GDP Gross Domestic Products
Gross Domestic Product
A country's gross domestic product. GDP is one of several measures of the size of its economy. Until the 1980s the term GNP or gross national product was used. The two terms GDP and GNP are almost identical. By definition, GDP is the market value of all final goods and services produced in a country, in a given period of time. GNP is a measurement of the value of all income earned by Canadians, regardless of whether that income is earned in Canada or in foreign countries. The small difference between GDP and GNP means that income earned by Canadians abroad is essentially offset by income earned by foreigners in Canada. The most common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption (C) + investment (I) + government spending (G) + Net Export (NX)
Y = C + I + G + NX
NOTE: Net Exports (NX)= Refers to the fact that imports are subtracted from exports.
- Consumption: Spending by households on goods and services
- NOTE: This component does not include purchases of new housing
- Investment: Spending on capital equipment, inventories, and structures
- NOTE: Include purchases of new housing
- Government Purchases: Spending on goods and services by local, territorial, provincial, and federal governments
- NOTE: Excluding government bonds
- Net Exports: The value of a nation's exports minus the value of its imports
- NOTE: Also called trade balance
Questions and Answers
- Q* An economy produces 500,000 tables at $100 each. Households purchase 100,000 tables of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables. The government purchases 100,000 domestically produced tables and 50,000 domestically produced tables are sold abroad. The unsold tables are held in inventory by the manufacturers. What is value of the private-sector investment component of GDP?
- A* The investment component should include both the spending of the "business" and also the spending of the table manufacturer. First we calculate the inventory change of the manufacturer. The number of tables left is 500 000 - household (50000) - business(200000) - government(100 000) - foreign (50000) = 100 000. This 100000 leftover table goes into their inventory, and they are worth 100 000 * $100 = 10 mil. We add this 10 mil into the tables bought by the business, which are worth 200 000 tables*$100 = 20 mil. Add them up and it's 30 mil.
- Q* According to the United Nations, Human Development Report 2001, GDP per person is $US 26,251 in Canada, and $US 1170 in the least developed countries. In interpreting these data, it can be reasonably concluded that: living standards in Canada is less than 22 times higher than that in the least developed countries, because GDP fails to measure non-marketed subsistence production. what is non-marketed subsistence production?
- A* Those are productions (for survival) that are not traded in the market. for example, housewives cooking at home in Canada, people are more likely to eat out, then when they pay at the restaurants, the money counts towards GDP. However, in developing countries, people don't eat out, and they only cook at home, then their work of cooking will not be counted towards GDP
Real Versus Nominal GDP
Nominal GDP: The value of goods and services produced calculated with the current prices
Real GDP: The value of goods and services produced calculated with the constant prices
Calculating the GDP Deflator
GDP Deflator: A measure of the price level
GDP Deflator = (Nominal GDP/Real GDP) multiplied by 100
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