C h a p t e r
MEASURING GDP AND ECONOMIC GROWTH*
Gross Domestic Product Gross domestic product, GDP, is the market value of all the final goods and services produced within in a country in a given time period. ♦ A final good or service is an item that is bought by its final user during a specified time period. In contrast, an intermediate good is an item produced by one firm, bought by another and used as a component of a final good or service. Intermediate goods are not directly included in real GDP. The circular flow of income and expenditure shows real and monetary flows in the economy. The circular flow involves: ♦ Four economic sectors — households, firms, ...view middle of the document...
A stock is a quantity that exists at a moment in time. Wealth and capital are stocks; saving and investment are flows. ♦ Wealth, the value of things that people own, is a stock; income, what people earn, is a flow. ♦ Saving is the amount of income remaining after spending on consumption. Saving is a flow that adds to wealth. ♦ Capital, the amount of plant, equipment, and inventories used to produce other goods, is a stock. ♦ Depreciation (also called capital consumption) is the decrease in the capital stock because of wear and tear and obsolescence. Gross investment is the total amount of investment. Net investment is gross investment minus depreciation. Net investment is the flow that is the amount by which the capital stock changes. Gross domestic product includes depreciation and so on the income side includes firms’ gross profit (before subtracting depreciation) and on the expenditure side includes gross investment. Net domestic product excludes (subtracts) depreciation so it includes firms’ net profits and net investment.
* This is Chapter 21 in Economics.
CHAPTER 5 (21)
Measuring U.S. GDP In 2003, U.S. GDP equaled $10,847 billion. ♦ The expenditure approach measures GDP by adding final expenditures, C + I + G + NX. Of these expenditures, personal consumption expenditure is the largest, at about 71 percent. Gross private investment is about 15 percent, government purchases of goods and services is about 19 percent, and net exports is about –5 percent. ♦ The income approach adds the compensation of employees, net interest, rental income, corporate profits and proprietors’ income to give net domestic income at factor cost. Indirect taxes and depreciation are added and subsidies subtracted to obtain GDP. Real GDP and the Price Level Real GDP is the value of final goods and services produced in a given year when valued at constant prices. Nominal GDP is the value of the final goods and services produced in a given year valued at the prices that prevailed in that same year. The base year prices method, which is the traditional method of calculating real GDP, values the quantities produced in each year using the prices of the base year. The chain-weighted output index method, which is the new method of calculating real GDP, uses the prices of two adjacent years to calculate the real GDP growth rate. ♦ The chain-weighted output index first calculates the value of GDP for this year and last year, using prices from last year and then calculates the growth rate of GDP between the two years. ♦ Next the chain-weighted index calculates the value of GDP for this year and last year, using prices from this year and again calculates the growth rate of GDP between the two years. ♦ The two growth rates are averaged. This average is used to scale up last year’s real GDP by multiplying last year’s real GDP by the average. The price level is the average level of prices. One measure is of the price level is the GDP deflator, which is an...