GDP/GNP

Firms: It is an organization that produces goods & services for sale

Household: A person or group of people that share their phone

Gross Domestic Product (GDP): It is the market value of all final goods & services produced within a nation in a given year

What isn't Included in GDP

• Intermediate Goods- something that needs further processing
• Used or Second-hand Goods- has been counted before
• Purely Financial Transactions- stocks, bonds, etc.
• Illegal Activities- drugs money, etc.
• Unreported Business Activity- tips
• Nonmarket Activities/Transactions- volunteering, babysitting
• Transfer Payments- scholarships, welfare payments, social security

What is included in GDP

C- Personal Consumption Expenditures (65% Americans spend on)

Ig- Gross (Total) Private Domestic Investment (17%)

• Factory Equipment Maintenance
• New Factory Equipment
• Construction of Housing
• Unsold Inventory or Products built in a Year

G- Government Spending (20% of American economy)

Xn- Net Exports (2%) (Exports-Imports)

Gross National Product (GNP): Total market value of all final goods & services by citizens of that country on its land or foreign land

Two Ways to Calculate GDP

1.    Expenditure Approach

-       Add up all of the spending on final goods & services produced in a given year formula:

GDP= C+Ig+G+Xn

“expenditure”- to spend

2.    Income Approach

-       It adds up all the income that resulted from selling all final goods & services produced in a given year formula:

W +R +I+ P+ statistical adjustments

W- wages

R- rents

I-  interests

P- profits

Statistical Adjustments

1.            Indirect Business Taxes

2.            Depreciation AKA Consumption of Fixed Capital

3.            Net Foreign Factor Payment

Compensation of Employees: Wages & salaries, could also include pensions, insurance, health & welfare

Rents: Income received by property owners

Interest

-Money paid by private businesses to the suppliers of loans

Corporate Profits

-It is the income of the corporation’s stockholders Ex. Dividends & corporate income taxes

Proprietor’s Income

-income that comes from entrepreneurships & partners in a business

Formulas:

-Budget Surplus/Deficit = Gov. Purchases of Goods & Services + Gov. Transfer Payments – Gov. Tax & Free Collection

-Trade Surplus/Deficit = Exports – Imports

National Income =

1.    Compensation of Employees + Rents + Interests + Corporate Profits + Proprietor’s Income

2.    GDP – Income Business Taxes – Depreciation – Net Foreign Factor Payment

Disposable Personal Income = National Income – Personal Household Taxes + Gov. Transfer Payments

-Net Domestic Product (NDP)= GDP – Depreciation

Net National Product (NNP)= GDP + Net Foreign Factor Payment

Nominal GDP	Real GDP
o   (price × quantity) o   The value of output produced in current year prices o   Used to measure an increase in prices o   Can increase from year to year if either price or quantity increases	o   (base yr. price × current yr. quantity) o   The value of output produced in constant base year prices o   ADJUSTED for inflation o   Used to measure economic growth o   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 ×100                                    Nominal Interest Rate ×100

   Real GDP                                                   Real Interest Rate

- In base year, GDP Deflator ALWAYS equals 100

- For years after the base year, GDP deflator is greater than 100

- For years before the base year, GDP deflator is less than 100

Consumer Price Index (CPI):

- Most commonly used measurement of inflation

- It measures the cost of a market basket of goods of a typical urban American family

(cost of a market basket of goods & services in a given year) ×100

(cost of a market basket of goods in a base year)

Inflation Rate:

New Price Index – Old Price Index/Old Price Index

Nominal Interest Rate:

-  The percentage increase in money, the borrower must pay a lender for a loan

- It is NOT adjusted for inflation

Real Interest Rate (RIR):

- The percentage increase in purchasing power, the borrower must pay the lend for a loan

- It IS adjusted for inflation

Formulas:

RIR= Nominal Interest Rate – Inflation

Nominal Interest Rate= Expected Interest Rate + Inflation Premium       

Hurt by Inflation

§     Savers

§     Lenders/Creditors

§     People who are on a Fixed Income Ex. Elderly, welfare

Helped by Inflation

§  People who Owe Money Ex. Debtors

C.O.L.A.

o   Cost of living adjustments

o   It is where you get an automatic wage increase when inflation occurs