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Macro Sessions 2-5 GDP PDF
Macro Sessions 2-5 GDP PDF
Macro Sessions 2-5 GDP PDF
Sessions: 2-5
Prof. Biswa Swarup Misra
Dean, XIMB
Components of GDP
Distinction between GDP and GNP
Nominal versus Real GDP
Households:
own the factors of production,
sell/rent them to firms for income
buy and consume g&s
Firms
Households
Firms
Households
Firms:
buy/hire factors of production,
use them to produce g&s
sell g&s
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Revenue (=GDP)
G&S
sold
Markets for
Goods &
Services
Firms
Factors of
production
Wages, rent,
profit (=GDP)
Spending (=GDP)
G&S
bought
Households
Markets for
Factors of
Production
Labor, land,
capital
Income (=GDP)
7
The government
collects taxes
purchases g&s
The financial system
matches savers supply of funds with
borrowers demand for loans
Measuring Output
The aggregate measure of income in the economy is
the GDP.
Gross Domestic Product is the market value of the final
Session 2-3
B.S.Misra
Wheat for
self consumption
in Household
Wheat
produced
by Farmer
(INR 50)
Session 2-3
Final
Purchases
Bread produced
-Non-Market activity(Farmer does not pay himself
to produce bread)
B.S.Misra
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Wheat for
self consumption
in Household
Wheat
produced
by Farmer
(INR 50)
Session 2-3
Purchased by
Baker (who puts
in effort to transform it to
another good) Value of
effort = INR 50
Final
Purchases
Bread produced
-Non-Market activity(Farmer does not pay himself
to produce bread)
Wheat + Effort
result in output
of bread
Sale of
bread
(INR 100)
B.S.Misra
Consumption
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Final
Purchases
Wheat
produced
by Farmer
(INR 50)
Purchased by
Baker (who puts
in effort to transform it to
another good) Value of
effort = INR 50
Wheat + Effort
result in output
of bread
Sale of
bread
(INR 100)
Consumption
B.S.Misra
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Session 2-3
B.S.Misra
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Baker
reports
sale of
of final good Farmer reports sale of
of final good
INR 100
INR
0
Final
Purchases
Wheat
produced
by Farmer
(INR 50)
Purchased by
Baker (who puts
in effort to transform it to
another good) Value of
effort = INR 50
Wheat + Effort
result in output
of bread
Sale of
bread
(INR 100)
Consumption
Session 2-3
B.S.Misra
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Final
Purchases
Wheat
produced
by Farmer
(INR 50)
Purchased by
Baker (who puts
in effort to transform
it to another good)
Value of effort = INR 50
Wheat + Effort
result in output
of bread
Sale of
bread
Unsold bread
on Shelves
Wheat not
used up
Consumption
Investment
in
Inventory
B.S.Misra
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Session 2-3
B.S.Misra
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Session 2-3
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B.S.Misra
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Session 2-3
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Purchased by
Baker (who puts
in effort to transform
it to another good)
Value of effort = INR 50
New Oven,
New Baking Racks
(Capital Stock)
Purchased
by Baker so
as to scale
up production
Bread produced
-Non-Market activity(Farmer does not pay himself
to produce bread)
Wheat + Effort
result in output
of bread
Unsold bread
on Shelves
Wheat not
used up
Deterioration of
Capital Good
(Depreciation)
Session 2-3
Sale of
bread
Net Addition
to
Capital
Stock
B.S.Misra
Final
Purchases
Consumption
Investment
in
Inventory
Net
Investment
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B.S.Misra
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Wealth of Nations
Wealth of Nations
Wealth of Nations
For all of the countries in the report except Nigeria,
Russia and Saudi Arabia, Human capital forms the
largest share of Wealth.
Wealth of Nations
The UN's exercise makes all three kinds of
capital comparable and commensurable.
Wealth of Nations
A country like Saudi Arabia, for example, depleted
its stock of fossil fuels by $37 billion between
1990 and 2008, while adding to its stock of schoolleavers and university graduates (its human
capital grew by almost $1 trillion).
Wealth of Nations
The idea that natural assets are substitutable makes some
environmentalists (including some contributors to the
report) nervous.
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measurements
Product approach: the amount of output
produced
Income approach: the incomes generated by
production
Expenditure approach: the amount of spending
by purchasers
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Exercise:
A farmer grows a kilo of wheat
Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)
These components add up to GDP (denoted Y):
Y = C + I + G + NX
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Consumption (C)
is total spending by households on g&s.
Note on housing costs:
For renters, consumption includes rent
payments.
