Chapter 9 - Gross domestic product. In this chapter, we will address the following questions: What is GDP? How is GDP measured? What are the national income accounts? What is the difference between GDP and real GDP? How does our GDP compare to those of other nations? How is per capita GDP calculated? What are the shortcomings of GDP as a measure of national economic well-being?
Chapter 9 Gross Domestic Product Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 91 Chapter Objectives • • • • What is GDP? How is GDP measured? What are the national income accounts? What is the difference between GDP and real GDP? • How does our GDP compare to those of other nations? • How is per capita GDP calculated? • What are the shortcomings of GDP as a measure of national economic well being? Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 92 What Is GDP? • GDP is the nation’s expenditures on all FINAL goods and services produced during the year at market prices. Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 93 • – – – – • Durable goods …………$ 820 Nondurable goods …… 2,010 Services ……………… 3,929 Total C …………………………….$6,759 Investment – – – – • The Components of GDP, 2000 (in $ billions) Consumption Plant & Equipment …….$ 1,361 Residential Housing …… 416 Inventory change ………. 57 Total I ……………………………….1,834 Government Purchases – Federal ………………….$ 595 – State and Local …………. .1,148 – Total G …………………………… $1,743 • Net Exports (Xn) – Exports ………………….$ 1,099 – Imports ………………… 1,466 – Xn …………………………………$ 370 • GDP …… …………………………$9,966 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 94 • Consumption – – – – • Investment – – – – • The Components of GDP, 2000 (in $billions) Durable goods …………$ 820 Nondurable goods …… 2,010 Services ……………… 3,929 Total C …………………………….$6,759 GDP = C + I + G + Xn Plant & Equipment …….$ 1,361 GDP =6,759+1,834+1,743+(370) Residential Housing …… 416 Inventory change ………. 57 GDP = 9,966 Total I ……………………………….1,834 Government Purchases – Federal ………………….$ 595 – State and Local …………. .1,148 – Total G …………………………… $1,743 • Net Exports (Xn) – Exports ………………….$ 1,099 – Imports ………………… 1,466 – Xn …………………………………$ 370 • GDP …… …………………………$9,966 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 95 How GDP Is Measured? Income (wages, salary, rent, interest, profits) Households Firms Expenditures by Consumers, Investors, Government, and Net Exports Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 96 How GDP Is Measured? Income (wages, salary, rent, interest, profits) Same As Firms Households Expenditures by Consumers, Investors, Government, and Net Exports Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 97 How GDP Is Measured? Income (wages, salary, rent, interest, profits) Value of what is produced Same As Firms Households Value of what is spent Expenditures by Consumers, Investors, Government, and Net Exports Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 98 How GDP Is Measured? Income (wages, salary, rent, interest, profits) Flow of Income Approach Value of what is produced Same As Firms Expenditures Approach Households Value of what is spent Expenditures by Consumers, Investors, Government, and Net Exports Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 99 How GDP Is Measured? Income (wages, salary, rent, interest, profits) Flow of Income Approach Firms Value of what is produced Same As Expenditures Approach Households Value of what is spent Expenditures by Consumers, Investors, Government, and Net Exports (GDP = C + I + G + Xn ) Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 910 Calculating Percentage Changes Change % change = Original Number 1980 GDP = 2784.2 1980 RGDP = 4611.9 1979 GDP = 2557.5 1979 RGDP = 4624.0 Change > 12.9 Change > 226.7 226.7 12.9 % change = % change = 4624.0 2557.5 % change = .0886413 = 8.8% Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 943 Calculating Percentage Changes Change % change = Original Number 1980 GDP = 2784.2 1980 RGDP = 4611.9 1979 GDP = 2557.5 1979 RGDP = 4624.0 Change > 226.7 226.7 % change = 2557.5 Change > 12.9 12.1 % change = 4624.0 % change = .0886413 = 8.8% % change = .0026168 = .26 % Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 944 Trillion Dollar Economies, 2000 10 9.2 4.4 2.1 1.4 1.4 1.2 1.1 1.0 U.S Japan Germany France Britain Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved Italy Brazil* China 945 Per Capita GDP GDP Per capita GDP = Population Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 946 Per Capita GDP GDP2000 Per capita GDP = 20000 Population 2000 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 947 Per Capita GDP GDP2000 Per capita GDP = 20000 Population 2000 $9,966,000,000,000 Per capita GDP = 281,000,000 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 948 Per Capita GDP GDP2000 Per capita GDP20000 = Population 2000 $9,966,000,000,000 Per capita GDP20000 = 281,000,000 Per capita GDP = $35,466 20000 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 949 Per Capita Real GDP To compare per capita GDP in one year with that of another year we have to correct for inflation. In other words, we really need to revise our formula Real GDP Per capita real GDP = Population Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 950 Per Capita Real GDP, Selected Years, 19292000 Year Per Capita Real GDP 1929 $ 9,087 1939 8,566 1949 11,566 1959 18,813 1969 17,934 1979 22,707 1989 25,231 2000 35,466 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 951 Per Capita GDP of the 10 Leading nations, 2000 $43,570 40,000 $40,080 $34,330 $33,260 $32,380 30,000 $30,060 $29,340 $26,570 $25,380 $24,780 20,000 10,000 Luxembourg Norway Switzerland Japan Denmark United States Belgium Singapore Germany Netherlands International comparisons for per capita GDP are at least somewhat suspect because of varying national income accounting systems as well as fluctuations of foreign exchange rates Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 952 The Cost of Living in the United States and Russia: An Alternate Comparison Minutes of work required in 1994 to pay for selected goods in the United States and Russia Good U. S Russia Sugar, per pound 3 minutes 29 minutes Bread, per pound 5 minutes 14 minutes Milk, halfgallon 9 minutes 1 hour, 10 minutes Sausage, per pound 12 minutes 2 hours, 27 minutes Gasoline, per gallon 8 minutes 1 hour, 16 minutes Television, average 6 days 71 days Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 953 Shortcomings of GDP as a Measure of National Economic Wellbeing • 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 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 954 What Goes into GDP • James Tobin and William Nordhaus: A Measure of Economic Welfare GDP The economic bads The regrettable necessities + Household, unreported, and illegal production A Measure of Economic Welfare Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 955 What Goes Into GDP • When a large part of our production goes toward national defense, police protection, pollution control devices, repair and replacement of poorly made cars and appliances, and cleanups of oil spills, a large GDP is not a good indicator of how we’re doing • In general, the problem with using GDP as a measure of national economic wellbeing is that GDP is just one number, and no single number can possibly provide us with all of the information we need Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 956 The Last Word on GDP • GDP includes some things that really shouldn’t be counted • GDP has excluded some things that should be included • If we can accept GDP, while acknowledging all of its limitations, it serves us well Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 957 ... 2002 by The McGrawHill Companies, Inc. All rights reserved 9? ?10 C, I, and G as Percentages of GDP, 197 92000 70 Consumption C 60 50 40 30 Government purchases 20 G Investment I 10 198 0 198 2 198 4 198 6 198 8 199 0 199 2 199 4 199 6 199 8 2000 Consumption has consistently been between 60 and 70% of our GDP, with a slow upward ... 1,500 Base year = 199 2 GDP 1,000 500 196 0 62 64 66 68 70 72 74 76 78 80 82 84 86 88 Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved 90 92 94 96 98 2000 9? ?35 Calculating Percentage Changes... % change = Original Number 198 0 GDP = 2784.2 198 0 RGDP = 4611 .9 197 9 GDP = 2557.5 197 9 RGDP = 4624.0 Change > 12 .9 Change > 226.7 226.7 12 .9 % change =