Chapter 2

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 What is Gross Domestic Product (GDP)

o Recall: in the previous chapter, GDP = national income / output


o But what is national income?
 GDP = market value of all final goods and services produced in a country
in a given time period.
 Market value: price and not cost
 Final: only goods and services sold to consumers / end users, not
intermediate goods or raw materials
 In a country: inside the border of a country
 Time: there is a time duration for the GDP eg. Annually, monthly,
quarterly etc.
 What do we mean by “gross”, “domestic” and “product”
 Gross = before deduct depreciation. After deduct depreciation = net
 Domestic = goods produced inside a country, not by factors of production from a
country. Eg. A Singaporean living and working in Malaysia = Malaysia’s GDP
 Product = Total productions / outputs before deduct taxes and add subsidies. After deduct
taxes and add subsidies = income

 How to calculate GDP?


o In macroeconomics, total income earned by everyone = total spending by
everyone = total production by everyone. Eg: When a buyer buys a set of
furniture from a seller, the seller first needs to produce the set of furniture to be
able to sell to that buyer. Next, money paid / spent by the buyer will be earned as
income by the seller. Hence, income = production = spending.
o To calculate GDP / national income, we can calculate total production, total
income or total spending / expenditure
o 3 Approaches to calculate Gross Domestic Demand (GDP):
 Income Approach (Income from all 4 factors of production (land, labour,
capital and entrepreneurial ability) : rent + wages + interest earning +
profit)
 Production Approach (Total Production value of all 10 sectors of
production)
 Expenditure Approach (GDP = Aggregate expenditure)
 Expenditure approach: total spending / total expenditure by
everyone including household sector (consumers), firm sector
(suppliers / sellers), government and international sector (other
countries)
 There are four sectors that we will focus on when calculating GDP
o Household
o Firms
o Government
o International sector
 Expenditure of these four sectors are called:
o Consumption (expenditure by household / consumers) –
denoted as C
o Investment (expenditure by firms) – denoted as I
o Government spending (expenditure by government) –
denoted as G
o Net exports (expenditure by international sector) – denoted
as NX of (X – M)
 Net exports = exports – imports
 GDP = Aggregate expenditure
 Y = C + I + G + (X – M)
 Nominal GDP vs Real GDP
o Nominal: Measured in terms of money
 Before adjusting for change in price
o Real: Measured in units of goods and services
 after adjusting for change in price
 Business Cycle: short run fluctuations in actual GDP around potential GDP
o Recall: actual GDP = current GDP and potential GDP = Max level of GDP when
all resources are fully utilized
o Output gap = potential GDP – actual GDP
 When potential GDP > actual GDP, output gap = positive and called
deflationary gap / recession gap
 When an economy experiences deflationary gap, inflation = low
and unemployment = high
 When actual gdp > potential GDP, output gap = negative and called
inflationary gap
 When an economy experiences inflationary gap, inflation = high
and unemployment = low
 Limitations of Real GDP
o Although real GDP is often used as a measurement of standard of living, real
GDP omits:
 Household activities
 Underground economic activity
 Health and life expectancy
 Leisure time
 Environmental quality
 Political freedom and social justice
Tutorial Answers
1. The following are components of the national account statistics of Malaysia in 2004.

Item Market prices (in RM million)


Private consumption expenditure 52,930
Government expenditure 14,180
Private gross fixed capital expenditure 30,248
Changes in stock / inventories -173
Exports 74,973
Imports (-)70,622
(a) sum 101,536

b) Explain four (4) examples of transactions that will not be included in this year’s
GDP. Underground activities, second-hand goods, non-market transactions
(eg sales of shares), intermediate goods

C) Define GDP, final goods and services and intermediate goods.


GDP: Market value (market price) of final goods and services produced within a
given period in the economy. Final g & s are purchased for final use and subject to
further processing, manufacturing or sale. Intermediate goods, on the other hand
are subject to further processing, manufacturing or resale.

2. GDP will be equal to $101,536. This is based on the concept of equilibrium where all
expenditures on final goods and services are equal to the income earned to spend on
those goods & services which are in turn equal to the value amount of goods and
services produced

3. a)
2001 2000
Items Quantity Price ($) Expenditure ($) Price ($) Expenditure ($)
Pizza 10 pieces 10 100 9 90
Coca Cola 20 bottles 3 60 2 40
Salad 20 bowls 4 80 5 100
240 230

b) $240
c) $230
d) 2001: 240/230 x 100 = 104.35. 2000 = 100
4.

2003 2004

Working age population 168 171

Labour force 110 115

Numbers unemployed 7 9

Numbers employed 103 106

a) Participation rate for 2003 - 65.5% and 2004 – 67.3%. Participation rate has
increased.
b) Unemployment rate in 2003 – 6.4% and 2004 – 7.8%. The unemployment rate
has increased.

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