FON University, Faculty of economics

Gross domestic product

(GDP)

Student: Menthor:
Aleksandra Spasovska Vesna Tasevska
11595/09

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 Gross domestic product-definition

The gross domestic product, or GDP, is a means of measuring the economic

success of a country. It is determined by calculating a country's economic output, or
how much they have produced, throughout the course of a year, and allows that
country to compare its success against previous years and other countries. While the
measurements received through calculating a country's gross domestic product is not
the only way of measuring that country's economic success, it is one of the best.
Gross domestic product is calculated based on four types of spending amounts, or
expenditures. The first of these expenditures is personal consumption, and is the most
important aspect when figuring the a country's GDP. This is a total sum of all of the
goods and services made and bought in a country. The second expenditure is
investments, which includes available, but unsold, inventories, and fixed assets. Fixed
assets are buildings, machines, and other things necessary for running businesses that
are not readily available for being turned into cash.
The third aspect that gets calculated into the total GDP amount is that of
government purchases. This number is achieved by taking the total amount of money
spent by the government and subtracting any money that went towards payouts, such
as welfare costs and unemployment. The final number that goes into calculating a
country's GDP is the amount of net exports, or the amount of goods and services that
were made available in other countries. This number is achieved by taking the total
number of exports and subtracting the total number of imports.
The overall gross domestic product of a country is fairly accurate for
determining how much a country is spending, but it has several shortfalls. The most
important of these shortfalls is that GDP doesn't consider the quality of life of the
people living in the country. For example, Hurricane Andrew, a devastating natural
disaster that destroyed the lives and homes of hundreds, if not thousands, of people
living in Florida, was tallied up as a $15 million dollar boost to the United State's
GDP. There is also no way to measure the distribution of wealth in a country. The top

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five percent of a country might control the majority of the wealth, but the GDP only
shows that the whole country is prosperous, which is almost never the case.
The gross domestic product was an idea developed during World War II for
the purpose of measuring wartime production, and was never actually meant to be
used as a tool for calculating the wealth of a country. Since that time, however, it has
become one of the most talked about numbers in politics, as a way of discussing the
economic health of a country. Unfortunately, it only gives a partial account of how
wealthy a country is, or is not, based on factors that have very little to do with the
lives of the people actually living in the country, and should not be used as the only
means of calculating a country's wealth.

Okun’s law

Okun's law refers to the relationship between increases in unemployment and

decreases in a country's gross domestic product (GDP). It states that for every one
percent increase in unemployment above a "natural" level, that GDP will decrease by
anywhere from two to four percent from its potential. Okun's law is named after
Arthur Okun, the economist who in 1962 was the first to make detailed observations
about this relationship. So-called "natural unemployment" refers to the fact that there
will always be at least a certain amount of unemployment in a free market economy,
because of voluntary changes in employment, and other reasons not related to
economic hardship.
Many economists have observed that Okun's law is really not a law at all, but
more of a tendency that can vary based on a number of factors. Although it can be
expressed mathematically, and holds up under real-world scrutiny, Okun's law is an
imperfect theory. This is not as a result of any error on the part of Okun the
economist, but rather because of unpredictability. For example, the exact amount of
unemployment that constitutes natural unemployment is not known, nor can it be.
Another imperfection in Okun's law is that the effect of a given increase in
unemployment could be magnified or diminished based on variables like productivity,
and general sentiment regarding the economy. These variables are, at best, hard to

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measure. The definition of unemployment -- not having a job but still seeking one --
also colors the data slightly, because unemployment therefore does not take into
account those that stop looking for new work after a certain amount of time.
Despite these imperfections, Okun's law does describe a measurable economic
trend in a way that helps economists and students of economics mentally crystallize a
certain sequence of causes and effects. The observed relationship between more
unemployment and less GDP becomes intuitive, since people who are out of work not
only stop producing, but also usually cut back significantly on spending. Also,
lackluster economic data such as high unemployment and low consumer spending
may discourage investment by businesses.
These two realities, when put together, make it easier to see that
unemployment has a multiplier effect that is not limited to a one-for-one type of
tradeoff. This is what Okun's law accomplishes, namely the description of this type of
relationship as something to be expected. It also implies that unemployment is not the
only thing that can affect GDP levels. If both productivity and the number of people
in the labor force increase, for example, then GDP will increase even though
unemployment statistics may have remained constant.

Constant dollar GDP

The constant dollar GDP is a way of measuring the gross domestic product in
terms of inflation-adjusted dollars. This is important because the value of currency
changes over the years. In order to truly understand a country's GDP, it is important to
establish a benchmark year. The constant dollar GDP is sometimes called the real
GDP or inflation-corrected GDP.
The constant dollar GDP's opposite is the nominal GDP. The nominal GDP
measures the gross domestic product, the value of all goods and services produced in
a country, in the value of the currency for that particular year. While this may provide
valuable information about a country's economic condition over a short time frame, it
provides very little usable information for comparison over time because it does not
take into account the effects of inflation.

