Gross domestic product (GDP)
It's the market value of all final goods and services produced within a nation in a given year.
Not included in GDP
- Intermediate goods- something needed for the process
- Used or second hand goods
- Purely financial transactions- stocks and bonds they do not count.
- Illegal activities (Ola-drugs)
- Unreported business activities (tips).
- Non-market activities ( volunteering, baby sitting).
- Transfer payment scholarships,welfare payment and social security.
Included in the GDP
- 65% C-personal consumption expenditure
- 17% Ig- Gross Profit domestic investment (factory equipment Maintenance, New factory equipment, construction of housing, unsold inventory of product sound in a year).
- 20% G- Government spending
- -2% Xn- Net Export (Export - Import)
GNP
Total value of all final goods and services by citizens of the country on its land or foreign land
Two ways to calculate GDP
- Expenditure approach - add up all of the spending on final goods and services produced In a given year (GDP=C+IG+G+XN)
- Income approach- it adds up all the income that resulted from selling all final goods and services produced in a given year ( W+R+I+P+ statistical adjustment). (Indirect business taxes, depreciation, net foreign factor payment)
- Compensation of employees - wages and salaries, pensions, insurance, health and welfare
- Rents- income received by property owners
- Interest - money paid by private business to the suppliers of loans
- Cooperate Holders- it is the income of cooperation stock holders
- Proprietors income - come from entrepreneurs and partners in a business
The value of
Real GDP
It is the value of output produced in constant base year prices. Adjusted for inflation. If we wanted to measure economic growth we use real GDP. If we wanted to measure an increase in prices known as inflation we will use nominal GDP.
NOMINAL GDP- can increase from year to year if either price or quantity increases.
Real GDP- can increase from year to year only if output increases
GDP Deflator
It is a price index used to adjust from nominal to real GDP. Nominal GDP divided by real GDP times 100
In the base year the GDP deflator always equals 100 for years after the base year GDP deflator is greater than 100 before years before the base year GDP is lower than 100.
Consumer price index.
Most commonly used measurement of inflation. It measures the cost of a market basket of goods of a typical urban American family. (cost of basket market of goods in a given year over the cost of a market basket of goods in the base year * 100).
Inflation Rate
Price index in year 2 minus the price index in year 1 divided by year 1 times 100
What is considered Nominal Interest rate?
Percentage increase in money the borrower must pay the lender for a loan not adjusted for inflation.
Real Interest rate
The percentage increase in purchasing power the borrower must pay the lender for a loan adjusted for inflation.
Nominal interest rate - inflation = real interest.
Anticipated inflation
Fisher effect
How to calculate nominal interest rate
Expected interest rate + inflation premium
Hurt by Inflation
- Savers
- Lenders/creditors
- People on fixed income ( elderly, welfare etc).
Helped by inflation
- Debtors
- Cola ( cost of living adjustment ) - automatic wage increase when inflation occurs
Unemployment
It's the failure to use available resources particularly labor to produce desired goods and services
People in labor force
Above 16 years
Wiling able to work
Labor force
Employed + unemployed
Not in the labor force
- Military
- Student
- Retired
- Disabled
- Homemakers
- Mental institution
- Jail/prison
- Not looking for a job
Unemployment rate
4 to 5%= full employment or natural rate of unemployment
How to calculate UR
number of unemployed over number of employed plus +unemployed times 100
4 types of unemployment
- Fractional - those searching for a job temporarily unemployed or in-between jobs transferable skills ( college and high school graduates , laid off your job, or leaving job).
- Structural - changes in the structure of the labor force that make some skills absolute these workers do not have transferable skills have to learn new skill in order to get a job (NASA).
- Seasonal- Due to the time of year and nature of job (school bus drivers, life guards, Santa Claus etc,construction workers).
- Cyclical Economy down turn such as recession as demand for goods and services fall demand for labor falls and workers are laid off
Frictional and structural = NRU
Full employment means there is no cyclical employment
GDP gap - is the amount by which actual GDP fall short of potential GDP
Okuns Law - for every one Percent in which actual unemployment rate exceed the NRU a GDP gap of about 2% occurs
Ex- in 2012 the unemployment rate for Mexico was 7.4 percent the NRU was 6 percent GDP GAP= 7.4 - 6= 1.4x2=2.8
Rule of 70- it's used to determine how many years it takes for a value to double given a particular annual growth rate
Ex if you put 20k in the bank and it earns a yearly interest of 7 percent how many years will it take for your income to double = 70/7 = 10
Gross Domestic Product (GDP) and Gross National Product (GNP) both try to measure the market value of all goods and services produced for final sale in an economy. The difference is how each term interprets what constitutes the economy. GDP refers to and measures the domestic levels of production, whereas GNP measures the levels of production of any person or corporation of a country. For example, the American GNP measures the production levels of any American or American-owned entity, regardless of where the actual production process is taking place, and defines the economy in terms of the citizens. GNP is less commonly referred to than GDP, but is best described as the measure of national output. I like how you included a definition of GNP but you should've elaborated to better help us understand it.
ReplyDeleteYour definition of Nominal GDP is a bit confusing. Some visual aid would be helpful but other than that, great blog.
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