GROSS DOMESTIC PRODUCT (GDP)

GDP : Total value of all the final goods and services produced
domestically of a country in a given year. Example : GDP of 2007
was 100000000 USD indicates total value of the all goods and
services in 2007 was 100000000 USD not in 2008 or 2007 or any
other period. There are important concept associated with it. Which
are :

Nominal GDP : Calculate based on the current price of goods

and services.

Real GDP : Calculate based on the base year price of goods

and services.

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 IS GDP A COMPLETE MEASURE ???

 GDP excludes most of the items that are produced and

consumed at home which never enter in the market place

GDP excludes items produced and sold illicitly such as

illegal drugs

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 GDP DEFLATOR

 Measures of Price Variation of All Goods & Services

Produced Domestically

 GDP Deflator reflects the current level of prices

relative to the level of prices in the base year

 GDP DEFLATER = [Nominal GDP / Real GDP] * 100

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 CONSUMER PRICE INDEX (CPI)

Like GDP Deflator , CPI is also Measure of Price Variation

BUT, CPI MEASURES:

Prices of Only the Goods and Services Bought

by A Typical Consumer

The Consumer Price Index (CPI) turns the

prices of many goods and services into a
single index measuring the overall level of
prices.

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 COMPUTING CPI

 Fix the basket of goods and services

 Find the prices of each goods and services in each year

 Use data on prices to calculate the cost of basket in each

year

 Choose one year as the base year and use it to compute

the index
CPI Can Be Calculated As:

[ Price of basket in each year / Price of basket of base year] * 100

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 EXAMPLE OF CACULATING CPI
Let’s see how the CPI would be computed in our
apple and orange economy

A typical consumer buys 5 apples and 2 oranges every month. Then

the basket of goods consists of 5 apples and 2 oranges, and the CPI is:

CPI= ( 5  Current Price of Apples) + (2  Current Price of Oranges) /

( 5  2005 Price of Apples) + (2  2005 Price of Oranges)

In this CPI calculation, 2005 is the base year.

The index tells how much it costs to buy 5 apples and 2 oranges in the
current year relative to how much it cost to buy the same basket of fruit
in 2005.

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 PROBLEMS IN MEASURING COST OF LIVING

CPI is not a Perfect Measure of Cost of Living

There are 3 types of problems :

 Substitution bias

 Introduction of new goods

 Unmeasured quality change 7

 GDP DIFLATOR VS CPI

GDP deflator focuses on prices of all goods and services

produced

CPI focuses on prices of only the goods and services bought

by consumers

Price of imported goods are not a part of GDP deflator but

part of CPI

CPI assigns fixed weights whereas the GDP deflator assigns

changing weights to the prices of different goods
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 INFLATION RATE

Inflation: increase of general price level of a country

Inflation Rate : Percentage change in the price index

from the preceding year

Can Be Calculated As:

Inflation Rate in Year 2= [(CPI in year 2- CPI in year 1) / CPI in year ] * 100

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 Gross National Product

The total market value of all final goods and services

produced within a given period by factors of production
owned by a country’s citizen , regardless of where the
output is produced.

GNP = National Income + Indirect business tax – Subsidy

+ Capital consumption allowances + Net factor
payment (wage, salary, rent) from the rest of the
world

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 NET NATIONAL PRTODUCT (NNP)

Total value of final goods of products (produced

domestically + abroad) in a given period of time after
subtracting the depreciation of capital (the amount of
the economy’s stock of plants, equipment, and
residential structures that wears out during the year)

NNP = GNP - DEPRECIATION

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 Disposable Personal Income
The total amount of money available for an individual or
population to spend or save after taxes have been paid.

DPI= Personal Income – Personal Income Tax Payments

For example, consider a family with a household income of

$100,000, and the family has an effective income tax rate of
25%. This household's disposable income would then be $75,000
($100,000 - $25,000).

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 Methods of Measuring National Income

1. Product/ Output Approach: the sum total of the gross value

of the final goods and services in different sectors of the
economy

GDP= Total product of (industry + service + agriculture) sector

Symbolically, GDP= ∑ (P × Q)

Where,

P= Market price of goods and services

Q= Total volume of output 13

Methods of Measuring National Income (…continued)
2. Income Approach: The total sum of income received by
these individuals comprise the national income for a given
period of time. Five components are:

Employ’s compensation (e.g. wage, salary)

Proprietor's income (income from non corporate business

including small firms)

Rental income

Corporate profits

Net interest 14
Methods of Measuring National Income (…continued)

2. Expenditure Approach: Sum of the four components of

expenditures:

C= Private Consumption Expenditure

I= Investment Expenditure

G= Government purchase

NX= Net Exports (export –import)

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 Labor Force

Labor force: sum of all employed and unemployed person

Unemployment rate: percentage of unemployed person in

the labor force

Unemployment Rate = [ Number of unemployed / Labor force] * 100

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