# GDP EQUATION - PowerPoint PPT Presentation

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GDP EQUATION

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#### Presentation Transcript

Definition of GDP: The value of all final goods and services produced in a country in a period of time (usually a year).Who does the GDP include? Consumers, businesses and the government.Criteria for GDP:* Must be a final good or service* Must be produced in U.S.* Must be created in current yearWhat does the GDP show us? It gives value to the economic activity happening during a certain period of time.

### GDP EQUATION

GDP= C + I + G + EX – IS

GDP= C (consumer) + I (investment—business spending) +

G (government purchases) + EX (export spending—what we sell to other countries)

– IS (import spending—what we buy from other countries)

How do we find it? GDP is calculated using the following formula:GDP = [(quantity of A X price of A) + (quantity of B X price of B) + ... + (quantity of N X price of N)] for every good and service produced within the countryFor example, let’s say that Country B only produces bananas and backrubs:

In year 1 they produce 5 bananas that are worth \$1 each and 5 backrubs that are worth \$6 each. The GDP for the country in this year equals:

(quantity of bananas X price of bananas) + (quantity of backrubs X price of backrubs) or

(5 X \$1) + (5 X \$6) = \$35.

As more goods and services are produced, the

equation lengthens. In general, GDP = (quantity of A

X price of A) + (quantity of B X price of B) + (quantity

of whatever X price of whatever) for every good and

service produced within the country.

What is the GDP for Year 3?

Real GDP: The sum value of goods and services produced in a country and valued at constant prices, calibrated from some base year. Real GDP frees year-to-year comparisons of output from the effects of changes in the price level.

Why do we need real GDP? It removes changes in price so

true growth is shown instead of just an increase in the price. By

keeping the prices constant in the computation of real GDP, it is

possible to compare the economic growth from one year to the

next in terms of production of goods and services rather than

the market value of these goods and services.

How do we find it? Start by choosing a base year. Look at

the GDP index for Country B again.

For example, to calculate the real GDP for in year 3 using year 1 as the base year, use the GDP equation with year 3 quantities and year 1 prices. In this case, real GDP is:

(10 X \$1) + (9 X \$6) = \$64.

For comparison, the GDP in year 3 is:

(10 X \$2) + (9 X \$6) = \$74.

Because the price of bananas increased from year 1 to year 3, the GDP increased more than the real GDP over this time period.

Find the real GDP for Year 3 using Year 2 as a base year.