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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 0 of 30 :10 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 0 of 30 10 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.