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UNIT Gross Domestic Product Inflate Your Mind

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									      UNIT 3 - Gross Domestic
              Product
   Gross Domestic Product Definition

     Gross Domestic Product, or GDP, is the
     value of all final goods and services
     produced during a period of time in a
     certain area or country.
       UNIT 3 - Gross Domestic
               Product
   United States GDP

    For United States GDP data, see Unit
    3, Section 3 of our CD, or visit
    http://www.bea.gov/
      UNIT 3 - Gross Domestic
              Product
   Gross Domestic Product Definition

    Excluded in the calculation of GDP are
   Intermediate goods (car tires, flour).
   Any good sold this year, but produced in an other
    year (used car, existing houses).
   Any transaction not directly representing production
    (welfare payments, purchases of stocks and bonds).
   Goods and services that are difficult to measure
    (fixing your own car) or that we choose not to
    measure (illegal drugs, illegal prostitution).
         UNIT 3 - Gross Domestic
                 Product
   Gross Domestic Product Definition

    Using the expenditure approach, GDP is:
    C+I+G+X
    Consumption + Investment + Government +           net e   Xports

    Using the income approach, GDP is:
    W + I + R + P + IBT + CCA
    wages) + interest + rent + profit + Indirect Business Taxes   +   Capital
    Consumption Allowance (depreciation)
      UNIT 3 - Gross Domestic
              Product
   Gross Domestic Product Definition

    Because all intermediate products are
    excluded, GDP does not accurately
    reflect ALL production in a country.

    In the GDP definition, two-thirds is
    consumption goods. In actuality,
    production of consumer goods is much
    less than two-thirds of all production.
      UNIT 3 - Gross Domestic
              Product
   Gross Domestic Product Calculation

    Example 1
     Let’s say that we produce 5,000 cups
     of yogurt at $1 per cup.

            And let’s say that we produce 100 cell
            phones at $40 per phone.

            What is GDP?
      UNIT 3 - Gross Domestic
              Product
   GDP Calculation

Example 1 answer:
    The value of the yogurt cups is:
    5,000 times $1 = $5,000.
    The value of the cell phones is:
    100 times $40 = $4,000.
    GDP = $5,000 + $4,000 = $9,000.
      UNIT 3 - Gross Domestic
              Product
   GDP Calculation

    Example 2
      Let’s say that we produce 5,000 cups of
      yogurt at $2 per cup.
      And let’s say that we produce 100 cell
      phones at $80 per phone.

      What is GDP?
       UNIT 3 - Gross Domestic
               Product
   GDP Calculation

    Example 2 answer:
       The value of the yogurt is:
       5,000 times $ 2 = $10,000.
       The value of the cell phones is:
       100 times $80 = $8,000.
       GDP is $10,000 + $8,000 = $18,000.

    GDP has doubled compared to example 1. Has
    the economy improved?
       UNIT 3 - Gross Domestic
               Product
   Nominal and Real GDP

    Year X nominal GDP uses year X prices
    times year X quantities.

    Year X real GDP uses a base year’s prices
    times year X quantities.

    When comparing real GDP between
    various years, only the quantity changes.
      UNIT 3 - Gross Domestic
              Product
   Nominal and Real GDP Calculation
    Example 1
    Let’s say that in year X, production is 20 cars
    and 10 computers. Prices are $100/car and
    $30/computer.

    Let’s say that in year Y, production is 22 cars
    and 9 computers. Prices are $120/car and
    $25/computer.


    What are nominal and real GDP for year X and
    year Y?
  In the previous question, nominal GDP
  for year 1 is ___ and for year 2 is ___

  1.      $2,250;   $2,856
  2.      $2,250;   $2,478
  3.      $2,856;   $2,200
  4.      $2,300;   $2,865
  5.      $2,300;   $2,450
  6.      $4,040;   $5,359

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      UNIT 3 - Gross Domestic
              Product
   Nominal and Real GDP Calculation

    Example 1 answer for nominal GDP
    Nominal GDP in year X is
    (20 x $100) + (10 x $30) = $2,000 + $300 =
    $2,300.

    Nominal GDP in year Y is
    (22 x 120) + (9 x $25) = $2,640 + $225 =
    $2,865.

    Nominal GDP has increased.
    In the previous question, real GDP for
    year 1 is ___ and year 2 is ___ (using
    year 1 prices)
  1.      $2,250;   $2,856
  2.      $2,856;   $2,250
  3.      $2,250;   $3,298
  4.      $2,250;   $2,490
  5.      $2,300;   $2,470
  6.      $2,300;   $2,610
  7.      $2,300;   $3,298
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      UNIT 3 - Gross Domestic
              Product
   Nominal and Real GDP Calculation

    Example 1 answer for real GDP
    Real GDP in year X (using year X prices) is
    (20 x $100) + (10 x $30) = $2,000 + $300 =
    $2,300.

    Real GDP this year (using year X prices):
    (22 x 100) + (9 x $30) = $2,200 + $270 =
    $2,470.

    Real GDP has also increased.
      UNIT 3 - Gross Domestic
              Product
   Nominal and Real GDP Calculation

    Example 2
    Let’s say that in year X, production is 30
    cameras and 50 pizzas. Prices are $80/camera
    and $5/pizza.

    Let’s say that in year Y, production is
    25 cameras and 60 pizzas. Prices are
    $100/camera and $8/pizza.

    What are nominal and real GDP for year X and
    year Y?
      UNIT 3 - Gross Domestic
              Product
   Nominal and Real GDP Calculation

    Example 2 answer for nominal GDP
    Nominal GDP in year X is
    (30 x $80) + (50 x $5) = $2,400 + $250 =
    $2,650.

    Nominal GDP in year Y is
    (25 x 100) + (60 x $8) = $2,500 + $480 =
    $2,980.

    Nominal GDP has increased.
      UNIT 3 - Gross Domestic
              Product
   Nominal and Real GDP Calculation
    Example 2 answer for real GDP

    Real GDP in year X (using year X prices) is
    (30 x $80) + (50 x $5) = $2,400 + $250 =
    $2,650.

    Real GDP in year Y (using year X prices) is
    (25 x $80) + (60 x $5) = $2,000 + $300 =
    $2,300.

    Real GDP has decreased.
       UNIT 3 - Gross Domestic
               Product
   Per Capita GDP

    is GDP per person (GDP divided by
    population).

    For per capita GDP data, see unit 3,
    section 2 of the CD (Bouman), or visit
    http://www.bea.gov/.
       UNIT 3 - Gross Domestic
               Product
   Per Capita GDP

    For data on per capita GDP of the
    various states in the United States,
    see unit 3, section 4 of our CD, or visit
    http://www.bea.gov/
       UNIT 3 - Gross Domestic
               Product
   GDP and the Environment


    Is there a trade-off between increased
    production and pollution?
       UNIT 3 - Gross Domestic
               Product
   GDP and the Environment

    Some environmentalists support to stop
    economic growth in order to preserve the
    environment, natural resources, and
    wildlife.
UNIT 3 - Gross Domestic Product
   GDP and the Environment

    Others believe that economic progress
    through technological advances will continue
    to find solutions to environmental and social
    problems, and actually improve the
    environment (electric
    cars; computers).
       UNIT 3 - Gross Domestic
               Product
   GDP and Leisure Time

    Does greater production mean a sacrifice
    of leisure time?
       UNIT 3 - Gross Domestic
               Product
   GDP and Leisure Time

    Some people sacrifice leisure
    time for greater production.

    Most people have experienced increases in
    GDP and leisure time.

    For these people, the income effect of a
    higher wage is greater than the
    substitution effect.

								
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