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The document provides an overview of Gross Domestic Product (GDP), detailing its significance, calculation methods (expenditure, income, and output approaches), and types (nominal, real, actual, and potential GDP). It also discusses Gross National Product (GNP), various price indices (Paasche, Laspeyres, Fisher), and concepts like Purchasing Power Parity (PPP) and Consumer Price Index (CPI). The content emphasizes the importance of these economic measures in understanding a nation's economic performance and inflation.

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20 views28 pages

Micro

The document provides an overview of Gross Domestic Product (GDP), detailing its significance, calculation methods (expenditure, income, and output approaches), and types (nominal, real, actual, and potential GDP). It also discusses Gross National Product (GNP), various price indices (Paasche, Laspeyres, Fisher), and concepts like Purchasing Power Parity (PPP) and Consumer Price Index (CPI). The content emphasizes the importance of these economic measures in understanding a nation's economic performance and inflation.

Uploaded by

000pa1n007
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTRO TO MACROECONOMICS

MEASURES OF GDP AND


ECONOMIC GROWTH
CHAPTERS 13-14

By: Shomurodov T.B.


WHAT DOES THE GROSS DOMESTIC
PRODUCT (GDP) SHOW ABOUT THE
NATION’S ECONOMY?
 The most important data economists analyze is gross domestic
product (GDP), which is the market value of all final goods and
services produced within a country’s borders in a given year.
WHAT IS THE GDP FORMULA?
 1. Expenditure Approach
 The expenditure approach is the most commonly used GDP formula,
which is based on the money spent by various groups that participate
in the economy.
GDP = C + G + I + NX
 C = consumption or all private consumer spending within a
country’s economy, including, durable goods (items with a lifespan
greater than three years), non-durable goods (food & clothing), and
services.
 G = total government expenditures, including salaries of
government employees, road construction/repair, public schools, and
military expenditure.
 I = sum of a country’s investments spent on capital equipment,
inventories, and housing.
 NX = net exports or a country’s total exports less total imports.
INCOME APPROACH
 This GDP formula takes the total income generated by the goods and
services produced.

GDP = Total National Income + Sales Taxes + Depreciation + Net


Foreign Factor Income

 Total National Income – the sum of all wages, rent, interest, and
profits.
 Sales Taxes – consumer taxes imposed by the government on the
sales of goods and services.
 Depreciation – cost allocated to a tangible asset over its useful life.
 Net Foreign Factor Income – the difference between the total
income that a country’s citizens and companies generate in foreign
countries, versus the total income foreign citizens and companies
generate in the domestic country.
OUTPUT APPROACH
 The output approach to calculate GDP sums
the gross value added of various sectors, plus
taxes and less subsidies on products.
 The output of the economy is measured using

gross value added. Gross value added is defined


as the value of all newly generated goods and
services less the value of all goods and services
consumed in their creation; the depreciation of
fixed assets is not included.
 When calculating value added, output is valued

at basic prices and intermediate consumption at


purchasers' prices. Taxes less subsidies on
products have to be added to value added to
obtain GDP at market prices.
 What is counted in GDP?
 Final goods and services

 Intermediate goods that have not yet been

used in final goods and services.


 Raw materials that have been produced, but

not yet used in the production of


intermediate or final goods.
 What is not included in GDP?

 Intermediate goods that have been turned

into final goods and services (e.g. tires on a


new truck)
 Used goods

 Transfer payments

 Non-market activities

 Illegal goods
WHAT ARE THE TYPES OF GDP?
 Nominal GDP – the total value of all goods and services produced at
current market prices. This includes all the changes in market prices
during the current year due to inflation or deflation.
 Real GDP – the sum of all goods and services produced at constant
prices. The prices used in determining the Gross Domestic Product are
based on a certain base year or the previous year. This provides a more
accurate account of economic growth, as it is already an inflation-
adjusted measurement, meaning the effects of inflation are taken out.
 Actual GDP – real-time measurement of all outputs at any interval or
any given time. It demonstrates the existing state of business of the
economy.
 Potential GDP – ideal economic condition with 100% employment
across all sectors, steady currency, and stable product prices.
GROSS NATIONALPRODUCT (GNP)
 GNP measures the value of goods and services
produced by only a country's citizens but both
domestically and abroad.
THE PAASCHE INDEX
 The Paasche Price Index is a price index used
to measure the general price level and cost of
living in the economy and to calculate
inflation. The index commonly uses a base
year of 100, with periods of higher price
levels shown by an index greater than 100
and periods of lower price levels by indexes
lower than 100.
LASPEYRES INDEX
 The Laspeyres Price Index is a consumer
price index used to measure the change in
the prices of a basket of goods and services
relative to a specified base period weighting.
Developed by German economist Etienne
Laspeyres, the Laspeyres Price Index is also
called the base year quantity weighted
method.
DIFFERENT PURPOSES OF EACH
INDEX
 The Laspeyres index, in which the quantities
are from the base period, indicates how
much an individual's income would have to
increase to offset price increases so that the
basket's utility remains the same.

 By contrast, the Paasche index, which uses


current quantities, is a measure of how much
income an individual would have to lose at
the base price level to equal the effect on her
utility of the inflation between the base and
current periods.
DOWNSIDES OF TH E INDIXES
 The main downside to these indices is the
fact that they do not take into effect
substitution effects.

 Laspeyres index uses base period quantities,


it tends to overestimate inflation by
assuming that individuals’ income expense is
still distributed in the same way.

 The opposite is true of the Paasche index:


because it uses current period quantities, it
underestimates inflation.
FISHER PRICE INDEX

 The Fisher Price Index,


also called the Fisher’s
Ideal Price Index, is
a consumer price index
(CPI) used to measure the
price level of goods and
services over a given
period. The Fisher Price
Index is a geometric
average of the Laspeyres
Price Index and
the Paasche Price Index. It
is deemed the “ideal”
price index as it corrects
the positive price bias in
the Laspeyres Price Index
and the negative price
PURCHASING POWER PARITY
 Purchasing power parity (PPP) is a
measurement of prices in different countries
that uses the prices of specific goods to
compare the absolute purchasing power of the
countries' currencies. In many cases, PPP
produces an inflation rate that is equal to the
price of the basket of goods at one location
divided by the price of the basket of goods at a
different location. The PPP inflation and
exchange rate may differ from the market
exchange rate because of poverty, tariffs, and
other transaction costs.
 https://data.oecd.org/conversion/purchasing-power-parities-ppp.htm
CONSUMER PRICE INDEX(CPI)
 A consumer price index measures changes
in the price level of a weighted
average market basket of consumer
goods and services purchased by households.
 The end

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