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 This is why the constant dollar GDP is so important. The first step in
determining the constant dollar GDP is to determine a baseline year. This will be the
easiest year for which to determine the constant dollar GDP because it will be the
same as the nominal GDP. From there, all other years included in the study will
require an adjustment.
For example, if the GDP for a country in 2005 were $10 billion US Dollars
(USD), and inflation were 5 percent in 2006, then the next year's figure would have to
take that into account. If, in 2006, the nominal GDP were $11 billion USD, at first
glance it would seem like an increase of 10 percent. However, if inflation increased
by 5 percent, that would require an adjustment. So, the real GDP for 2006 would be
$10,450,000,000 (USD), which is 5 percent of $11 billion. Therefore, the constant
dollar GDP is determined to have only increased 4.5 percent.
The baseline year chosen is often near the middle of the data set being
considered. For example, if comparing the constant dollar GDP for years between
1980 and 2000, the year 1990 may be chosen as the baseline. While this is common
practice, there is no set rule for choosing a baseline year.
The constant dollar GDP can often indicate if the standard of living in a
country has improved over time. The theory is that if the country has an increased
level of economic production, its citizens will naturally benefit. Conversely, if the
country has a contraction in economic activity, its citizens are likely to experience
harmful effects. This is a generalization that may not be true in all cases.

GDP deflator

The formula for calculating the GDP deflator is relatively simple. Essentially,
the calculation requires current information regarding the chain volume measure or
real GDP, and the current price or nominal GDP. This figure is calculated by taking
the nominal GDP, dividing it by a known deflator, and multiplying the result by one
hundred. This final figure will represent the real current status of the gross domestic

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product, as it allows for the change or deflation of the nominal GDP into real world
terms.
One of the easiest ways to think of the GDP deflator is to think of it as current
dollars and conditions compared to the same set of factors in a previous time period.
For example, an idea of the GDP deflator associated with the most recent calendar
year can be ascertained by looking at the state of the GDP in a previous calendar year.
This can be helpful in determining if an inflation of the GDP is taking place from one
period to another.

It is possible to use this

approach both with the broad
GDP for an entire country, or to
understand the economic
stability of some sub-category
within the economy of the
country. Businesses will often
use this approach to gauge
conditions within their own industry. Using the current year price and the number of
units produced, as compared to the price and production of a previous year can help to
indicate whether the
The formula for the GDP deflator may indicate that the relationship between
units and unit price is shifting in some manner, such as more generated revenue but
less units produced. This would indicate the presence of upward price changes or
price inflation. At the same time, less revenue generated from more produced units
indicates downward changes in prices that may eventually drive some manufacturers
out of the indre is actually growth or shrinkage taking place.

The United States GDP

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 The United States GDP (Gross Domestic Product), like any nation's GDP, can
be defined in three different ways, all of which are similar. First, it is the total
expenditures for all goods and services produced by the nation in a year-long period.
Second, it can be defined as the value added to input materials at every stage of
production by all industries within the United States, plus taxes, minus government
subsidies. The third definition is the sum of the income of everyone in the country.
The GDP of a nation indicates its level of financial wealth and economic productivity.
The United States GDP is the largest in the world, beating out the next largest,
Japan, by a factor of more than three. Sometime around 2003, the US annual GDP
exceeded $10 trillion US Dollars (USD) in 2009 dollars. In 2007, the United States
GDP was estimated as $13.8 trillion USD. This translates to a GDP per capita of
about $46,000 USD per working-age person in 2007, which ranks at about number ten
in the list of all countries. In 2008, about 72% of the economic activity in the United
States came from consumers -- the rest is from industry and government. The primary
industries are very diverse, and include consumer goods, lumber, mining, motor
vehicles, aerospace, petroleum, telecommunications, chemicals, steel, electronics,
food processing, and defense.
The annual growth of the United States GDP is approximately 10% per year,
which is slightly lower than the global average, which was 11.99% in 2007. In
contrast, the annual GDP growth of China in 2007 was 22.59%. In 2007, Armenia had
GDP growth of 43.69%, the highest in the world. The economy of the United States
includes a labor force of approximately 150 million, which is roughly half the
population, with an employment rate fluctuating between 3% and 8%. In 2007,
exports were $1.149 trillion, while imports were $1.968 trillion. The difference
between exports and imports is known as the trade deficit.
Despite its great wealth, the government of the United States has extreme
gross external debt, about $US 10.6 trillion as of late 2008. This works out to
approximately 65% of GDP, or $37,316 USD per capita. In contrast, entry to the euro
economic and monetary union requires countries to have a gross public debt of less
than 3% of GDP. Besides its foreign debt obligations, the United States government
also has about $59.1 trillion USD in long-term liabilities through unfunded Medicaid,
Social Security, and Medicare obligations, or $516,348 USD per household.

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Bibliography:

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Ekonomija - prof.d-r. Taki Fiti

Ekonomika –principi i analizi – prof.d-r. Mirko Tripunovski

Internet

Statistika za biznis i ekonomija – prof.d-r. Slave Ristevski

Content:

• Gross Domestic Product-definition

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• Okun’s law
• Constant dollar GDP
• GDP deflator
• The United states GDP
• Bibliografy

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