115 CFA
File: Economics - Reading 14 - 1. Gross Domestic Product

1. Gross Domestic Product

a. calculate and explain gross domestic product (GDP) using expenditure and income approaches;

b. compare the sum-of-value-added and value-of-final-output methods of calculating GDP;

c. compare nominal and real GDP and calculate and interpret the GDP deflator;

d. compare GDP, national income, personal income, and personal disposable income;

What is Gross Domestic Product (GDP)?
GDP is the total market value of all domestically produced final goods and services for a particular year.

What are the five key factors that determine GDP?
The (1) market value of (2) final goods and services (3) produced (4) within a country (5) during a specific time period.

Does GDP include final goods (purchased by consumers) AND intermediate goods (purchased by businesses to create final goods)?
No. Only final goods are included, in order to avoid double-counting. The intermediate goods are included within the final goods prices.

What is nominal GDP vs real GDP?
GDP is measured over time which makes it subject to fluctuations in the value of money. Nominal GDP is not adjusted for inflation, while real GDP accounts for the effects of GDP.

How is a price index used to adjust for inflation?
A price index measures the cost of purchasing a market basket or bundle of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period (e.g., a base year).

What is a GDP deflator?
The GDP deflator is a price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year. It is a good measurement to give an economy-wide measure of inflation. GDP deflator includes prices for capital goods and other goods and services purchased by businesses and governments.

What is the formula to get real GDP (GDP in dollars of constant purchasing power)?
- Real GDPi = Nominal GDPi x (GDP Deflator for base year/ GDP Deflator for year i)
- E.g.
- given a 36% increase of nominal GDP's from
- 1992 = $6,244B
- 2010 = $8,509B
- given GDP deflator of
- 1992 = 100
- 2010 = 112.7
- to get the real 2010 GDP:
- 8509 * (100/112.7) = $7,550B
- Measured in terms of 1992 dollars, the real GDP in 2010 was only 20.9% higher than that in 1992

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