Lecture Economics (6/e): Chapter 9 - Stephen L. Slavin

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 = ­­­­­­­­­­­­­­­­­­­­­