Lecture 2: Measuring economic activity GDP

Definition of gross domestic product GDP GDP is defined as the market value of the all final goods and services produced in a country during a given period.. Note:  Market value: to ad

Lecture 2: Measuring economic activity – Gross Domestic Product

(GDP)

Dr Do Xuan Luan

Faculty of economics and rural development (FERD), Thai

Nguyen University of Agriculture and Forestry (TUAF)

All lectures of the course

1. Introduction to macroeconomics;

2. Gross Domestic Product (GDP);

3. Economic growth;

4. Unemployment

5. Inflation;

6. Aggregate Demand & Aggregate Supply (AS-AD model);

7. Fiscal Policy;

8. Monetary Policy;

9. Combined effects of monetary and fiscal policy;

10. Trading with the world;

Is GDP the best indicator measuring performance of an economy?

Measurement of GDP Definition of GDP

GDP deflator Real GDP vs nominal GDP

Definition of gross domestic product (GDP)

GDP is defined as the market value of the all final goods and services produced in a country during a given period

Note:

 Market value: to add up products & services with different

measurement unit

 Final goods and services: not intermediate goods which are used to produce other goods Why? To avoid double counts

 In a country (within the boundary, irrespective of where people come from

 A given period of time: such as in a quarter, in a year and so on

An example illustrating final goods

Actors Revenue (VND)

Intermediate

costs (VND)

Value added (VND) Raw cotton (farmers) 24.000 0 24 Cotton threads 33.000 24.000 9.000 Cotton fabric 60.000 33.000 27.000 T-shirt (final good) 90.000 60.000 30.000

Total 207 117 90 (  VA)

HOUSEHOLDS FIRMS

Land (rent), labor (wage), capital (interest rate), entrepreneur (profit)

approach

Final goods, services

Output market

Input market

How to measure GDP? Start with the circular flow of

expenditure and income

Income approach

Costs

How to measure GDP?

The expenditure

approach

begins with the

money spent on

goods and services

Two main approaches

the income approach

starts with the income earned (wages, rents, interest, profits) from the production

of goods and services

Expenditure approach to measure GDP

GDP can be expressed as the sum of expenditures on domestically produced final goods and services

GDP = C + I + G + X-IM

Sectors Type of

expenditure

Examples

Household Consumption (C) Food, clothes, haircuts, new cars

Business firms Investment (I) New factories and equipment, new

houses, increases in inventory stocks

purchases (G)

New school building, new military hardware, salaries of soldiers and governmental officials

Foreign sector Net exports, or

exports minus imports

(X-IM)

Exported manufactured goods, legal or financial services provided by

domestic residents to foreigners

GDP data of Vietnam

GDP component (expenditure approach) Symbol Value

(billion USD)

% of GDP in

2015

General government final consumption

expenditure

Exports of goods and services X 173.85

Imports of goods and services IM 172.30

An example of calculating GDP based on expenditure (USA)

(billion USD)

% of GDP

Personal consumption

expenditures

Gross private domestic

investment

Government

expenditures

GDP measurement (income approach)

(billion USD)

% of GDP

How big GDP of Vietnam is?

 193.60 billion US

dollars in 2015

 represents 0.31 percent

of the world economy

presents 0.31 percent of

the world economy

Nominal GDP vs Real GDP

𝐺𝐷𝑃 = 𝑃 ∗ 𝑄

𝑛

1

An increase in GDP means rising physical amount of final products and services produced??

 GDP can change from time to time because of two reasons:

 ∆𝑃 (prices)

 ∆𝑄 (𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑖𝑒𝑠 𝑜𝑓 𝑓𝑖𝑛𝑎𝑙 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠)

 Real GDP 𝐺𝐷𝑃𝑟 = 𝑃𝑛1 0 ∗ 𝑄𝑡

(gross domestic product evaluated at based market prices

 Nominal 𝐺𝐷𝑃𝑡 = 𝑃𝑛1 t ∗ 𝑄𝑡

(gross domestic product evaluated at current market prices)

 0: based year

 t: current year

GDP deflator

 GDP Deflator is the ratio of the value of aggregate final output at

current market prices (Nominal GDP) to its value at the base year prices (Real GDP)

 𝐺𝐷𝑃𝐷 = 𝐺𝐷𝑃𝑛

𝐺𝐷𝑃𝑟 ∗ 100

 The GDP deflator is a price index telling us the average price change

of the whole economy

 Example:

 𝐺𝐷𝑃𝑟2015 = 𝑃𝑘1 2000 ∗ 𝑄2015= 64.64 billion US

 𝐺𝐷𝑃𝑛2015 = 𝑃𝑘1 2015 ∗ 𝑄2015=193.60 billion US

 𝐺𝐷𝑃𝐷 = 𝐺𝐷𝑃𝑛

𝐺𝐷𝑃𝑟 ∗ 100= 193.6064.64 ∗ 100= 299.50

Interpretation: the average price level in the economy increased by 199.5% percent from 2000 (the base period for estimating real GDP) to 2015

A simple example of calculating nominal, real GDP and GDP

deflator (2014: base year)

Year

Price (1000d/kg)

Quantiy (kg)

Price (1000d/litre)

Quantity (litre)

GDPn (1000d)

GDPr (1000d) DGDP

Is GDP a good measure of economic welfare? No, it ignores

other wellbeing indicators

Well being

B

E

C

D

A

Quality of

goods and

services

Leisure time

Equality

-Income distribution -Gender equality

Underground GDP

Evaded taxes;

illegal

Environment

-Erosion -Pollution -Flood, drought

Summary of key points

goods and services produced in a country during

a given period

physical quantities of all final goods and services

of all final goods and services It is also a

measurement of inflation

Assignment 2

1) Look for GDP of Vietnam for the period 2010-2015

2) Calculate per capita GDP of Vietnam for this period

3) Make comments on the change in per capita GDP

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