows the calculation for2007.


13/46


14/46

21.2 MEASURING GDP

Expenditures Not in GDP

Used Goods

Expenditure on used goods is not part of GDP

because these goods were part of GDP in theperiod in which they were produced andduring which time they were new goods.

Financial Assets

When households buy financial assets suchas bonds and stocks, they are making loans,not buying goods and services.


15/46

21.2 MEASURING GDP

The Income Approach

Measures GDP by summing the incomes that firms pay

households for the factors of production they hire. Wages

Interest

Rent

Profits


16/46

21.2 MEASURING GDP

Wages

Wages, called compensation of employees in thenational accounts, is the payment for labor services.

It includes net wages and salaries plus fringebenefits paid by employers such health careinsurance, social security contributions, and pension

fund contributions.


17/46

21.2 MEASURING GDP

Interest, Rent, and Profit

Interest, rent, and profit is the sum of the incomesearned by capital, land, and entrepreneurship.

Interestis the income households receive on loans theymake minus the interest they pay on their borrowing.

Rent includes payments for the use of land and other

rented inputs.Profitincludes the profits of corporations and smallbusinesses.


18/46

21.2 MEASURING GDP


19/46


20/46

21.2 MEASURING GDP

Net domestic product at factor cost is the sum of

wages, interest, rent, and profit.

Net domestic product at factor cost is notGDP.

We need to make two adjustments to arrive at GDP:

One from factor cost to market prices One from net product to gross product


21/46

21.2 MEASURING GDP

From Factor Cost to Market Price

The expenditure approach values goods at marketprices; the income approach values them at factor cost.

Indirect taxes (such as sales taxes) make market pricesexceed factor cost.

Subsidies (payments by government to firms) makefactor cost exceed market prices.

To convert the value at factor cost to the value atmarket prices, we must:

Add indirect taxes and subtract subsidies


22/46

21.2 MEASURING GDP


23/46

21.2 MEASURING GDP

From Gross to Net

The expenditure approach measures gross product; the

income approach measures net product.

Gross profit is a firms profit before subtracting the

depreciation of capital.

Net profit is a firms profit aftersubtracting the

depreciation of capital.Depreciation is the decrease in the value of capitalthat results from its use and from obsolescence.


24/46

21.2 MEASURING GDP

Income includes net profit, so the income approachgives a net measure.

Expenditure includes investment. Because some new

capital is purchased to replace depreciated capital, theexpenditure approach gives a gross measure.

To get gross domestic product from the incomeapproach, we must add depreciation to total income.

After making these two adjustments the incomeapproach almost gives the same estimate of GDP asthe expenditure approach.


25/46

21.2 MEASURING GDP


26/46

21.2 MEASURING GDP

Statistical Discrepancy

The income approach and the expenditure approach do

not deliver exactly the same estimate of GDPthere is

a statistical discrepancy.

Statistical discrepancy is the discrepancy between

the expenditure approach and income approach

estimates of GDP, calculated as the GDP expendituretotal minus the GDP income total.


27/46

21.2 MEASURING GDP


28/46

21.2 MEASURING GDP

GDP and Related Measures of Production and

Income

Gross national product (GNP) is the market value ofall the final goods and services produced anywhere in the

world in a given time period by the factors of production

supplied by residents of the country.

Msia GNP =Msia GDP + Net factor income (Y) from abroad**

(**Y received from other countries - Y paid to other countries)


29/46

21.2 MEASURING GDP

Real GDP and Nominal GDP

Real GDP is the value of the final goods and servicesproduced in a given year expressed in the prices of thebase year.

Nominal GDP is the value of the final goods andservices produced in a given year expressed in the

prices of that same year.


30/46

21.2 MEASURING GDP

Calculating Real GDP

The goal of calculating real GDP is to measure the

extent to which total production has increasedReal GDP removes the influence of price changes from

the nominal GDP numbers.

To focus on the principles and keep the numbers easy

to work with, well calculate real GDP for an economy

that produces only one consumption good, one capital

good, and one government service.


31/46

21.2 MEASURING GDP

Table 21.3 shows the calculation with 2000 (base year)

and 2008.

To find the total expenditure in 2000 multiply the

quantity of each item produced in 2000 by its price in

2000.

Then sum the expenditures to find nominal GDP in

2000.


32/46

Nominal

GDP in2000 is$100million.

Because2000 is thebase year,

real GDPin 2000 isalso $100million.


33/46

21.2 MEASURING GDP

In part (b) of Table 21.3, we calculate nominal GDP in

2008.

Again, we calculate nominal GDP by multiplying the

quantity of each item produced by its price and then

sum the expenditures to find nominal GDP in 2008.


34/46

Nominal

GDP in2000 is$100million.

NominalGDP in2008 is

$300million.


35/46


36/46

21.2 MEASURING U.S. GDP

The increase in real GDP will tell by how much the

quantity of good and services has increased.

Real GDP in 2008 is what the total expenditure would

have been in 2008 if prices had remained the same as

they were in 2000.

To calculate real GDP in 2008 multiply the quantities

produced in 2008 by the price in 2000 and the sumthese expenditures to find real GDP in 2008.

Part (c) of Table 21.3 shows the details.


37/46

Real GDP

in 2000 is$100million.

Real GDPin 2008 is$160million

only 1.6times realGDP in2000.


38/46

21.3 THE USE AND LIMITATIONS OF REAL GDP

We use estimates of real GDP for two main purposes:

To compare the standard of living over time

To compare the standard of living among countries

The Standard of Living Over Time

To compare living standards we calculate real GDP per

person (GDP per capita / income per capita)- realGDP divided by the population.


39/46


In 1967, real GDP in the United States was $3,485 billionand the population of the United States was 198.7million.

Real GDP per person = $3,485 billion 198.7 million

Real GDP per capita in US = $17,536

GDP per capita (current price) in Malaysia

2011= US$9977.32


40/46


Long-Term Trend

Figure 21.3 showsthe long-term trend

in U.S. real GDP perperson.

Real GDP per persondoubled in the 36

years from 1967 to2002.


41/46


Short-Term Fluctuations

Fluctuations in the pace of expansion of real GDP is

called the business cycle.

The business cycle is a periodic irregular up-and down

movement of total production and other measure of

economic activity.

The four stages of a business cycle are expansion,peak, recession, and trough.


42/46


The shaded periodsshow the

recessionsperiods of fallingproduction thatlasts for at least sixmonths.


43/46


Standard of Living Across Countries

To compare living standards across countries, we must

convert real GDP into a common currency and common

set of prices, called purchasing power par i ty.

Purchasing power parity in Msia in 2008 = US$14,206

Goods and Services Omitted from GDP

Household production

Underground production

Leisure time

Environment quality


44/46


45/46


Leisure Time

Our working time is valued as part of GDP, but ourleisure time is not.

Environment Quality

Pollution is not subtracted from GDP.

We do not count the deteriorating atmosphere as a

negative part of GDP. If our standard of living is adversely affected by

pollution, our GDP measure does not show thisfact.


46/46


Other Influences on the Standard of Living

Health and Life Expectancy

Good health and a long life do not show up directlyin real GDP.

Political Freedom and Social Justice

A country might have a very large real GDP perperson but have limited political freedom andsocial justice.

A lower standard of living than one that had thesame amount of real GDP but in which everyoneenjoyed political freedom.

lecture 17 (gdp std of living)

Documents