Download Gross Domestic Product

TO BE OR NOT TO BE GDP
That is the Question
What is gross domestic product (GDP)?
GROSS equals entire, whole, aggregate
 DOMESTIC equals within a country’s border
 PRODUCT equals good or service
 The GDP measures the total dollar value of all
FINAL goods and services produced within a
country’s national borders during one calendar
year period (12 Months).

What is gross domestic product (GDP)?




Currency value (such as U.S. dollar) of all final
goods and services produced within a country in a
given period
Total income of a nation
Measure of nation’s economic well-being
Measure of a nation’s economic growth from one
period to the next
What’s included in GDP?


GDP = Consumption + Investment + Government
spending + Net exports
GDP= C+I+G+(X-I)
What’s included in GDP?

Consumption by households
 Goods:
groceries, clothes, iPods
 Services: haircuts, oil changes
Consumption (C) is the expenditure by households
on consumption goods and services. It includes
durables (goods lasting three or more years),
nondurables, and services.
What’s included in GDP?

Investment by businesses and households
 Fixed
assets for production
 New homes
 Inventories
Investment (I) is the purchase of new capital goods
(tools, instruments, machines, buildings, and other
constructions) and additions to inventories.
In other words, it is spending by firms, including final
purchases on machinery, equipment and tools, all
construction of new houses, buildings, and apartments,
and additions to inventory.
What’s included in GDP?

Government expenditures by local, state, and
federal government
 Roads
and schools
 Military and police


Government purchases of goods and services (G)
are purchases of goods and services by all levels of
government.
It excludes transfer payments (welfare spending and
unemployment compensation) because those payments
do not represent new products or services; rather,
they are transfers of income.
What’s included in GDP?

Net exports
 Value of a country’s exports to other nations, less its
imports from other nations
Net exports of goods and services (X-IM or NX) is
the value of exports of goods and services minus the
value of imports of goods and services.
In the United States, it is the value by which
American spending on foreign goods and services
exceeds foreign spending on American goods and
services.
What’s not included in GDP?

Intermediate goods
Used goods
Underground production (black market)
Financial transactions
Household production

Transfer payments (welfare spending and




unemployment compensation)
What’s not included in GDP?
ITEM
Illegal goods and services
Legal goods and services with
no record of the transaction
Some non-market goods and
services
Sales of used goods
Stock transactions and other
financial transactions
Government transfer payments
EXAMPLE
A person buys an illegal
substance or gambles/bets on a
game
A gardener works for cash and
no sales receipts exists.
A family member cooks, cleans,
and cuts the lawn
A used car is bought
A 100 shares of stock is
purchased
A person receives Social
Security, welfare, unemployment
What are the components of GDP?
GDP
Personal
Consumption
Expenditures
Investment
(I)
(C)
Fixed Investment
Nonresidential
Government
Net Exports
(G)
Inventories
Residential
GDP = C + I + G + NX
(NX)
Exports
Imports
How much of GDP is each component?
Average Percent of GDP since 2003
Component
% of GDP
110%
100%
Government
19%
Investment
16%
90%
80%
70%
60%
50%
40%
Consumption (PCE)
70 %
30%
20%
10%
0%
-10%
Net Exports
-5%
GDP
100%
Source: Bureau of Economic Analysis
What is a good rate of growth?
GDP Growth
10%
8%
Year-over-year GDP
growth
6%
4%
2%
Average GDP growth 1980–
2008
0%
-2%
-4%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
What is a good rate of growth?


For a developed economy a
desirable rate of growth is
approximately 3% to 3.5%
The U.S. economy has grown at a
about 3% average rate since 1980
GDP
and
Beyond
Real and Nominal GDP
Nominal GDP measures the total spending on
goods and services in all markets in the
economy.
 If total spending rises from one year to the
next, one of two things must be true:
 The economy is producing a larger output of
goods and services,
 and/or goods and services are being sold at
higher prices.

Real and Nominal GDP
To obtain a measure of the amount produced
that is not affected by changes in prices, use
real GDP, the production of goods and services
valued at constant prices.
 Calculate real GDP by choosing one year as a
base year to express the prices in.
 Real GDP uses constant base-year prices to
place a value on the economy’s production of
goods and services.

Real and Nominal GDP

When GDP is computed in the current
year’s prices, rising prices (inflation) can
make it difficult to determine if a change
in GDP from one year to the next is due
to the country’s production of more goods
and services or to increases in the price
level.
Real and Nominal GDP
Nominal
GDP: GDP that is not adjusted
for inflation. The value of goods and
services in current prices.
Real GDP: The dollar price of GDP in a
base year’s price, used to compare
changes in GDP from one year to the
next. An increase in real GDP is an
increase in economic growth.
What GDP does not tell us




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Does not measure income distribution
Does not measure non-monetary output or
transactions (e.g., barter, household activities)
Does not take into account desirable externalities,
such as leisure or environment
Does not measure social well-being
Correlates to standard of living but is not a
measure of standard of living