Growth rate of the economy is 3%
Last year the economy grew by 2.4%
GDP- A key macro indicator of an economy’s performance.
GDP is the market value of all final goods and services produced in a country, in a period
of time, usually a year
We can measure GDP in terms of total expenditure or as the total income received by
households.
Expenditure Components
Consumption= C
Investment( in plants and equipment) = I
Govt. Expenditures ( on goods and services) = G
Net Exports= Exports – Imports= NX
So GDP= C + I + G + NX
Know difference between govt. expenditures and govt. spending
IF the govt. is spending money and is not getting a good or service from it, it is not part of
the economy or the GDP
Overall govt. spending is 40% of the US economy, yet Govt. Purchases is only 20%, the
other 20% is in transfer payments(social security, medicare)
Income Components
Wages and Salaries = W
Interest = Intr.
Rental Income = R
Profit = Pr
SO GDP = W+ Pr + Intr. + R
govt. spending on goods and services is different from govt. spending overall
Consumer spending is the largest component on the spending side and Wages and salaries
are the biggest on the income side
Problems with the GDP
It only measures “Market’ activity.
It only measures legal activity.
It omits certain “quality-of-life” indicators, including leisure and the cost of pollution.
It does not account for the distribution of income or consumption.
It is an aggregate number
Nominal Vs real GDP
GDP is a linear combination of prices and quantities
using current prices yields “ Nominal GDP”
What happens when price changes?
Inflation and Deflation
Inflation is a general increase in the price of goods and services
Deflation is a general decrease in the price of goods and services
What causes inflation or deflation?
Why do we even care?
Real GDP
SO, to control for changes in the level of prices, across he board, economists use a measure
called “Real GDP.”
When one encounters the word “real” in economic discussions, it usually means;
controlling for inflation.
To calculate Real GDP one needs a “base year.”
Calculating Nominal GDP
N=finals goods in the economy in the year=T
To calculate nominal GDP, one simply sums the product of the final goods and the
quantities of the final goods.
Nominal GDPt = P1t Q1t + P2t Q2t + … + PNt QNt
Calculating Real GDP
N=finals goods in the economy in the year=T
Identify a base year
Then to calculate real GDP, add the sums of the product of the prices of final goods, in the
base year, and the quantities of final goods, in the current year, t
