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Gross Domestic Product

Gross

domestic product (GDP) is the


total market value of newly
produced, final goods and services
within a country in a given period of
time (which is generally one year).

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GDP Calculation: An economy produces three products A,


I and S
Pa

Qa

Pi

Qi

Ps

Qs

10

10

12

10

08

10

How can we calculate the total market value?


Total market value =
=
=
=

Pa.Qa + Pi.Qi + Ps.Qs


10*10 + 12*10 + 08*10
100
+ 120
+ 80
300

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GDP Calculation: In reality, A, I and S is the output of


Agriculture sector, Industrial sector and Services sector

How can we calculate the share of a particular


sector in total GDP?
Share of Agriculture sector = Value of Agricultural output/GDP*100
Share of Industrial sector = Value of Industrial output/GDP*100
Share of Services sector = Value of Services sector output/GDP*100
For real data and chart, see ES-2011-12,
Chapter 1, P11 Fig 1.4 and P16 Table 1.1.

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Intermediate Vs Final goods and Value added


Value addition
A farmer produces wheat which are sold
to a miller at Rs100.
The miller processes the wheat into flour,
which he then sells to a baker for Rs.180.
The baker uses the flour to bake bread
which is then sold to shops for Rs.250.

Farmers

Rs. 100

Millers

Rs. 80

Bakers

Rs. 70

Shopkeepers

Rs. 50

Total

Rs. 300

The shopkeeper then sell the bread to final


consumers for Rs.300.
Any

step in the production


process that improves the
product for the customer
and results in a higher net
worth.
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Which of these activities should be recorded in GDP?

A person purchases a locally produced, brand new BMW 316i in Rs


2,800,000.

2 months later, he sells the BMW 316i in Rs 2,400,000.

James works in a Car Washing center. He washes a clients car.

James washes his fathers car at home.

Mr. Naveed (A real estate agent) sells a New Bungalow worth Rs. 35
million to a client and charges Rs. 1 million as commission.

03 months later, he re-sale the same Bungalow in Rs. 40 million to another


party and receives Rs. 1.2 million as commission.

Pension, Unemployment payment, Cash transfer in Income support


schemes.

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The Circular-Flow Diagram


The equality of income and
expenditure can be illustrated
with the circular-flow diagram.

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Circular Flow 2 Sector model


Income (Y)

Wages, Rent, Interest & Profit

Factors of
production
Labour, Land, Capital
and Enterprise

Consumers

Producers
Goods and Services

Consumption spending (C)

2 Sector model
Saving and Investment
Income (Y)

Wages, Salaries, Rent, Interest & Profit

Consumers

Producers

Consumption spending (C)

Savings (S)

Investment (I)

Financial Sector

Circular Flow of Income


Three Sector Model
Consumers, Producers, Financial and Government Sectors

Income (Y)

Consumers
Consumption spending (C)

Savings (S)

Producers

Investment (I)

Taxes (T)

Taxes (T)
Government Sector

Direct transfers

Government
Spending (G)

Circular Flow of Income


Four Sector Model
Consumers, Producers, Financial and Government Sectors

Income (Y)

Consumers

Producers

Consumption spending (C)

Savings (S)

Investment (I)

Taxes (T)

Taxes (T)
Government Sector
Government
Spending (G)

Direct transfers
Imports

External Sector

The Measurement of GDP


There are three approaches to measuring GDP:
the expenditure approach (final sales), the production approach
(value added) and the income approach (incomes of the factors of
production).
Expenditure approach: We add the expenditures of final consumers
on products and services.
Income /Cost approach: In this approach, consideration is given to
the costs incurred by the producer within his own operation.
Value added approach: It measures the contribution to output
made by each producer.
Reference for Real methodology
Pbs.gov.pk.SectionsNational accounts.MethodologyP2
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Calculate GDP in an economy, having two producers only

Farmer (Oranges)

Juice seller

Transactions of Mr. A

Transactions of Mr. B

Wages paid

(Rs.200)

Oranges purchased

Taxes

(Rs.150) Wages
(Rs.150)

(Rs.500)

Oranges sold to Mr. B

Rs.500

Taxes

(Rs.100)

Oranges sold to public

Rs.500

Juice sold to public

Rs.1000

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What Is Not Counted in GDP?


