Jim’s Notes

Growth and GDP

Gross Domestic Product and It’s Limits

market value of all final goods and services produced during a year

What Drives Growth?

More Resources

Better Technology

Capital Accumulation



Limitations of GDP

Imperfect measure of Welfare

Freedom and Health
Depletion of resources

Some production ignored

Products not sold
Household production
Underground and Barter

Some activity must be estimated

‘Imputed rental income’
In-kind payments

Measuring GDP

National Income Identity: GDP = GDI

notation: Q = Y

Different approaches:

Quantities Produced can’t add

Income (Gross Domesitic Income)

notation: Y (if real)

Expenditures (Gross Domestic Product)

notation: Q (real)

GDI: Income Approach

value of aggregate output equals aggregate income paid for resources used to produce that output

Profit arising from production

GDI = Wages + Profit + Interest + Rent

Profit, Interest, and Rent can be considered the ‘returns to capital’
GDI = wages + returns to capital

GDP: Expenditure Approach

Aggregate expenditure (spending):

Consumption (C)
Investment (I)
Government Purchases (P)
Net Exports (X-M)
GDP = C + I + G + (X-M)
also called ‘Aggregate Expenditure’ or ‘Aggregate Demand’

C: Personal Consumption Expenditure

Purchases by households
Largest spending category ~ 2/3 US GDP
Durable Goods
Nondurable Goods

I: Investment Spending

Planned Investment:
New buildings and machinery by firms
New residential construction by households
Net Change in Inventories
Increase in inventories = + investment
Decrease in inventories = – investment
Not Counted:
Household durable goods
Existing buildings and machines
Financial assets

Inventory change: the coordination component in GDP

GDP = C + Iplanned + InventoryChange + G + (X – M)

G: Government Purchases

Gov’t. consumption and investment
Federal Spending
State and Local government spending (including schools and special districts)
Excludes transfer payments

Measures of GDP:

Nominal GDP

Total Production at then–current prices
Starting point for all other measures
observed at then-current prices
reported quarterly q/ monthly revisions of estimates
limited use and meaning unless adjusted

Real GDP:

adjusting nominal GDP to account for changes in price level (value of money) over time
takes inflation out of the numbers
restates all years/quarters in terms of a ‘base year’s’ prices
Nominal GDP = Real GDP times Change in Price Level

GDP Growth

Growth Rates
Typically reported quarterly as annual percentage rate

Per Capita GDP

adjusts for changes or differences in population
per capita GDP = GDP (usually real) / population

Examples and graphs of GDP and GDP trends