M4L2 GDP and GNP

Resource
Market value

the amount of money people have paid for goods and services
they have received

Production
process

the steps used in the making or manufacturing of a good or

service

Gross national
product (GNP)

the market value of all final goods produced by a country's

permanent residents in a given period of time

Foreign
nationals

people living in a country who do not have the right to

permanent residency status

U.S. nationals

people living in the country who have permanent resident

status, either as a citizen born in the country or acquired
citizenship from the government (naturalization)

Nominal gross
domestic
product (nom
GDP)

measures output in terms of actual dollar amount

Real gross
domestic
product (real
GDP)

measures output in terms of physical goods and services

Base year

a specific year used as a means of comparison for goods and

services produced

Physical output

the actual amount of product or services produced over a

specific period of time

GDP deflator

the measure of the average price level relative to the base

year
(nom GDP / real GDP) x 100

Investment
spending

expenditures associated with business, other than for human

resources (wages, benefits, etc.)

Lecture 1
GDP

the market value of all final goods and services produced

within a country in a given period of time
the market value GDP is in terms of money ($)
of all legally transacted trades
the government relies on reports to ensure that this
includes all transactions does not cover goods and
services on the black market (those transactions not
reported to the government)
NB. the black market entails services as innocuous as
mowing the lawn or not reporting all of a persons tips to
something as illegal as prostitution or drug dealing. All the
black market means is that there is no report of it to the
government so it is an unknown market.
final goods and services purchased by households for
consumption; they are not used as capital
final goods are used to avoid double counting
for example, a car frame that is sold is not included in
GDP because it is not a final good, it is an intermediate
good; when the car that the frame went to is sold, the price
of the car is included in GDP and it is assumed that the
price of the car frame is included in the overall price of the
car
goods and services things and actions people do for money,
e.g., haircuts, lawn care, etc.
produced only things made in the current year; secondhand
transactions do not count
within a country all activity within the political borders of a
country regardless of the nationalities of the actors

GDP vs. GNP

GDP within a country (all peoples)

GNP only those countrys nationals, regardless of their
locations in the world
in a given period of time usually one year

nominal GDP

the GDP as measured in terms of money

real GDP

the GDP as measured in terms of the actual products and

services produced; the amount of stuff were actually making
it seeks to hold constant the effects of changes in price to
measure the amount of real goods and services produced

example of
distinction

calculating nominal GDP

Apples
Year
$
#
2000
$1.00
2
2001
$1.50
4
2002
$2.00
5

Bananas
$
#
$2.00
3
$2.50
4
$3.00
5

Nominal
GDP
$8.00
$16.00
$25.00

nom GDP 2000 = ($1.00 x 2) + ($2.00 x 3) = $2.00 + $6.00

nom GDP 2001 = ($1.50 x 4) + ($2.50 x 4) = $6.00 + $10.00
nom GDP 2002 = ($2.00 x 5) + ($3.00 x 5) = $10.00 + $15.00
calculating real GDP (holding price constant)
Year
2000
2001
2002

Apples

$
$1.00
$1.00
$1.00

#
2
4
5

Bananas
$
#
$2.00
3
$2.00
4
$2.00
5

Real
GDP
$8.00
$12.00
$15.00

Using year 2000s prices as base price

real GDP 2001 = ($1.00 x 4) + ($2.00 x 4) = $4.00 + $8.00
real GDP 2002 = ($1.00 x 5) + ($2.00 x 5) = $5.00 + $10.00
real GDP is used to measure actual changes in production
GDP deflator

(nom GDP / real GDP) x 100

Year
2001
2002

nom GDP
$16.00
$25.00

real GDP
$12.00
$15.00

GDP deflator
133
166

GDP deflator 2001 = ($16 / $12) x 100 = 1.33 x 100

GDP deflator 2002 = ($25 / $15) x 100 = 1.66 x 100

The GDP deflator is one of the methods to measure how

much prices have gone up (inflation) or down (deflation), and
how quickly the prices are changing over time
Since GDP deflator = (nom GDP / real GDP) x 100, then we
can find the real GDP using the GDP deflator:
real GDP = (nom GDP/ GDP deflator) x 100
Lecture 2
Expenditures Approach
All transactions involve a buyer (demand) and a seller (supply)
A buyer spends money in exchange for goods and services
from the seller.
The seller receives income from the buyers expenditures.
Two ways to
measure GDP

1. Add up all spending in an economy (expenditures

approach)
2. Add up all income in an economy (income approach)
Spending = Income (remember the circular flow model)
Components of total spending in an economy (Y)

Component

Variable

Households

Businesses

Government

Net exports

Xn

Definition
Consumption/consumer
spending
Investment spending
Often acts as a policy
variable to either stimulate
the economy or to rein it in
Exports imports = Xn

*Consumer spending is usually around

% of
1999
GDP
68%*
17%
17%
-3%

of GDP

Yn = C + I + G + Xn
(nominal GDP = Consumer spending + Business investment +
Government spending + Net exports)

Yr = Yn / GDP deflator
real GPD = nominal GDP divided by the GDP deflator
1998 US GDP

By sectors:
1.2% agriculture (grows stuff)
19.2% industry (makes stuff)
79.6% services (does stuff)
If there were only 100 people in the US,
1 person would grow all the food they ate,
19 people would make all the things they use, and
80 people would help others do things, producing nothing (of
economic importance)