Gross Domestic Product

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					Gross Domestic Product


 Total market value
 Of all final goods and services
 Produced in a nation
 During a time period (usually one year)
                     More GDP

 Does not include foreign production by a US firm
 Includes production in the US by a foreign firm
 Measures value using dollars
 Uses prices established in the market
 Compiled by the Bureau of Economic Analysis
              New Domestic Production

 Does not include the resale of a used car or a
 previously occupied home
    Only exchanges of goods and NOT current production
    Sales commission is included as it is a newly provided service
 Does not include purely financial transactions as
 they do not involve new production
    Monetary gifts, buying and selling of stocks and bonds, or
     transfer payments (govt. payment to an individual such as
     welfare, Social Security, etc.)
                     Only Final Goods

 Finished goods and services produced for the
 ultimate user so that goods are not doubly counted
    Example: tires on a new Ford Explorer are only counted as
     part of the final car
    Intermediate Goods: goods and services used as inputs for the
     production of the final goods
    Only the final purchase is counted!
                 Circular Flow Model

 Used to understand how and what to measure better
   Shows the flow of products from businesses to households and
    the flow of resources from households to businesses.
   Due to the exchange of resources, money payments flow
    between the businesses and households
          Model Explained (Page 381)

 Inner loop—households pay money for goods and
  services in the product market, which creates
  demand for the businesses to produce. Businesses
  make payments to individuals in the factor markets
  for production inputs, which creates demand from
  the households
 Outer loop—Households supply the factor markets
  with inputs that businesses then use to supply the
  product markets with goods and services. The
  product market supplies households with the goods
  and services
  Expenditure Approach to Measuring GDP

 Measures total spending flowing through the product
  markets in the circular flow diagram
 Adds together all spending for final goods and
  services during a time period
 Example on page 383
                   GDP Formula

 C + I + G + NX
 C—Consumption or Consumer Spending: total
  spending by households for goods and services (cars,
  appliances, clothing, furniture, education, medical
 I—Private Domestic Investment: all private (not
  government) domestic (not foreign) spending by
  businesses for investment purposes that will earn
  profit in the future (capital goods, new buildings,
  newly constructed homes, inventory changes)
                GDP Formula Continued

 G—Government Spending: the value of goods and
  services the government purchases at all levels
  (police and teachers, capital, roads, schools)
     Remember that it does not include transfer payments like
      social security and welfare!
 NX—Net Exports: Exports – Imports
   Exports are purchases by foreigners for goods and services
    produced in the United States
   Imports are purchases made by us including foreign-made
    goods and services
   What do you think the number for the United States is?
                 Which Component?

 Stereo produced and          New factory
    sold in the US by a        Sale of a previously
    Japanese company              occupied house
   College tuition              Home cooked meal
   Social Security              Dinner at a restaurant
   Microsoft stock              Computer produced in
    purchased from                the US and sold in
    Microsoft                     Canada
   Space Shuttle launch         A new interstate
   Plane ticket to Orlando
           Income Approach to GDP

 Adds all incomes earned by households in exchange
  for the factors of production
 Should yield the same GDP calculation as the
  Expenditure approach
 Employee Compensation + Rents + Profits +Net
  Interest + Indirect Taxes + Depreciation
                Income Approach Cont.

 Employee Compensation
   Largest category

   Wages, salaries, and supplements paid by businesses and
    governments to suppliers of labor
   Includes employer taxes—Social Security and unemployment
   Includes fringe benefits like health insurance

 Rents
   Smallest category

   Rents and royalties property owners earn for the use of their
               Income Approach Cont.

 Profits
   Income earned by business proprietors that they pay
    themselves for labor
   Income earned by stockholders of a corporation including
    dividends, retained earnings of a business, and corporate
    income taxes
 Net Interest
   Difference between interest earned and interest payments

   Interest earned on savings and other financial interests

   Interest paid on loans
                Income Approach Cont.

 Indirect Business Taxes
   % of prices of goods sold and includes sales taxes, excise taxes,
    license fees, property taxes, and customs duties
 Depreciation
   Other name for the consumption of fixed capital like machines
    and robots a business uses
   An allowance for the portion of capital worn out producing
    goods and services
 Example on page 386
       US GDP and Around the World

 US GDP Since 2007
 GDP Shares Around the World
                     GDP Shortcomings

 Excludes many unpaid activities such as things you do
  for yourself
 How consumption is dispersed is not known
    Does only a small percentage of the population consume all?
    Does everyone consume the same amount?
 Does not differentiate between the kinds and quality of
  goods and services
 Does not consider the amount of leisure time—wealthier
  nations tend to have more leisure time
 Does not include illegal goods and services
 Negative externalities are not taken into consideration

 Read You’re the Economist on page 391
 Answer the Analyze the Issue question
            Other Economic Indicators

 National Income = GDP – Depreciation
   Measures how much income is earned by households who own
    and supply the production resources
 Personal Income—total income received by
  households that is available for consumption,
  savings, and payment of taxes
 Disposable Personal Income—amount of money
  people can spend or save after taxes
 Comparison of the four different measures on page
                  Nominal vs. Real GDP

 Nominal GDP is current GDP, what we have been talking
    Can grow by increasing output, prices not changing
    Prices can rise and production stays the same
    Production and prices can both raise at the same time
 Need to adjust GDP just for a change in production, not a
  change in price, therefore we use Real GDP
 Real GDP—the value of all final goods produced during a
  given time period based on prices from a selected base
    Example: comparing GDP for years 1998 – 2005 using 2000 as the
     base year (using prices from 2000)
                    Figuring Real GDP

 GDP Chain Price Index—measures price changes of
  consumer goods and price changes of business
  investment, government spending, exports, and imports
  (Not the same as the Consumer Price Index)
 Real GDP =
    (nominal GDP/GDP chain price index) X 100
 US currently uses 2000 as the base year, so the
 Chain Price Index in 2000 is 100
    When prices were lower, the Chain Price Index is less than 100
    When prices are higher, the Chain Price Index is more than
    Example on page 396

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