Download Gross Domestic Product

1. What is GDP?
2. What does GDP measure?
3. Which is more useful when comparing a nation’s income
from one year to the next, nominal or real GDP?
4. Why should one not rely exclusively on GDP to
understand the health of a nation’s economy?
5. What is the role of the National Bureau of
Economic Research (NBER)?
Discussion Questions
WHAT’S IN GDP?
An activity for “The ABCs of GDP” (Extra Credit Spring 2009)
What is gross domestic product (GDP)?
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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?

Consumption by households
 Goods:
groceries, clothes, iPods
 Services: haircuts, oil changes
What’s included in GDP?

Investment by businesses and households
 Fixed
assets for production
 New homes
 Inventories
What’s included in GDP?

Government expenditures by local, state, and
federal government
 Roads
and schools
What’s included in GDP?

Net exports
 Value of a country’s exports to other nations, less
its imports from other nations
What’s included in GDP?


GDP = Consumption + Investment + Government
spending + Net exports
GDP = C + I + G + NX
What’s not included in GDP?
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Intermediate goods
Used goods
Underground production (black market)
Financial transactions
Household production
Transfer payments
What are the components of GDP?
GDP
Personal
Consumption
Expenditures
Net
Investment
(I)
(C)
Fixed Investment
Nonresidential
Government
Exports
(NX)
(G)
Inventories
Residential
GDP = C + I + G + NX
Exports
Imports
How much of GDP is each component?
Average Percent of GDP since 2003
110%
100%
Component
% of GDP
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
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.
 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.
Mrs. Altman shows her age…
When I was young…
Year 1: Movie ticket for 11 and under if you went with a parent… $.75
Year 2: Movie ticket TODAY for child… $10.50
Nominal GDP:
Year 1: $.75 x 10 =
Year 2: $10.50 x 10 =
Real GDP: Use base year: $.75
Year 1: $.75 x 10 =
Year 2: $.75 x 10 =
What if we saw a different number of movies?...
How do we calculate GDP…

Nominal GDP Year #1
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