23115 Lecture Notes - Lecture 7: Income Approach, Social Security, United Nations Development Programme
Macroeconomics
Lecture 7 - Macroeconomics; National Income (GDP); Cost of Living
(Inflation)
PRODUCTION AND GROWTH (CH 24)
THE COMPONENTS OF GDP
• ▪ Gross domestic product (GDP) measures the total income of everyone in the economy
ad the total epediture o the eoos output of goods ad series.
• ▪ Generally, GDP can be defined as the market value of all final goods and services
produced within a country in a given period of time.
• ▪ Breaking down the definition and measurement of Gross Domestic Product:
• ✓ The market value: value goods at market prices.
• ✓ Of all: include all items produced in the economy and sold legally in the markets.
• ✓ Final: include only the value of final goods (i.e. off the shelf for consumption).
• ✓ If a iterediate good is produed ad added to a firs ietor to e used or sold
later,
its value is added to GDP as investment.
• ✓ Goods and services: include tangible goods and intangible services.
• ✓ Produced: include goods and services currently produced.
• ✓ Within a country: measures value of production within the geographic confines of a
country.
• ✓ Gross national product (GNP) is the value of production of a atios peraet
residents.
• ✓ In a given period of time: measure the value of production that takes place within a
specific
interval of time; e.g. uately, half‐yealy, yealy.
• ✓ Quarterly GDP is usually the amount of income or expenditure during the quarter
multiplied
by 4 to make it comparable with annual GDP. Quarterly GDP may also need seasonal
adjustment.
▪ The components of GDP can be summarised in the following equation. o GDP equation (note
that Y represets ioe:
Consumption (C) refers to spending by households on goods and services, with the exception of
purchases of new housing.
Investment (I) refers to the purchase of new capital equipment, inventories and structures, including
household purchases of new housing.
find more resources at oneclass.com
find more resources at oneclass.com
Government purchases (G) refers to the spending on goods and services by local, state and federal
governments (but does not include transfer payment such as pension benefits).
Net exports (NX) – spending on domestically produced goods by foreigners (exports) minus
spending on foreign goods by domestic residents (imports) – also alled trade alae X‐M.
Consumption makes up around 55% of GDP, investment makes up around 20% of GDP, and
goeret spedig akes up aroud ‐5% of GDP. Net eports usually have a small deficit
(negative) contribution to GDP.
• ▪ Using to calculate GDP is called the expenditure approach.
• ▪ ABS also uses two other approaches to calculate GDP:
Income approach (I): the sum of factor incomes, consumption of fixed capital (depreciation)
and net indirect taxes.
Production approach (P): uses a concept called value added to calculate GDP. Value added
refers to the alue of a firs output ius the alue of its iputs.
REAL GDP (Yr) versus NOMINAL GDP (Yn)
▪ Since GDP increases from year to year can be accounted for by TWO factors (increase in
PRODUCTION or increase in PRICE – adjustment for inflation required), it can be categorised.
Nominal GDP (Yn) refers to the production of goods and services at current prices. o Real GDP (Yr)
refers to the production of goods and services at constant prices.
Since we know that nominal GDP uses urret pries to plae a alue o the eoos produtio
of goods and services and Real GDP uses ostat ase‐ear pries to plae a alue on the
eoos produtio of goods ad series.
We can conclude that real GDP is NOT AFFECTED by the changes in prices. Changes in real GDP
reflect only changes in the amounts of being produced. Thus, real GDP is a measure of the real
increase in an ecoos produtio ot the prie of goods ad series.
PRODUCTIVITY: ITS ROLE AND ITS DETERMINANTS
• ▪ Productivity is the aout of goods ad series produed fro eah hour of a orkers
time. Productivity can explain the convergence of living standards between nations.
• ▪ The determinants of productivity include –
➢ Physical capital is the stock of equipment and structures that are used to produce
goods and
services.
➢ Human capital is the knowledge and skills that workers acquire through education,
training
and experience.
➢ Natural resources are the inputs into the production of goods and services that are
provided
by nature, such as land, rivers and mineral deposits.
➢ Technological knowledge is an understanding of the best ways to produce goods and
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Lecture 7 - macroeconomics; national income (gdp); cost of living (inflation) Quarterly gdp may also need seasonal adjustment: the components of gdp can be summarised in the following equation. o gdp equation (note that (cid:858)y(cid:859) represe(cid:374)ts i(cid:374)(cid:272)o(cid:373)e(cid:895): Consumption (c) refers to spending by households on goods and services, with the exception of purchases of new housing. Investment (i) refers to the purchase of new capital equipment, inventories and structures, including household purchases of new housing. Government purchases (g) refers to the spending on goods and services by local, state and federal governments (but does not include transfer payment such as pension benefits). Net exports (nx) spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports) also (cid:272)alled trade (cid:271)ala(cid:374)(cid:272)e (cid:894)x m(cid:895). Consumption makes up around 55% of gdp, investment makes up around 20% of gdp, and go(cid:448)er(cid:374)(cid:373)e(cid:374)t spe(cid:374)di(cid:374)g (cid:373)akes up arou(cid:374)d (cid:1006)(cid:1004) (cid:1006)5% of gdp.
