Download You down with GDP?

….YEAH YOU KNOW ME!!!
For all countries there are three major
economic goals:
1. Promote Economic Growth
2. Limit Unemployment
3. Keep Prices Stable (Limit Inflation)
In this unit we will analyze how each
of these are measured.
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Goal #1
Promote Economic Growth
How does a country measure
economic growth?
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 Bureau
of Economic Analysis
(BEA) compiles National
Income and Product Accounts
◦ Assess health of economy
◦ Track long run course
◦ Formulate policy
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

Economists collect statistics on production,
income, investment, and savings.
This is called national income accounting.
The most important measure of growth is GDP.
Gross Domestic Product (GDP) is the dollar value of all
final goods and services produced within a country’s
borders in one year.
• Dollar value- GDP is measured in dollars.
• Final Goods-GDP does not include the value of
intermediate goods.
• One Year-GDP measures annual economic
Does this count?
performance.
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What does GDP tell us?
Just like calculating your own income, GDP measures
how well the U.S. is doing financially.
How do you use GDP?
1. Compare to previous years (Is there growth?)
2. Compare policy changes (Did a new policy work?)
3. Compare to other countries (Are we better off?)
Which 15 countries have
the highest GDP?
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GDP by Country
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*CIA Factbook 2013 Estimate
World GDP Distribution
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How can you measure growth from
year to year?
% Change
in GDP
=
Year 2 - Year 1
Year 1
X 100
Mordor’s GDP in 2014 was $4000
Mordor’s GDP in 2015 was $5000
What is the % Change in GDP?
Transylvania’s GDP in 2014 was $2,000
Transylvania’s GDP in 2015 was $2,100
What is the % Change in GDP?
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GDP Growth by Country
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*CIA Factbook 2013 Estimate
Does GDP accurately measure
standard of living?
Standard of living can be measured, in part, by
how well the economy is doing…
But it needs to be adjusted to reflect the size of
the nation’s population.
GDP Per Capita (per person)
GDP divided by the population. It identifies on
average how many products each person makes.
GDP per capita is the best measure of
a nation’s standard of living.
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What are the top 10 most populated countries?
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GDP Per Capita
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Why do some countries have higher GDPs than others?
Productivity
1. Economic System
Example#1: Capitalist countries have historically had more
economic growth.
–
The Invisible Hand, Yo!
2. Property Rights
3. Capital
–
–
Capital (like robots) can produce more than people
Countries with more capital, can produce more products than countries
without a lot of capital.
Example#1: India has over a billion people (human resources)
but relatively few capital resources and therefore a lower
GDP than the U.S.
Example#2: Japan has few natural resources but a high GDP
4. Human Capital (Knowledge)
5. Natural Resources
Ex: Syria has a lower GDP because it is mostly desert.
What is NOT included in GDP?
1. Intermediate Goods
• Goods inside the final goods don’t count.
• EX: Price of finished car, not the stock
radio or tires.
2. Nonproduction Transactions
•Financial Transactions (nothing produced)
•Ex: Stocks, bonds, Real estate
•Transfer Payments
•Used Goods
•Ex: Old cars, used clothes
3. Non-Market and Illegal Activities
• Things made at home- household production
•Ex: Unpaid work, black markets, drugs 16
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Calculating GDP
Two Ways of calculating GDP:
1. Expenditures Approach -Add up all the
spending on final goods and services
produced in a given year.
2. Income Approach -Add up all the income
that resulted from selling all final goods and
services produced in a given year.
Adding up how much was spent on goods and
services and how much income was earned
should generate the same number
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Expenditures Approach
Four components of GDP:
1. Consumer Spending- 70% of U.S. GDP
Purchases of final goods/services by private
individuals. Ex: A burrito, car insurance
2. Gross Investment- 15% of U.S. GDP
Businesses spending on tools, equipment, construction,
R&D, changing inventories, depreciation
Ex: Walmart buys self checkout machines
3. Government Spending- 20% of U.S. GDP
Ex: School, tanks, but NOT transfer payments
4. Net Exports- Exports (X) – Imports (M)
Ex: Value of 3 Ford Focuses minus 2 Nissans
GDP = C + Ig + G + Xn
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Net Investment
Gross Investment
- Depreciation
= Net Investment
Gross
Investment
Net
Investment
Depreciation
Increase
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Stock of
Capital
Consumption
& Government
Spending
Stock of
Capital
January 1
Year’s GDP
December 31
Calculating GDP
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For each situation:
a. identify if it is included in GDP
b. identify the category C, I, G, or Xn
c. Tally the total GDP in $$$
1. $10.00 for movie tickets
2. $5M Increase in defense expenditures
3. $45 for used economics textbook
4. Ford builds new $2M factory
5. $20K Toyota made in Mexico, sold in US
6. $10K Profit from selling stocks
7. $15K car made in US, sold in Canada
8. $10K Tuition to attend college
9. $120 Social Security payment to Bob
10. Farmer purchases new $100K tractor
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GDP=$7,105,010
1. $10.00 for movie tickets (C)
2. $5M Increase in defense expenditures (G)
X $45 for used economics textbook
4. Ford builds new $2M factory (I)
5. $20K Toyota made in Mexico, sold in US (-X)
X $10K Profit from selling stocks
7. $15K car made in US, sold in Canada (X)
8. $10K Tuition to attend college (C)
X $120 Social Security payment to Bob
10. Farmer purchases new $100K tractor (I)
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




