GDP - measures how much an economy is producing as a whole (aggregate output)
- also interested in fraction of economy employed/unemployed, prices, inflation, etc
- 1. value of final goods/services produced by economy in any given period
- final good - destined for final consumption
- intermediate good - good used in production of another good
- 2. sum of value added in economy in a given period
- value of firm's production minus value of intermediate goods used by firm (profit)
- revenue by 1 firm may be the expenses of another firm
- aka net profit, but w/o taking into account wages
- 3. sum of incomes in economy in a given period
- labor income + capital income (profits) + indirect taxes
- all 3 definitions should give same value
- nominal GDP - sum of quantities of final goods times current price
- production/prices increase over time >> nominal GDP increases
- aka dollar GDP, GDP in current dollars
- real GDP - considers mainly just the quantity of goods
- multiples the quantity by a constant, instead of current prices
- aka GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation
- real GDP intersects nominal GDP at base year
- special case - inflation a problem to the extent that nominal GDP increases (due to inflation), but real GDP actually decreases
- GDP per capital - ratio of GDP to population
- GDP growth = (Yt - Yt-1)/Yt-1)
- nominal GDP
- real GDP
- base year
example: steel firm sells to car firm
- Given:
- steel firm generates $100 in revenue, spends $80 in wages >> $20 net profit
- car firm generates $200 in revenue, spends $70 in wages, $100 to steel firm >> $30 net profit
- def 1 GDP = $200 (final good = cars)
- def 2 GDP = $100 from steel firm, $100 from car firm = $200
- steel/car firm pay wages, but only car firm uses intermediate goods
- def 3 GDP = labor income ($80+$70) + capital income (profits = $20 + $30) = $200
hedonic pricing - changing quality of goods complicates GDP calculation
- quality improves >> get more for your money >> relative price drops
- assume that public willing to pay 10% more for newer model than older model
- if newer model costs the same this year as the older model did last year, then quality-adjusted price has decreased by 10%
- in conjunctions w/ already decreasing prices, overall price decreases by even more when quality taken into consideration
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