Understanding Gross Domestic Product (GDP) and Macroeconomic Concepts
Understanding Gross Domestic Product (GDP)
The Gross Domestic Product (GDP) represents the market value of all final goods and services produced within an economy during a specific period. It can be calculated by summing the value of all final goods and services produced, or by totaling all expenditures within the economy. GDP can be measured as the total final expenditure on the economy’s production. This expenditure is divided into consumption expenditure (C), government expenditure (G), investment expenditure by companies and the government (I), plus exports (X) minus imports (M). Therefore, GDP = C + I + G + X – M.
Gross National Product (GNP) includes net income from abroad, while GDP does not. The difference between GDP and GNP is the net income received from or sent abroad. GDP can be calculated in several ways: by the flow of goods produced for final demand, by payments made to purchase this flow of goods, and by payments to the factors of production. However, it excludes all monetary transactions within the economy. The difference between GDP at market prices and GDP at factor cost is indirect taxes less subsidies. If a country has more income sent abroad than received, then GDP at market price will be greater than GNP at market price. For social accounting purposes, wages and salaries of officials are considered government transfer spending.
PIBc.f.: Salary + interest + rent + profit / PIBp.m.: PIBc.f + Indirect Taxes – subsidies. Net Domestic Product (NDP): GDP – depreciation.
Currency Liquidity and Monetary Policy
Currency liquidity is defined by its ability to be readily available and accepted for various transactions. It serves as a medium of exchange, a unit of accounting, and a store of value. The creation of means of payment occurs when companies take duplicates to banks to discount, receiving currency in sight deposits. The Central Bank of Brazil issues paper currency, supervises and controls financial intermediaries, and manages check clearing. Open market operations involve the Central Bank buying or selling government bonds. The main function of compulsory reserves on bank deposits is to serve as an instrument of monetary policy, allowing monetary authorities to control the amount of bank currency. To reduce the volume of means of payment, the Central Bank should raise the rediscount rate. The quantity theory of money asserts that a change in the quantity of money, assuming its velocity of circulation is stable, causes a change in the product in the same direction in nominal terms. If a country is producing at full capacity, an increase in the money supply will lead to a rise in the general price level. A decrease in the compulsory reserve requirement by the Central Bank is a policy measure typically used to fight inflation. The money multiplier value is always greater than one. It represents the relationship between the total means of payment and the monetary base.
Balance of Payments and Economic Equilibrium
Unbalanced payments deficit: In an open economy, an unbalanced payments deficit corresponds to a current account deficit. A favorable trade balance means exports exceed imports. The current account balance is the sum of the trade balance, net income from abroad, and net current transfers. According to the Keynesian model, national equilibrium occurs when aggregate demand equals aggregate supply. The government can affect aggregate demand using fiscal policy during a recession. According to Keynesian theory, savings is a function of income. Machines and equipment are part of investment. The propensity to consume is the proportion of income spent on consumption. National product is the total value of goods and services produced in a country. National income is the total income earned by a country’s residents. The objectives of macroeconomic policy include full employment, price stability, and economic growth. In an economy where income sent abroad is greater than income received from abroad, the Gross Domestic Product is greater than the Gross National Product. Consumption depends primarily on disposable income.
Avoiding Double Counting in National Product
To avoid double counting of intermediate goods and services during the calculation of the National Product, it is sufficient to calculate, for each unit of production, the value added at each stage of its production.
Macroeconomic Variables in the Labor Market
In the labor market, the macroeconomic variables are the level of employment and the general price level.
Investment Decisions
Investment is determined by the expected rate of return and the market interest rate. In this sense, if the rate of return on an investment exceeds the market interest rate, there will be investments in capital purchases. Investment demand can be affected by the availability of long-term credit. If the rate of return is greater than the market interest rate, resources will be allocated to productive investments rather than financial or speculative applications. The expected profitability of projects influences the expansion of productive capacity, regardless of the marginal efficiency of capital.
Calculating GDP: An Example
A farmer sells corn to a flour factory for R$ 500.00. The flour maker sells their production to a bakery for R$ 1,300.00. The bakery manufactures and sells bread to consumers for R$ 1,800.00. The value of the Gross Domestic Product of these activities corresponds to R$ 1,800.00.
True or False Statements
1. (True) Government costs include expenses on public education and security, among others.
2. (True) Expenses on programs such as Bolsa FamÃlia and the Rural Worker Assistance Program (FUNRURAL) constitute government expenditure in national accounting and, therefore, are part of the Gross Domestic Product (GDP), computed from the expenditure perspective.