The news & GDP

The statement above refers to GDP (gross domestic product), not real GDP. Hence, there is a possibility that the increase in GDP can be due to an increase in prices. For, example, of if nominal GDP for 2007 was $300 billion, if prices increase by 10%, GDP will become $330 billion the next year at the same output. Hence, changes in prices must be accounted for in order to reasonably compare output in different years. In addition, GDP does not measure well-being or happiness, it only measures economic activity or increases (or decreases) in production.

• Which of the following are included in the calculation of this year’s GDP?
• Twelve-year-old Johnny mowing his family’s lawn; (b) Dave Malone buying a used car;
• Barbara Wilson buying a bond issued by General Motors;
• Ed Ferguson’s receipt of a Social Security payment;

the illegal drug transaction at the corner of Elm and Fifth. None are included in the calculation of the GDP. Some nonmarket goods and services, legal and illegal underground activities, sales of used goods, financial transactions, government transfer payments, and leisure are omitted from the computation of GDP.

Note that:

• Johny mowing the lawn is an economic activity performed at home and not entering the marketplace,
• Dave Malone buying a used car is a transfer of asset and does not denote an increase in output;
• Barbara Wilson buying a bond issued by General Motors is a transfer of cash, and not an increase in production;
• Ed Ferguson’s receipt of a Social Security payment is a transfer payment, or a reallocation of income;
• the illegal drug transaction at the corner of Elm and Fifth are activities in the underground economy, which is hidden from the government.

Discuss the problems you see in comparing the GDPs of two countries, say, the United States and the People’s Republic of China. Problems in comparing GDPs of two different countries include, among other things,

1. Different Prices. If prices for the same goods differ in the two countries, the GDP comparison will be clouded by those price discrepancies.
2. Different Populations. If the two countries’ populations are significantly different, then GDP comparisons may be inaccurate. Even if their per-capita GDP are used, the distribution of income may be different between the two countries.

(iii) Different Levels of Imputations. A number of transactions are excluded from GDP — namely, nonmarket goods and services, illegal and underground transactions, used goods. There may be more underground transactions and unrecorded in China than in the U. S. because the former is more advanced economically. The differences between the two countries may hinder any meaningful comparisons about their economic well-being using the GDP. 6. Why does GDP omit the sales of used goods? of financial transactions? of government transfer payments?

Sales of used goods, financial transactions or government transfer payments are excluded from GDP because in those instances existing resources or assets are transferred from one entity to another, rather than new goods or services generated for consumption or investment. Sales of used goods, for example, transfer ownership of the goods from the previous owner to the new owner. Transfer payments from government involve the use of monies paid from taxes for government programs. A business firm produces a good this year that it doesn’t sell.

As a result, the good is added to the firm’s inventory. How does this inventory good find its way into GDP? GDP = C + I + G + (EX – IM). Investment (I), or gross private domestic investment, is of two types: fixed investment and inventory investment. The good that is produced but not sold is considered as inventory investment. Inventory good thus finds its way into the GDP measurement through Investment. Economists prefer to compare Real GDP figures for different years instead of comparing GDP figures. Why? GDP does not account for changes in prices.

The consumer price index or inflation rate changes every year. If a country suffers from a high level of inflation, changes in nominal GDP could reflect increase in prices rather than changes in output or increase in economic activity. What is the difference between a recovery and an expansion? Recovery and expansion refer to increases or improvement in gross domestic product. Recovery, however, points to that portion of growth in which the economy increases production to the levels it had reached prior to the recession.

Expansion, on the other hand, refers to growth beyond the cyclical highs that were attained in the previous business cycle.  Define each of the following terms:

• Contraction
• Business cycle
• Trough
• Disposable income

Net domestic product

Contraction points to a decline in Real GDP that occurs after the economy has peaked.  The business cycle is the up and down movements or fluctuations in Real GDP over time. The trough is the low point in the business cycle, just before the curve begins to turn up.

Disposable income is personal income less personal taxes. Net domestic product is gross domestic product less depreciation, i. e. the capital consumption allowance. Working With Number and Graphics: 1, 2, 3, 4, 8, 10, 11, 12. 1. Net exports are –$114 billion and exports are $857 billion. What are imports? NX = EX – IM. This results to: –$114 billion = $857b illion – IM. After rearrangement: IM = 857 + 114 = $971 billion. Consumption spending is $3,708, spending on nondurable goods is $1,215, and spending on services is $2,041 billion.

What does spending on durable goods equal? Consumption = durable goods + nondurable goods + services. Hence, $3,708 = durables + $1,215 + $2,041, which means that: Durables = $3,708 – $1,215 – $2,041 = $452 billion. Inventory investment is $62 billion and (total) investment is $1,122 billion. What does fixed investment equal? Total Investment = Fixed Investment + Inventory Investment; hence, FI = TI – Inventory Investment FI = $1,122 – $62 = $1,060 billion. In year 1, the prices of goods X, Y, and Z are $2, $4, and $6 per unit, respectively.

In year 2, the prices of good X, Y, and Z are $3, $4, and $7, respectively. In year 2, twice as many units of each good are produced as in year 1. In year 1, 20 units of X, 40 units of Y, and 60 units of Z are produced. If year 1 is the base year, what does Real GDP equal in year 2? Real GDP is calculated using the base-year prices in computing total output. Hence, for year 2, base-year prices are used instead of the prices in year 2 to exclude changes in prices from output. Real GDP in year 1 = $2 ? 20 + $4 ? 40 + $6 ? 60 = $560

Real GDP in year 2 = $2 ? 40 + $4 ? 80 + $6 ? 120 = $1,120 8. National income = $500 billion, income earned from the rest of the world = $10 billion, income earned by the rest of the world = $12 billion, indirect business taxes = $2 billion, capital consumption allowance = $1 billion, and GDP = $525 billion. What does the statistical discrepancy equal? National Income = GDP + income earned from the rest of the world – all the other listed factors – statistical discrepancy $500 = $525 + $10 – $12 – $2 – $1 – S. D. S. D. = $21 billion.

If Real GDP in year 1 is $487 billion and it is $498 billion in year 2, what is the economic growth rate equal to? Growth Rate = (GDP2 – GDP1)/ GDP1 Growth Rate = [(498 – 487) / 487 = 2. 26%. If the chain-weighted price index is 132 and GDP is $8,655 billion, what does Real GDP equal? Real GDP = GDP * (100 / Chain-weighted price index) Real GDP = $8,655 ? (100 / 132) = $6,557 billion. If the chain-weighted price index is 143 and Real GDP is $4,322 billion, what does GDP equal? GDP = Real GDP ? (Chain-weighted price index / 100) GDP = $4,322 ? (143 / 100) = $6,180 billion