GDP excludes most items that are
produced and consumed at home and
that never enter the marketplace.
It excludes items produced and sold
illicitly, such as illegal drugs.

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Other Measures of Income


Gross

National Product (GNP)


Net National Product (NNP)
National Income
Personal Income
Disposable Personal Income

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Gross National Product


Gross national product (GNP) is the total
income earned by a nations permanent
residents (called nationals).
It differs from GDP by including income
that our citizens earn abroad and
excluding income that foreigners earn here.

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Net National Product


(National Income at market price)

Net National Product (NNP) is the total


income of the nations residents (GNP)
minus losses from depreciation.
Depreciation is the wear and tear on
the economys stock of equipment and
structures.

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National Income (at factor cost)

National Income is the total income earned by a nations


residents in the production of goods and services.

It differs from NNP by excluding indirect business taxes


(such as sales taxes) and including business subsidies.

ES 2011-12, chapter 1, p-16, table 1.1

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Personal Income
Personal income is the income that
households and noncorporate businesses
receive.
Unlike national income, it excludes retained
earnings, which is income that corporations
have earned but have not paid out to their
owners.
In addition, it includes households interest
income and government transfers.

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Disposable Personal Income


Disposable personal income is the income
that household and noncorporate
businesses have left after satisfying all
their obligations to the government.
It equals personal income minus personal
taxes and certain nontax payments.

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The Components of GDP


GDP (Y ) is the sum of the following:

Consumption (C )
Investment (I )
Government Purchases (G )
Net Exports (NX )

Y = C + I + G + NX
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The Components of GDP

Consumption (C):

The spending by households on goods and


services, with the exception of purchases of
new housing.

Investment (I):

The spending on capital equipment,


inventories, and structures, including
new housing.

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The Components of GDP

Government Purchases (G):


The spending on goods and services by local,
state, and federal governments.
Does not include transfer payments because
they are not made in exchange for currently
produced goods or services.

Net Exports (NX):

Exports minus imports.

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Real versus Nominal GDP


Nominal GDP values the production of
goods and services at current prices.
Real GDP values the production of
goods and services at constant prices.

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Real versus Nominal GDP


An accurate view of the economy
requires adjusting nominal to real
GDP by using the GDP deflator.

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GDP Deflator
The GDP deflator measures the current
level of prices relative to the level of
prices in the base year.
It tells us the rise in nominal GDP that is
attributable to a rise in prices rather
than a rise in the quantities produced.

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GDP Deflator
The GDP deflator is calculated as follows:

NominalGDP
GDPdeflator=
100
RealGDP

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Converting Nominal GDP to Real


GDP
Nominal GDP is converted to real
GDP as follows:

(NominalGDP20xx )
RealGDP20xx =
X 100
(GDPdeflator
20xx )

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GDP and Economic


Well-Being
GDP is the best single measure of the
economic well-being of a society.
GDP per person tells us the income and
expenditure of the average person in
the economy.

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GDP and Economic


Well-Being
Higher GDP per person indicates a
higher standard of living.
GDP is not a perfect measure of the
happiness or quality of life, however.

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GDP, Life Expectancy, and Literacy


Country

Real GDP per


Person (1997)

Life
Expectancy

United States

$29,010

77 years

99%

J apan

24,070

80

99

Germany

21,260

77

99

Mexico

8,370

72

90

Brazil

6,480

67

84

Russia

4,370

67

99

Indonesia

3,490

65

85

China

3,130

70

83

India

1,670

63

53

Pakistan

1,560

64

41

Bangladesh

1,050

58

39

920

50

59

Nigeria

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Adult
Literacy

Summary
Because every transaction has a buyer and
a seller, the total expenditure in the
economy must equal the total income in
the economy.
Gross Domestic Product (GDP) measures
an economys total expenditure on newly
produced goods and services and the total
income earned from the production of
these goods and services.

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Summary
GDP is the market value of all final goods
and services produced within a country
in a given period of time.
GDP is divided among four components
of expenditure: consumption, investment,
government purchases, and net exports.

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Summary
Nominal GDP uses current prices to
value the economys production. Real
GDP uses constant base-year prices to
value the economys production of goods
and services.
The GDP deflator--calculated from the
ratio of nominal to real GDP--measures
the level of prices in the economy.

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