GDP Fundamentals

GDP 

• Total dollar value of all final goods and services produced within a countries borders within a given year
• Included in GDP:
•  Consumption - 65%
• purchased finished goods and services
• Ig (Gross Private Domestic Investment) - 17%
• factory equipment maintenance
• new factory equipment
• new construction housing
• unsold inventory of products built in a year
• Government Spending - 20%
• School District counted 
• Net Exports - -2%
• Exports - Imports = Net Exports
• Not Included in GDP:
• Intermediate Goods - Not final, but in process
• Secondhand Goods -  To avoid double counting
• Purely Financial Transactions (stocks & bonds)
• Illegal Activities (drugs)
• Unreported business activities (unreported tips)
• Transfer payments
• Public (SS, VA, welfare)
• Private (Scholarships)
• Non-market activity (Volunteering, babysitting, solo work)

Calculating GDP:

1. Expenditure Approach:
• C  +  Ig  +  G  +  Xn  =  GDP
• Add all spending on final goods and services provided in a given year.
2. Income Approach
• Add all income resulted from selling final goods and services produced in a given year.
• Rarely used b/c dishonesty
• W  +  R  +  I  +  P  +  Statistical Adjustments  =  GDP
• Where:
• W = Wages
• R = Rent
• I = Income
• P = Profits/Proprietor's Income

• Compensation of employees: Wages/salaries, Wage/salary supplements (pensions, health ins., welfare)
• Rent: Income received by households and businesses that supply property resources
• Interest: Money paid to suppliers of loans (owe interest + principal)
• Proprietor's Income : Sole proprietorship and partnerships have
• Corp. Profits: Inc. Dividends, corp. income tax, undis. corp. profits
• Statistical Adjustments: Indirect business taxes; consumption of fixed capital (depreciation); net foreign factor payment

GNP

• Total value of all final goods and services produced by a country in a year whether on or off its land.