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PART 7. MONITORING THE MACROECONOMY. 20. GDP and the Standard of Living. CHAPTER. 1. 2. 3. 4. C H A P T E R C H E C K L I S T. When you have completed your study of this chapter, you will be able to.

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PART 7

MONITORING THE MACROECONOMY

20

GDP and the

Standard of Living

CHAPTER


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1

2

3

4

C H A P T E R C H E C K L I S T

  • When you have completed your study of this chapter, you will be able to

  • Define GDP and explain why the value of production, income, and expenditure are the same for an economy.

Describe how economic statisticians measure GDP in the United States.

  • Distinguish between nominal GDP and real GDP and define the GDP deflator.

Explain the limitations of calculating real GDP. Explain the difference between GDP, standard of living and quality of life index.


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GDP, INCOME, AND EXPENDITURE

  • GDP Defined

    • Gross domestic product or GDP

    • Is the market value (current prices or nominal prices) of all the final goods and services produced within a country in a given time period.


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Current prices (NORMINAL VS REAL)

Year Q P GDP

  • 10 $1 $10

  • 10 $2 $20

    GPD deflator = (NGDP/RGDP) X100

    $20/$10 = 200 GDP deflator

    Real GDP is adjusted for inflation = NGDP X 100  GDP deflator

    = 20 x 100 200 = $10


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Final goods vs.Intermediate goods

Final good or service

  • A good or service that is produced for its final user and not as a component of another good or service.

  • Intermediate good or service

  • A good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service.

  • GDP includes only those items that are traded in markets.


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Where ? And when?

Where Produced

  • Within a country

    When Produced

  • During a given time period.

  • It is calculated every quarter or three months.


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Why measure GDP

  • Economic Growth

  • Creation of jobs

  • Standard of living

  • Increase in income


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What is Gross National Product (GNP)?

GNP measures the market value of all final goods and services produced by a nation’s residents, no matter where they are located.

Under GDP physical location is important and under GNP citizenship is important. Why change?


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How do we measure GDP?EXPENDITURE and INCOME

  • Expenditure Approach

  • Total expenditure is the total amount received by producers of final goods and services.

  • Total expenditure = C + I + G + NX

  • Income Approach

  • Labor earns wages, capital earns interest


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MEASURING U.S. GDP

  • The Expenditure Approach

    • Measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports.


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GDP, INCOME, AND EXPENDITURE

  • Circular Flows in the U.S. Economy

    • Consumption expenditure ($8668 billion)

    • The expenditure by households on consumption goods and services.

    • Durable goods

    • Non-durable goods

    • Services are intangible goods and services)


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GDP, INCOME, AND EXPENDITURE

  • Circular Flows in the U.S. Economy

    • Investment ($2054 billion)

    • Fixed investments

    • Inventory investments

    • The purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories.

    • What is not included in calculating GDP?

      Used Goods

    • Expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods.

    • Financial Assets

    • When households buy financial assets such as bonds and stocks, they are making loans, not buying goods and services.


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GDP, INCOME, AND EXPENDITURE

  • Government expenditure on goods and services ($2338)

  • The expenditure by all levels of government on goods and services.

  • Federal Government

  • State government

  • Net exports of goods and services (-$687)

  • The value of exports of goods and services minus the value of imports of goods and services.


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MEASURING U.S. GDP

  • The Expenditure Approach

    • Measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports.



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GDP, INCOME, AND EXPENDITURE

  • Income from factors of production: land, labor, capital, and entrepreneurship

  • Labor earns wages, ($7111 billion (57.5%))

  • CAPITAL OWNERSHIP ($2953 Billion (23.9%))

  • capital earns interest,

  • land earns rent,

  • entrepreneurship earns profits.


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MEASURING U.S. GDP

  • Net domestic product at factor cost ($10064 billion (81%)

  • The sum of wages, interest, rent, and profit.

  • Net domestic product at factor cost is not GDP.

  • We need to make adjustments to arrive at GDP: add

  • Indirect taxes (such as sales taxes) make market prices exceed factor cost.

  • Subsidies (payments by government to firms) make factor cost exceed market prices.

  • Depreciation is the decrease in the value of capital that results from its use and from obsolescence.


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MEASURING U.S. GDP

  • Net Domestic product

    NDP = GDP –Depreciation

    profit is a firm’s profit before subtracting the depreciation of capital.

  • Net profit is a firm’s profit after subtracting the depreciation of capital.

  • Depreciation

  • The decrease in the value of capital that results from its use and from obsolescence—also called capital consumption.



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NOMINAL GDP VERSUS REAL GDP

  • Calculating Real GDP

    • Real GDP

    • The value of the final goods and services produced in a given year expressed in the prices of the base year.

    • Nominal GDP

    • The value of the final goods and services produced in a given year expressed in the prices of that same year.

    • The method of calculating real GDP changed in recent years, we describe the two methods.


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THE USE AND LIMITATIONS OF REAL GDP

We use estimates of real GDP for two main purposes:

  • To compare the standard of living over time

  • To compare the standard of living among countries

  • The Standard of Living Over Time

    • To compare living standards we calculate real GDP per person—real GDP divided by the population.


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    THE USE AND LIMITATIONS OF REAL GDP

    • Goods and Services Omitted from GDP

      • Household production

      • Underground production

      • Leisure time

      • Environment quality

      • Costs due to economic development

      • Stress, crime, travel, family time and alienation

      • The regrettable necessities :Army, police, justice system, security industry,


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    THE USE AND LIMITATIONS OF REAL GDP

    • Other Influences on the Standard of Living

      • Health and Life Expectancy

        • Good health and a long life do not show up directly in real GDP.

      • Political Freedom and Social Justice

        • A country might have a very large real GDP per person but have limited political freedom and social justice.

        • A lower standard of living than one that had the same amount of real GDP but in which everyone enjoyed political freedom.


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    GDP in YOUR Life

    As you listen to the news, look for references to GDP. How is GDP used in daily life?

    Is the news about nominal GDP or real GDP? Is the term used correctly?

    Using U.S.GDP person, how does your income compare to the average income?

    How do you think your standard of living compares with that of a student in France or China?

    Do you produce more market goods than nonmarket good? How can you value your nonmarket production?

    Is your production counted in the nation’s output?


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