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GDP

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  • pg 1
									General plan: check to see where Slavin
introduces GDP segment
Slides about nominal vs. real GDP
Expand discussion of GDP vs. GPI
Reading on same?
Separate set of slides for C, I, G, X
Separate section on syllabus for Inflation etc.
Gross Domestic Product

       Chapter 9
     Gross Domestic Product
• What is it?

  – It is the monetary measure of the total annual
    output of all goods and services.
     Gross Domestic Product
• Defined as:
  – THE MARKET VALUE OF ALL FINAL
    GOODS AND SERVICES PRODUCED IN A
    YEAR WITHIN A COUNTRY.
     Gross Domestic Product
• MARKET VALUE:
  – The market value is the market price.


• FINAL GOODS AND SERVICES:
  – What is purchased by a consumer.
     Gross Domestic Product
• PRODUCED IN A YEAR:
  – The year of production, not the year of sale.


• WITHIN A COUNTRY:
  – Within the boundaries of the US, regardless of
    who owns the business.
The Components of GDP
Gross Domestic Product
     • GDP equation:

  • GDP = C + I + G + X
       GDP Components

C = HOUSEHOLD CONSUMPTION

I = BUSINESS INVESTMENT

G = GOVERNMENT SPENDING

X = NET EXPORTS
Net Domestic Product
     • NDP equation:

• NDP = GDP - Depreciation
      Net Domestic Product


• Depreciation: the wearing out of
  equipment, machinery, buildings, roads
  and infrastructure.
• NDP measures economic growth after
  replacement of worn out capital.
Nominal GDP vs. Real GDP
     Nominal vs. Real GDP

Problem: GDP statistics are based on the
    purchase price of everything bought
    by consumers.
If prices go up, so does the GDP.
  Nominal GDP vs. Real GDP
How much of the growth of the GDP is
  due to inflation (price increases), and
  how much is due to the growth of the
  economy?
     Nominal vs. Real GDP

Nominal GDP = output in terms of the
              current dollar value

Real GDP = output in terms of constant
           price
Calculating Percentage Change

   % Change = Change
           Original Number
Calculating Percentage Change

Real GDP = Current GDP – Original GDP
              Original Real GDP

This allows us to compute the percentage
   change in Real GDP
Calculating Percentage Change
Real GDP = Nominal GDP * 100
          GDP deflator

This allows us to compute the percentage
   change in the GDP, adjusting for
   inflation.
What is Excluded from the GDP
   What is Excluded from the
            GDP?
• The GDP is our best estimate of the size of
  the economy of a country.

• However, many products are not counted in
  the GDP.
   What is Excluded from the
            GDP?
• Financial Transactions

• Nonmarket Production

• The Underground Economy
      Financial Transactions
1. Stock market transactions
  –   The purchase and sale of all stocks and bonds
      is excluded because it is merely a transfer of
      ownership.
  –   Brokers’ services are counted because each
      time a stock is sold, a new service has been
      performed.
     Financial Transactions
2. Public transfer payments
  – Such as Social Security, veteran’s
     payments, welfare
  – They are not counted because they are
     not payments for current production
      Financial Transactions
3. Private transfer payments
   – Such as private pension plans or family
       gifts
   – They are not counted because they are
       not payments for current production
      Financial Transactions
•   All of these activities are perfectly legal,
    thoroughly recorded, and frequently taxed.

•   We have very good numbers for them.
     Nonmarket Production
1. Any work that you do yourself
  - Such as painting your own house

2. All of the necessary household tasks
   performed by homemakers.
  – Such as food preparation, cooking,
     cleaning
       Nonmarket Production
1. These activities are legal, but not done in
   the marketplace.

2. Therefore we can only estimate that
   amount of nonmarket production.
3. Studies suggest that this activity is
   extremely large, somewhere between 10%
   and 20% of the size of the recorded GDP
The Underground Economy
1. Second hand sales
  -   Already counted

2. Legal but not reported
   - working under the table

3. Illegal and not reported
       Other Problems with
          Current GDP

1. Quality changes aren’t well tracked.
2. Pollution not correctly counted.
3. Leisure time is not accounted for.
4. Certain costs to humans not correctly
   counted.
5. Volunteer work not counted.
             Quality Changes
1. Price increases reflect product improvement as
   well as inflation, and it is difficult to separate the
   two out.

2. Example: cars today are much more expensive
   than they were 10, 20 years ago.

3. Part of this price increase is due to increase in
   quality (standard features that were optional or
   didn’t even exist previously).
     Pollution Not Correctly
             Counted
1. The damage to the environment is not
   counted.

2. The money spent cleaning up pollution is
   counted as part of the GDP.

So the more we spend cleaning up pollution,
    the more the GDP grows.
        Leisure is not counted

1. We don’t track leisure time in our GDP statistic.
         Stress is Miscounted

1. The increase in stress due to more work and less
   leisure doesn’t show up in the GDP.

2. What shows up is the increase in aspirin, alcohol
   and legal drug consumption.

    So the increase in work hours is “good” because
    more stuff is produced and we buy more pain
    relievers.
 Volunteer work is not counted

1. We don’t track volunteer work in our GDP
   statistic.

2. How would Little League, Girl Scouts, churches,
   function without volunteers?

3. Chad Pegrake’s work isn’t counted.
      Results of Flawed GDP
           Techniques
1. Housework is not counted.

2. The underground economy is not counted.

3. True environmental costs not counted.

4. Decreased leisure and increased stress not
   counted.

								
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