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Investment (I)
is total spending on goods that will be used in the
future to produce more goods.
includes spending on
capital equipment (e.g., machines, tools)
structures (factories, office buildings, houses)
inventories (goods produced but not yet sold)
Note: Investment does not
mean the purchase of financial
assets like stocks and bonds.
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1/1/2007:
economy has $500b worth of capital
during 2007:
investment = $60b
1/1/2008:
economy will have $560b worth of capital
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Stock
A stock is a
quantity measured
at a point in time.
E.g.,
The U.S. capital stock
was $26 trillion on
January 1, 2006.
stock
flow
a persons wealth
a persons
annual saving
# of people with
college degrees
# of new college
graduates this year
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46
47
48
C
G
I
NX
59
11
38
-9
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% of GDP
per capita
$12,480
100.0
$ 42,035
8,746
70.1
29,460
2,100
16.8
7,072
2,360
18.9
7,950
NX
726
5.8
2,444
50
16768.1
11484
2648
3144
NX
-508
% of GDP
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16
19
-3
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Exercise 1:
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Exercise 1:
Answers
A. Abhinav spends Rs. 200 to buy his friend dinner
at Mayfair.
Consumption and GDP rise by Rs. 200.
B. Aditi spends Rs.1800 on a new laptop to use in his
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Exercise 1:
Answers
C. Ipsita spends Rs.1200 on a computer to use in her
business. She got last years model on sale for a great
price from a local manufacturer.
Current GDP and investment do not change, because the
computer was built last year.
D. Tata Motors builds Rs.500 million worth of cars, but
consumers only buy Rs.470 million of them.
Consumption rises by Rs.470 million,
inventory investment rises by Rs.30 million,
and GDP rises by Rs.500 million.
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Answers
a. When an earthquake destroys property, wealth
is affected, not income (or GDP). However, if a
significant amount of the capital stock is
destroyed, then less can be produced in the time
period under study, leading to a decrease in GDP.
On the other hand, the rebuilding of destroyed
property means that increased economic activity
will take place, leading to an increase in GDP.
b. The sale of your old textbook will not constitute
an official market transaction. In addition, the
textbook has already been used and is not
currently produced. Therefore GDP will not be
affected.
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Answers
c. The sale of existing stock holdings is a transfer
of wealth and, as such, does not affect GDP. Any
fees that you may have to pay your broker for his
or her services, however, constitute payment for
services rendered. GDP will increase by that
amount.
d.
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GDP vs GNP
GDP - market value of all final goods &
services produced within a country in a
given period of time
and
NFIA
Net compensation of employees receivable from
abroad is equal to the difference between
compensation of employees received by resident
employees who are living or employed abroad
temporarily and compensation of foreign nationals
working temporarily in the domestic economy.
Who is a Resident?
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Some Concepts
Market prices: The prices at which goods and services
are sold in various markets to households and firms.
Some Concepts
Subsidies are also called negative taxes because
they impose expenses on government budgets
instead of contributing revenues.
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GNPFC = GNPMP + S IT
IT is paid to government and not to factors of
Production
NNPFC = NNPMP + S IT
NNPFC is otherwise known as National Income and
National Income
Relationships
NNPMP
GNPMP
GDPMP
GNP
NNP
GDP
FC
NDP
MP
FC
FC
Depreciation
Net Indirect Taxes
NDP
FC
B.S.Misra
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Exercise-1
Using the following data, calculate the GDP and NDP.
Calculate under closed and open economy.
Gross Investment
$46
Exports
Consumption
Government Purchases
Consumption of Fixed Capital
84
Imports
12
180
52
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Solution-1
Under Open Economy
GDP
= C + I + G + NX
NDP
= $307 - $52
= $255
= $307
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Solution-1
Under Closed Economy
GDP = C + I + G
= $310 - $52
= $258
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Exercise-2
Using the following data, derive GDP, NDP, National
Income, Personal Income, Personal Disposal Income, GNP,
and NNP. Which economic indicator is higher, GDP or GNP?
Why?
