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Lecture 1

Lecture 1. Gross domestic product (GDP) is the total market value of all final goods and services produced within a country in a given period of time. Breaking down the definition: “ GDP is the Market Value . . .” - Output is valued at market prices. “. . . Of All Final . . .”

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Lecture 1

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  1. Lecture 1

  2. Gross domestic product (GDP)is the total market value of all final goods and services produced within a country in a given period of time. Breaking down the definition: “GDP is the Market Value . . .” • - Output is valued at market prices. “. . . Of All Final . . .” • -Records only the value of final goods, not intermediate goods (as value is counted only once). “. . . Goods and Services . . . “ • - Includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). GDP

  3. “. . . Produced . . .” • Includes goods and services currently produced, not transactions involving goods produced in past ( Used goods) • “ . . . Within a Country . . .” • Measures the value of production within the geographic confines of a country. • “. . . In a Given Period of Time.” • Measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).

  4. Circular flow model (A Simple Model of Economic Interaction) Wages, rent, COST Interest, Factor MARKET capital profit RESOURCES Labor, land HOUSEHOLDS BUSINESS FIRMS & services expenses Goods & goods PRODUCT MARKET Consumption, services revenue Investment ( Injection) Capital market Savings (Leakage)

  5. Calculating GDP • Suppose there are two goods in the economy. • Rice and Wheat • GDP= ( Price of Rice X Quantity of Rice) + ( Price of Wheat X Quantity of Wheat) • Here we can use either current price or base price.

  6. Ways of Measuring GDP There are two ways of measuring GDP: • Summing up value addition in every stage of production of a good • Considering only the market value of final goods and services.

  7. Summing up value addition in every stage of production of a good In production process of a good raw materials are turned into intermediate goods and intermediate goods are transformed to final good. Different firms will take part in this process. So what is value addition? It is the difference between the value of a good ( market price that a firm gets ) and the cost of all raw materials. Example: Suppose there is only one good in the economy. Production process of that good is the following. First afirm buys raw materials at a price 10tk and then use capital and labor to transform it to intermediate good which it sells at 20tk. So the value addition is 10tk. Now think of another firm who buys the intermediate good at 20tk and then use capital and labor to transform it to final good which it sells at 40 tk. So the value addition by firm 2 is 20tk.

  8. So in GDP calculation we sum up value addition in every stage of production of a good In our example, GDP will be the sum of three components GDP= value of raw materials + value added by firm1+ value added by firm2. GDP= 10+ 10+ 20 = 40

  9. Considering only the market value of final goods and services: Here in GDP calculation we just include the value of final goods. In our example the market price of the final good is 40. So we need to add 40 to the calculation of GDP. Question: Should we add up the prices of intermediate good and final good so that the GDP becomes= 40+20=60? No # Problem that can arise here is double counting We should add only 40 to the GDP.

  10. 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.

  11. Table: Real and Nominal GDP Source: books and web materials

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