GDP

- Value of all final goods and services produced in a country each year
- GDP = Ca + Ia + Ga + (Xa – IMa)

NATIONAL OUTPUT AND VALUE ADDED

- Compare intermediate goods and final goods
- Biggest error: double counting (adding all sales of all firms) because production
happens ins stages

*To avoid double counting use the concept of value added

Value added = Sales rev – cost of intermediate goods
Value added = payments owed to the firm’s factors of production

Apple pies Transportation P.M sales

20 000 (value 2 000 (value 30 000 (revenue)
added) added)

EXPENDITURE APPROACH/ GDP FROM THE EXPENDITURE SIDE

1. Consumption expenditure (Ca): household expenditure on all goods and
services (except housing) (rent/haircuts/ phone bills/food/clothes/flowers)
2. Investment expenditure (Ia): expenditure on the production of goods not for
present consumption
 Includes inventories (finished goods not yet sold for current consumption),
capital goods and residential housing
3. Government purchases (Ga): expenditure on currently produced goods and
services (exclusive of government transfer payments like employment insurance)
(street cleaning/firefighting)
Government output is valued at cost and not market value
4. Net exports = Exports – Imports (Xa -IMa)
Foreign expenditure on domestically produced goods and services
Measured from the expenditure side, GDP is equal to the total expenditure on
domestically produced output
GDP = Ca + Ia + Ga + NXa

Capital stock: economy’s total quantity of capital goods

Gross investment: total investment in the economy
Net investment = Gross investment – Depreciation
WITHDRAWAL, INJECTION, CIRCULAR FLOW
- Simple circular flow
Buying a car
Getting payed for your labour services
Injections
Exports
Building a new school
Withdrawal
Imports
Taxes

GDP FROM THE INCOME SIDE

- Involves adding up the factor incomes and other claims on the value of output
until all the value is accounted for
1. Factor incomes:
 wages and salaries (anything paid to labour)
 interest (anything earned on bank deposits/ interests on loans/ investment
income)
 business profits (rent received by private owners/ dividends and retained
earnings)
2. Non-Factor payments: subsides act like negative taxes (payments from the gov
to firms)
 Indirect taxes: taxes on the production of goods and services (GST)
 Value of indirect taxes + net domestic income = GDP from the income side

GDP DEFLATOR
Nominal GDP

GDP Deflator = REAL GDP ×100

Measures prices of what we are producing

OMISSIONS FROM GDP

- Illegal activities
- Underground economy (production not reported for tax purposes)
- Home production, volunteering, leisure (this is a major issue in underdeveloped
countries because there is a lot of home production that is not accounted for)
- Economic “bads”
- Environmental waste
*Some problems will always persist (it will be interpreted with limitations)
Very difficult to get rid of omissions
The book thinks it’s a good measure of living standards

EXAMPLES
Does this affect GDP?
1. Getting your tooth extracted at the dentist YES
2. Renting an apartment in NDG YES
3. Buying a new house in Laval YES
4. Buying a 50-year-old house in NDG NO (it was already bought once)
5. Smuggling drugs from Mexico to Canada NO
6. Bombardier increases production of helicopters, exported to India YES
7. Canadians consume more Australian wines
8. Ford opens a new factory in Ontario and starts producing new cars YES
9. Buying 100 shares from Rodgers NO
10. Buying 50 bonds of Suncor Energy NO (no production of anything it’s just
lending)
11. Writing a poem and reading it to neighbours NO (did not bring any money)
12. Publishing a poem and selling it to Chapters YES
13. Teaching 2 accounting courses at UBC YES
14. Selling a used car to your friend NO (already accounted for)
15. Assembling IKEA furniture by yourself NO (no money)
16. Hiring professional assemblers to assemble furniture for you YES
17. Receiving commission on a condo YES
18. Seeing a child psychologist YES

Calculate nominal GDP for each year

Year Computer Price of a Cellphones Price of a Nominal
computer cell GDP
2000 20 500 100 50 15 000
2001 20 550 80 65 16 200
2002 10 1000 50 100 15 000

Take 2002 as a base year

2000: 30 000
2001: 28 000
2002: 15 000

Calculate GDP deflator for each year

2000: 50
2001: 57.86
2002: 100
Calculate inflation for each year (CPI)
2000: WE CAN’T
2001: 15.72%
2002: 72.83%
 YEAR NOMINAL GDP GDP DEFLATOR (1992
BASE YEAR)
1993 700 104
1994 770 110

- What was the growth rate of nominal GDP between 1993 and 1994?
10%

- What was the growth rate in the GDP deflator between 1993 and 1994?
(110-104)/104 *100 = 5.77

- What was the real GDP in 1993 measured in 1992 prices?

(700/104) *100 = 673.08
REAL GDP = nominal GDP/ GDP deflator *100

- What was the real GDP in 1994 measured in 1992 prices?

(770/110) *100 = 700

- What was the growth rate of the real GDP?

4%

- Show that the nominal GDP growth rate is approximately equal to the real growth
rate plus the inflation rate
10% = 4 + 5.77