MACROECONOMICS BEB1043

Topic 2 Measuring GDP

Measuring GDP

Measuring GDP Definition of GDP Methods of Calculating GDP Key Terms

Measuring GDP

To measure national income or GDP, we must know: Total value of the output of goods and services produced in Malaysia Total amount of expenditure taking place in the economy Total amount of income generated through production of goods and services

Definition of GDP

What is GDP? GDP stands for GROSS DOMESTIC PRODUCT Definition of GDP The market value of all the final goods and services produced within a country in a given time period. This definition has four (4) parts: Market value Final goods and services Produced within a country In a given time period
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Definition of GDP

Market value The prices at which each item is traded in markets Look at the price tag Final goods and services A final good (or service) is an item that is bought by its final user during a specified time period Examples of final goods?

Definition of GDP

Produced within a country Goods and services that are produced in Malaysia only. Regardless who own the factor of productions use in producing those goods. In a given time period Normally quarter of a year (quarterly GDP) or a year (annually GDP). Only counted goods & services produced in that particular year.
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Definition of GDP - Exception

Only goods & services that pass through organized markets count in the GDP. Those that didnt are not counted. Examples: Illegal activities Housework Do-it-yourself repairs Why not counted? They all lack that important measuring rod i.e MARKET PRICE
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GDP The Importance

The importance of measuring GDP: To identify the rate of economic growth Real GDP To identify changes to overall living standards of the population GDP per capita To look at the distribution of national income (i.e. measuring income and wealth inequalities)

Methods of Calculating GDP

The Expenditure Method (Aggregate Demand) The Income Method (Sum of Factor Income) The Output Method (Sum of Output Value)

The Expenditure Method

The sum of the final expenditure on goods and services produced, measured at current market price (value). The equation for GDP using this approach is: GDP = C + I + G + (X M)

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The Expenditure Method

C consumption expenditure Expenditures by households on goods and services I investment (gross private domestic investment) Expenditure on capital equipment and buildings by firms Expenditure on new homes by households G government purchases Purchases of goods and services by all levels of government Salary paid to government servants
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The Expenditure Method

(X- M) net exports

The value of exports minus the value of imports (of goods and services)

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The Expenditure Method

Calculation GDP for 2003:

Symbol Amount (billions of ringgit) 7,674 1,624 2, 054 - 505 10,847

Item

Personal Consumption Expenditure Gross Private Domestic Investment Government Purchases Net exports GDP at market price

C
I G (x M) Y

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The Income Method

The sum of incomes that firms pay households for the factors of production they hire, i.e.: Wages for labour Interest for capital Rent for land Profits for entrepreneurship

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The Income Method

This method divide incomes into five (5) categories: Compensation of employees: the payment for labour services (salary/wages) Net interest: the interest households receive on loans they make minus the interest households pay on their own borrowing Rental income: the payment for the use of land and other rented resources

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The Income Method

Corporate profits: the profits of corporations, some of which are paid to households in the form of dividends and some of which are undistributed profits (retained earning) Corporate Profits = Dividends + Retained Earning+ Corporate Income Tax Proprietors income: the profits earned by sole proprietorship owners

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The Income Method

Calculation:
Amount (billions of ringgit) 6,165 582 153 1,023 839 782 1,303 10,847

Item Compensation of employees Net interest Rental income Corporate profits Proprietors income Indirect taxes Less Subsidies Capital consumption (depreciation) GDP

* The sum of all incomes is called Net Domestic Income at factor cost.
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The Output Method

This measures the value of output produced by each of the productive sectors in the economy (using the concept of value added). Value added is the increase in the value of a product at each successive stage of the production stage. We use this approach to avoid double counting the value of intermediate goods.

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The Output Method

Sector: Forestry
Production Stage 1. Timber 2. Lumber 3. Sawn Wood 4. Furniture Value Value Added

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The Output Method

Example of sectors in the economy: Primary sector: Mining and Quarrying; Agriculture; Forestry and Fishing Secondary sector: Manufacturing; Construction Tertiary sector: Electricity; Gas and Water; Wholesale and Retail Trade; Finance; Insurance; Real Estate; Transport
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Key Terms

Expenditure Government purchases Income Rental Income Value added Net interest Final goods Corporate profits Intermediate goods Proprietors income Gross Domestic Product Market value Consumption Investment
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The End
Next Topic: Aggregate Demand & Aggregate Supply

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