Personal Consumption Expenditures $490 Indirect Business Taxes
70
Interest
40 Imports
30
Corporate Profit
70 Proprietors Income
55
Government Purchases
150 Income Tax
100
Depreciation
40 Income Earned but not received
60
Rent
20 Income Received but not earned
70
Gross Private Domestic Investment 50 Factor Incomes to Overseas
25
Compensation of Employees
420 Exports
50
Factor Incomes from Overseas
30
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Solution-2
2. Expenditure Approach
PI=NI+IRNE-IENR=605+70-60=615
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Solution-2
National Income = Employees Compensation (Wages and
Salaries) + Corporate Profits + Sole Proprietors Income +
Net Interest Income + Rental Income
= $420 + 70 + 55 + 40 + 20
= $605
Personal Income = National Income Income earned but
not received + Income received but not earned
= $605 - $100
= $515
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Solution-2
Income Approach
GDP = National Income + Depreciation + Indirect Business
= $710
GNP = GDP Net Factor Payments to the rest of the world
= $710 ($25 - $30) = $715
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Exercise-3
The following information is given:
Personal Consumption Expenditures
Interest
Corporate Profit
Government Purchases
Depreciation
Rent
Gross Private Domestic Investment
Compensation of Employees
Factor Incomes from Overseas
$500
40
85
150
45
25
70
400
30
105
30
50
120
80
90
50
80
Solution-3
Expenditure Approach
GDP = C + I + G + NX
= $500 + 70 + 150 + (80-30)
= $770
NDP
= GDP Depreciation
= $770 - $45
= $725
National Income = Employees Compensation (Wages and
Salaries) + Corporate Profits + Sole Proprietors Income +
Net Interest Income + Rental Income
= $400 + 85 + 50 + 40 + 25
= $600
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Solution-3
Personal Income = National Income Income earned but
not received + Income received but not earned
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We can measure GDP in terms of total expenditure or as the total income received by
households.
The largest component of income received by households is wages, which are about three
times as large as the profits received by sole proprietors and the profits received by
corporations combined.
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EXAMPLE 2 :
Pizza
Ice Cream
year
2002
Rs.10
400
Rs.2.00
1000
2003
Rs.11
500
Rs.2.50
1100
2004
Rs.12
600
Rs.3.00
1200
Increase:
2002:
= Rs.6,000
2003:
= Rs.8,250
37.5%
2004:
= Rs.10,800
30.9%
89
EXAMPLE 2 :
Pizza
Ice Cream
year
2002
Rs.10
Rs.10
400
Rs.2.00
Rs.2.00
1000
2003
Rs.11
500
Rs.2.50
1100
2004
Rs.12
600
Rs.3.00
1200
Increase:
2002: Rs.10 x 400 + Rs.2 x 1000 = Rs.6,000
20.0%
2003: Rs.10 x 500 + Rs.2 x 1100 = Rs.7,200
16.7%
2004: Rs.10 x 600 + Rs.2 x 1200 = Rs.8,400
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EXAMPLE 2 :
year
2002
Nominal
GDP
Rs.6000
Real
GDP
Rs.6000
2003
Rs.8250
Rs.7200
2004
Rs.10,800
Rs.8400
In each year,
nominal GDP is measured using the (then)
current prices.
real GDP is measured using constant prices
from the base year (2002 in this example).
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EXAMPLE 2 :
year
2002
Nominal
GDP
Rs.6000
2003
Rs.8250
2004
Rs.10,800
Real
GDP
Rs.6000
37.5%
30.9%
Rs.7200
20.0%
Rs.8400
16.7%
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Real GDP
$8,000
(base year
2000)
$6,000
$4,000
Nominal
GDP
$2,000
$0
1965
1970
1975
1980
1985
1990
1995
2000
2005
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Definition:
nominal GDP
GDP deflator = 100 x
real GDP
EXAMPLE 3 :
2002
Rs.6000
Rs.6000
GDP
Deflator
100.0
2003
Rs.8250
Rs.7200
114.6
Rs.8400
128.6
year
2004
Nominal
GDP
Rs.10,800
Real
GDP
14.6%
12.2%
100 x (6000/6000) =
100.0
2003:
100 x (8250/7200) =
114.6
2004:
100 x (10,800/8400) =
128.6
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2:
Computing GDP
Exercise
2005
P
2006
Q
Rs.30
900
Rs.31
1,000
Rs.36
1050
Rs.100
192
Rs.102
200
Rs.100
205
2:
Answers
Exercise
2005
P
2006
Q
Rs.30
900
Rs.31
1,000
Rs.36
1050
Rs.100
192
Rs.102
200
Rs.100
205
2:
Answers
Exercise
2005
P
2006
Q
Rs.30
900
Rs.31
1,000
Rs.36
1050
Rs.100
192
Rs.102
200
Rs.100
205
Implications of Rebasing
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SNA
The compilation practices of Indias NAS have
always broadly followed the United Nations System
of National Accounts (SNA).
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B.S.Misra
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SNA
SNA
(ii) GDP at market prices is the GDP in
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