Question

Assume that in 2018 the nominal GDP was $8,000 billion and in 2019 the nominal GDP was $8,500 billion. Based on this information can we make any meaningful comparison of the economy’s performance?

Would the value of automobile production in 2019 in the U.S. by a Korean auto company be counted in the U.S.’s GDP for the Year 2019? Briefly explain.

If you purchased $10,000 of Google stock in 2019, would that purchase be included in GDP statistics for 2019?

As a result of covid-19 pandemic the U.S. economy declined by a historical amount in the 2^nd quarter of this year. The revised second quarter GDP data was announced on 2^nd October 2020. What was the annual rate of decline for the 2^nd quarter U.S. GDP growth?

Answer 1

1)

To understand this question we have to understand the concept of Nominal GDP. By nominal GDP of a nation, we mean the money value of all final goods and services produced within the national boundary of a nation in a given period of time in the price of that year or some time called current prices. On the other hand, there is a concept of real GDP which measure GDP in prices of some base year. Suppose an economy produces only one commodity and Q is the amount of that commodity and P is the price. Then,

Nominal GDP₂₀₂₀ = P₂₀₂₀ X Q₂₀₂₀

If we take 2015 as the base year then Real GDP is

Real GDP = Price₂₀₁₀ X Quantity₂₀₂₀

So it is argued that the true growth rate of the economy is measured in terms of real GDP, not in terms of nominal GDP. Nominal GDP of a nation can change when price level, the quantity of output changes or both of them changes. But real GDP can change only when the quantity of output changes. So in the above example, it may be the case that nominal GDP increased in the US only due to prices have increased but the quantity of output production remain the same. To understand the economy's performance we need more information, information on real GDP, GDP deflator to see whether output production has changed or not.

2)

The answer is in the definition of GDP, GDP is the money value of final goods and services produced within the national boundary of a nation in a given period of time. Notice the underlined words. When we calculate GDP of a nation, it is important that production should be done within the national boundary of the nation, it does not matter whether the factors of production are of domestic origin or not. So when an Indian citizen works in US factory then his salary income will be the part of US GDPbeacuse it is earned in the USA. Just like that the value of automobile production in 2019 in the U.S. by a Korean auto company should be counted in the U.S.’s GDP for the Year 2019.

3)

If someone purchased $10,000 of Google stock in 2019, that would not be a part of GDP or national income because the person is not engaging in any productive work. Sometimes a person may buy an asset, in this case, a financial asset at a relatively lower price and his objective is to sell it at a relatively higher price at some point in future. The gain that is made is called a capital gain. This capital gain is not part of national income, not part of GDP because the person has done no productive work to obtain the gain, it is only included in his personal income.

4)

According to the report released by the US Bureau of Economic Analysis, the real GDP for the nation decreased at an annual rate of 31.4 percent.