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Gross Domestic
Product (GDP)
Basics
Guttmann – AP Macroeconomics
from Kleinschmidt APSI Notes
What is GDP?
• Defined = The total value of all final goods and services
produced in a country in a year, using resources from that
country
• The measures were created in the 1930’s.
• Until the 1990’s, Gross National Product was the federal
measure of the economy.
• Key terms to know:
• “Gross” = Totals before adjustments (inflation’s effect)
• “National” = Production owned by US companies
• “Domestic” = Production in the US, even if foreign owned
How does it work?
• GDP is officially measured in “quarters” of years:
•
Quarter 1 = Jan/Feb/Mar
•
Quarter 2 = Apr/May/June
•
Quarter 3 = July/Aug/Sep
•
Quarter 4 = Oct/Nov/Dec
What’s it made of?
• The main form used is the “Expenditures” Approach:
•GDP = C + Ig + G + Xn
• The traditional Alternate approach to GDP accounting =
Income Approach: was W+R+I+P+SA (as listed in older texts)
GDP Components
• C = Personal Consumption in the economy:
• (67% of the Economy !!!)
• The purchases of finished goods and services (but not houses)
GDP Components
• Ig = Gross Private Business Investment monies:
•
•
•
•
Factory equipment maintenance,
New factory equipment,
Construction of housing,
Unsold inventory of products built in a year, but not sold that
year
GDP Components
• G = Government Spending:
• Government purchases of products and services
GDP Components
• Xn = Net Foreign Factor of Trade: Exports minus Imports
• Exports = Dollars in, Imports = Dollars out
• (Post WWII, Xn has usually been a negative number: Trade
Deficit)
What’s not counted?
• Items that DO NOT Count in GDP:
• Used goods/Second-Hand goods
• Gifts or “Transfers” (Private or Public) (note COLAs)
• Stock/Equity/Securities purchases (places like the NYSE,
NASDAQ)
• Unreported business activities conducted in “cash”
(unreported tips...)
• Illegal activities (underground markets)
• Financial transactions between banks and businesses
• “Intermediate goods” (no double counting)
• “Non market” activities like volunteer and family work