Gdp Explanation

Definition of GDP
Total market value of All the goods and services Produced By the factors of production Located in a country During a certain period of time Except those produced by households for household consumption.
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Total market value of

GDP = P1 × Q1 + P2 × Q2 +∙∙∙∙

Q1 = 10 pounds P1 = $2/pound

Q2 = 4 units P2 = $100 each

GDP = $2 × 10 + $100 × 4 = $420
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All the goods and services

Don’t forget services.
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Remember: Include ALL the goods and services produced

But don’t double count the banana battery which is already under the hood.
Final versus intermediate goods

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Three Faces of GDP
1. Production
– Total value of new products – GDP = P1 × Q1 + P2 × Q2 +∙∙∙∙

2. Expenditure
– Total expenditure on those products – By households, firms, government, foreign countries

3. Income
– Factor income generated in producing those products – Wage + Interest + Rent + Profit
GDP = Value of Production = Total Expenditure = Total Factor Income
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By the factors of production
Land Labor Capital

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Nominal and Real GDP Year 2004 2005 P1 Q1 P2 Q2 Nom GDP Real GDP $60 $84

$5 × 2 + $10 × 4 = $50 $6 × 4 + $12 × 5 = $84

2006

$8 × 6 + $15 × 6 = $138 $108

Real GDP at constant 2005 prices (Base Year = 2005)
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GDP Deflator

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GDP Deflator
Year P1 2004 $5 Q1 2 P2 Q2 Nom Real GDP GDP $50 $60 GDP Deflator
$50 × 100 = 83 $60 $84 × 100 = 100 $84

$10 4

2005 $6 4

$12

5

$84

$84

2006 $8

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$10 6

$138 $138 $108 × 100 = 128 $108

GDP deflator at constant 2005 prices (Base Year = 2005)
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Consumer Price Index

1983

$9

$4

$43

1984 $10 × 3 + $5 × 4 = $50 1985 $11 1986 $12 $6 $7 $57 $64
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