GDP

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