Lecture 2: Measuring economic activity GDP

Lecture 2: Measuring economic activity – Gross Domestic Product (GDP) Dr Do Xuan Luan Faculty of economics and rural development (FERD), Thai Nguyen University of Agriculture and Forestry (TUAF) All lectures of the course Introduction to macroeconomics; Gross Domestic Product (GDP); Economic growth; Unemployment Inflation; Aggregate Demand & Aggregate Supply (AS-AD model); Fiscal Policy; Monetary Policy; Combined effects of monetary and fiscal policy; 10 Trading with the world; Contents Definition of GDP Measurement of GDP Real GDP vs nominal GDP GDP deflator Is GDP the best indicator measuring performance of an economy? Definition of gross domestic product (GDP) GDP is defined as the market value of the all final goods and services produced in a country during a given period Note:  Market value: to add up products & services with different measurement unit  Final goods and services: not intermediate goods which are used to produce other goods Why? To avoid double counts  In a country (within the boundary, irrespective of where people come from  A given period of time: such as in a quarter, in a year and so on An example illustrating final goods Revenue (VND) Intermediate costs (VND) Value added (VND) Raw cotton (farmers) 24.000 24 Cotton threads 33.000 24.000 9.000 Cotton fabric 60.000 33.000 27.000 T-shirt (final good) 90.000 60.000 30.000 207 117 90 (VA) Actors Total How to measure GDP? Start with the circular flow of expenditure and income Output market Revenue Expenditure approach Final goods, services FIRMS Costs HOUSEHOLDS Land (rent), labor (wage), capital (interest rate), entrepreneur (profit) Input market Income approach How to measure GDP? Two main approaches The expenditure approach the income approach begins with the money spent on goods and services starts with the income earned (wages, rents, interest, profits) from the production of goods and services Expenditure approach to measure GDP GDP can be expressed as the sum of expenditures on domestically produced final goods and services GDP = C + I + G + X-IM Sectors Type of expenditure Examples Household Consumption (C) Food, clothes, haircuts, new cars Business firms Investment (I) New factories and equipment, new houses, increases in inventory stocks Governments Government purchases (G) New school building, new military hardware, salaries of soldiers and governmental officials Foreign sector Net exports, or exports minus imports (X-IM) Exported manufactured goods, legal or financial services provided by domestic residents to foreigners GDP data of Vietnam GDP component (expenditure approach) Symbol Value (billion USD) % of GDP in 2015 Household final consumption expenditure C 124.52 64.32 Investment I 53.39 27.58 General government final consumption expenditure G 14.13 7.30 Exports of goods and services X 173.85 Imports of goods and services IM 172.30 Net exports (X-IM) X-IM 1.55 0.8 193.60 100 Total An example of calculating GDP based on expenditure (USA) Item Symbol Amount (billion USD) % of GDP Personal consumption expenditures C 10285 70.5 Gross private domestic investment I 1842 12.6 Government expenditures G 2991 20.5 Net exports IM -539 -3.7 GDP= C + I + G + IM Y 14579 100.0 GDP measurement (income approach) Item Amount (billion USD) % of GDP Compensation of employees 7929 54.4 Net interest 924 6.3 Rental income 299 2.1 Corporate profits 1210 8.3 Proprietor’s income 1050 7.2 Indirect taxes less subsidies 1127 7.7 Depreciation 1860 12.8 GDP 14399 100 How big GDP of Vietnam is?  193.60 billion US dollars in 2015  represents 0.31 percent of the world economy presents 0.31 percent of the world economy Nominal GDP vs Real GDP 𝑛 𝐺𝐷𝑃 = 𝑃∗𝑄 An increase in GDP means rising physical amount of final products and services produced??  GDP can change from time to time because of two reasons:   ∆𝑃 (prices)  ∆𝑄 (𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠) Real GDP 𝐺𝐷𝑃𝑟 = 𝑛 𝑃0 ∗ 𝑄𝑡 (gross domestic product evaluated at based market prices  Nominal 𝐺𝐷𝑃𝑡 = 𝑛 𝑃t ∗ 𝑄𝑡 (gross domestic product evaluated at current market prices)  0: based year  t: current year GDP deflator  GDP Deflator is the ratio of the value of aggregate final output at current market prices (Nominal GDP) to its value at the base year prices (Real GDP)    𝐺𝐷𝑃𝐷 = 𝐺𝐷𝑃𝑛 𝐺𝐷𝑃𝑟 ∗ 100 The GDP deflator is a price index telling us the average price change of the whole economy Example:  𝐺𝐷𝑃𝑟 2015 = 𝑘 𝑃2000 ∗ 𝑄2015 = 64.64 billion US  𝐺𝐷𝑃𝑛 2015 = 𝑘 𝑃2015 ∗ 𝑄2015 =193.60 billion US  𝐺𝐷𝑃𝐷 = 𝐺𝐷𝑃𝑛 𝐺𝐷𝑃𝑟 ∗ 100= 193.60 64.64 ∗ 100= 299.50 Interpretation: the average price level in the economy increased by 199.5% percent from 2000 (the base period for estimating real GDP) to 2015 A simple example of calculating nominal, real GDP and GDP deflator (2014: base year) Rice Year Price (1000d/kg) Orange juice Quantiy Price (kg) (1000d/litre) Quantity (litre) GDP GDPn (1000d) GDPr (1000d) DGDP 2014 10 1.000 180 ? ? ? 2015 12 1.200 10 190 ? ? ? 2016 15 1.350 12 210 ? ? ? Is GDP a good measure of economic welfare? No, it ignores other wellbeing indicators Leisure time B Quality of goods and services Underground GDP Evaded taxes; illegal A C -Income distribution -Gender equality Well being E Equality D Environment -Erosion -Pollution -Flood, drought Summary of key points 1) 2) 3) 4) GDP is defined as the market value of the all final goods and services produced in a country during a given period The idea of real GDP is to measure a change in physical quantities of all final goods and services GDP deflator measures a change in average price of all final goods and services It is also a measurement of inflation GDP is not a good measure of economic welfare Assignment 1) Look for GDP of Vietnam for the period 2010-2015 2) Calculate per capita GDP of Vietnam for this period 3) Make comments on the change in per capita GDP www.themegallery.com