Unit 2 - GDP, Real/Nominal GDP, GDP Deflator, Inflation (1-28-16 to 2-1-16)

GDP

GDP: total market value of all final goods and services produced in a country's borders within a given year.

GNP: total market value of all final goods and services by citizens of that country of if its land or foreign land,

Included in GDP:

• 65% (C) - "Personal Consumption Expenditures"
• 17% (Ig) - "Gross Private Domestic Investment" (Factory Equipment/Maintenance, Construction of houses, unsold inventory of products built in a year)
• 20% (G) - "Government Spending"
• -2% (Xn) - "Net Exports (exports - imports)

NOT Included in GDP:

1. Intermediate Goods - good requires further processing before ready for final use.
2. Used/Secondhand Goods - avoid double counting.
3. Purely Financial Transactions - (stocks) its not physical.
4. Illegal Activity - drugs
5. Unreported Business Activity - tips
6. Transfer Payments - (Public: Social Security), (Private: Scholarships)
7. Non Market Activity - volunteering, babysitting, work for oneself

2 Ways of Calculating GDP (Expenditure vs. Income Approach)

1) Expenditure Approach: add up all spending on final goods and services produced in a given year. (GDP = C + Ig + G +Xn)

2) Income Approach: add up all of the income that resulted from selling all final goods and services produced in a given year. (GDP = (W)Wages, (R)Rent, (I)Interest, (P)Profit)

Nominal and Real GDP

Nominal: value of output produced in current prices

Real: value of output produced in constant base-year prices

(Formula = Price * Quantity)

• nominal can increase from year to year if either output of price increases
• real GDP can increase from year to year ONLY if output increases
• if you want to measure economic growth, use REAL GDP
• if you want to measure price increases, use NOMINAL GDP
• REAL GDP is adjusted for inflation (Uses BASE YEAR)
• Base Year = Earliest year if not given.

FORMULAS

NDP/Net Domestic Product: (GDP - Depreciation)

NNP/Net National Product: (GNP - Depreciation)

GNP: (GDP + Net Foreign Factor Payment)

GDP Deflator & Inflation

GDP Deflator: price index used to adjust from nominal to real GDP 
Formula = (Nominal / Real GDP) * 100

• in base year, deflator will always = 100
• in years AFTER base year, GDP is GREATER than 100
• in years BEFORE base year, GDP is LESSER than 100

Consumer Price Index (CPI): most commonly used measurement of inflation 
Formula = (Price of market basket in particular year / Price of same market in BASE year) * 100

Inflation: (GDP deflator in NEW or Current Year - GDP deflator in OLD Year / GDP deflator in OLD Year) * 100