Compensation of employees
Rents
Interest
Proprietor’s income
Corporate profits
◦ Corporate income taxes
◦ Dividends
◦ Undistributed corporate profits

Taxes on production and imports
◦ Sales tax, excise tax, customs duties, etc.
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in Billions
Receipts
Expenditures Approach
Allocations
Income Approach
Personal Consumption (C) $ 9734
Compensation
Gross Private Domestic
Rents
Investment (Ig)
2125
$ 7874
65
Interest
603
Government Purchases (G) 2690
Proprietor’s Income
1043
Net Exports (Xn)
Corporate Profits
1627
-708
Taxes on Production and
Imports
National Income
1009
$12,221
Net Foreign Factor Income (-)
96
Statistical Discrepancy (+)
29
Consumption of Fixed
Capital (+)
Gross Domestic Product $ 13,841
Gross Domestic Product
1687
$ 13,841
 From
national income to GDP
◦ Subtract net foreign factor income
 (“domestic” instead of “national”)
◦ Statistical discrepancy
◦ Consumption of fixed capital (add depreciation)
 Other
◦
◦
◦
◦
national accounts
Net domestic product (NDP) (GDP minus depreciation)
National income (NI) (not just domestic)
Personal income (PI)
Disposable income (DI) – income after taxes
 DI = Consumption + Saving
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Gross Domestic Product (GDP)
Less: Consumption of Fixed Capital (depreciation)
Equals: Net Domestic Product (NDP)
Less: Statistical Discrepancy
Plus: Net Foreign Factor Income
Equals: National Income (NI)
Less: Taxes on Production and Imports
Less: Social Security Contributions
Less: Corporate Income Taxes
Less: Undistributed Corporate Profits
Plus: Transfer Payments
Equals: Personal Income (PI)
Less: Personal Taxes
Equals: Disposable Income (DI)
$ 13,841
1687
$ 12,154
29
96
$ 12,221
1009
979
467
344
2237
$ 11,659
1482
$ 10,177
 GDP
is a dollar measure of
production
 Using dollar values creates
problems
 Nominal GDP
◦ Use prevailing price
 Real
GDP
◦ Reflect changes in price
◦ Use base year price
 Use
price index to determine
real GDP
Price
Index
In Given
Year
Real
GDP
=
=
Price of Market Basket
In Specific Year
Price of Same Basket
In Base Year
x 100
Nominal GDP
Price Index (in hundredths)
Nonmarket activities
 Leisure
 Improved product quality
 The underground economy
 GDP and the environment
 Composition and distribution of the
output
 Noneconomic sources of well-being

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As a percentage of GDP, Selected
Nations, 2007
Percentage of GDP
0
Mexico
South Korea
India
Italy
Spain
China
Sweden
Germany
France
United Kingdom
Japan
Switzerland
United States
5
10
15
20
25
30
Source: Open Assessment, E-Journal
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0
Consumption
◦ Census Bureau’s Retail Trade Survey
◦ Census Bureau’s Survey of
Manufacturers
◦ Census Bureau’s Service Survey
 Investment
◦ All Consumption data sources
◦ Census Bureau’s Housing Starts
Survey and Housing Sales Survey
◦ Retail Trade Survey
◦ Wholesale Trade Survey
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4◦ Survey of Manufacturing

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1
Sources of BEA Data
 Government
Purchases
◦ Office of Personnel Management
◦ Construction Surveys
◦ Census Bureau’s Survey of
Government Finance
 Net
Exports
◦ U.S. Customs Service
◦ BEA Surveys and Analysis
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2
 Read
pgs. 591 – 600 on
the Business Cycle and
Unemployment
 Complete Unemployment
worksheet
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