14  GDP

Objectives

  1. Know definition of Gross Domestic Product
  2. Compute GDP
    1. Total spending approach
    2. Total output approach
    3. Total income approach
  3. Understand criticisms of GDP
  4. Compute GDP growth rate
  5. Compute real and nominal GDP
Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country within a year

14.1 Why GDP?

Dimension Description
Life Satisfaction Countries with higher GDP per capita tend to report higher levels of happiness and life satisfaction
Education Wealthier countries typically have better educational systems, higher literacy rates, and more years of schooling
Infant Mortality Higher GDP is associated with lower infant mortality rates due to better healthcare and nutrition
Life Expectancy Countries with higher GDP generally have longer life expectancies due to better healthcare, nutrition, and living conditions

14.2 Final vs Intermediate

Final Goods and Services

Finished goods and services that are not used to make other products.

Intermediate Goods and Services

Goods or services used as inputs in the production of other products.

14.3 Measurement - Total Spending Approach

We measure total GDP as

\[ Y = C + I + G + NX \]

Component Symbol Description Example
Consumption C Household spending on goods and services Food, clothing, entertainment
Investment I Business spending on capital goods Machinery, buildings, equipment
Government Spending G Government purchases of goods and services Defense, education, infrastructure
Net Exports NX Exports minus imports Trade balance

14.4 Criticisms

Criticism Description
Prices are not Values Market prices may not reflect true social value or utility
Doesn’t Capture Shadow Economy Informal economic activities and black market transactions are not measured
No Measure of Environmental Degradation GDP doesn’t account for environmental costs or resource depletion
Leisure Doesn’t Count Increased leisure time and work-life balance improvements are ignored
GDP Ignores Distribution Total output doesn’t reflect how wealth and income are distributed across population

14.5 Real and Nominal GDP

Nominal GDP

GDP measured in today’s prices.

Real GDP

GDP measured in constant prices

14.6 Change over Time: The Growth Rate

Growth Rate

A measure of how much something has changed, in percent. Follows the formula \[ GR_{Y} = \frac{Y_{\text{new}} - Y_{\text{old}}}{Y_{\text{old}}} \times 100 \]

14.7 Conclusions

  • This lecture introduces gross domestic product (GDP), our overall measure of the economy
  • We compute real GDP to control for prices
  • We use the growth rate to create a ‘scale independent’ measure of GDP