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Gross Domestic Product &
Growth
Chapter 12 Section 1
Gross Domestic Product
G. D. P.
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Early economists believed that a national
economy would help regulate itself.
Periods of high unemployment and low
income and output would be temporary and
short-lived and would be corrected
automatically.
These ideas about the economy lasted until
the Great Depression of 1929.
G. D. P.
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In 1929, a severe economic decline that
lasted over a decade (10 years).
This economic avalanche touched off by the
Great Crash of the Stock Market in October
of 1929.
This crash devastated the economy of the
United States.
G. D. P.
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The Depression convinced many economists
that they must find a way to monitor the
macro-economy’s performance so that they
could predict economic downturns and try to
prevent them.
G. D. P.
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National Income and Product Accounts…
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Keeping track of the U.S. economy is an
enormous task.
Economists monitor the macro-economic data
using national income accounting – a system that
collects statistics on production, income,
investment, and savings. The data are compiled
and presented in the form of National Income and
Product Accounts (NIPA) – which are maintained
by the US Department of Commerce.
G. D. P.
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NIPA data is used determine economic policy
on the national level.
G. D. P.
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Gross Domestic Product…
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The dollar value of all final goods and services
produced within a country’s border in a given year.
This is the most important of the measures in
NIPA.
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Dollar Value is the total of the selling prices of all goods
and services produced in a country in one calendar year.
Final Goods and Services – are products in the form to
consumers.
G. D. P.
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Fin. G&S is opposed to intermediate goods –
which are used in the production of final
goods. These are goods produced within a
country’s borders.
i.e. US GDP includes cars made in Ohio by a
Japanese car company.
It does not include cars made in Brazil by an
American company.
G. D. P.
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Another Example…
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A house that is sold this year by your neighbor. It was
built in 1982 and it was counted on the GDP for 1982.
We cannot count it again this year. But the fees paid to
the real estate agent who handled the resale of the
house if included on this year’s GDP.
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If you build a house this year. Do you count the
lumber, nails, shingles, windows, and other items used
to produce this house in the country’s GDP?
G. D. P.
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Answer … N O.
Those are intermediate goods and their value
would be included in the price of the
completed house.
So we really only count the price of the house
in the GDP.
G. D. P.
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Expenditure Approach:
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One way government economists calculate GDP is by
using the expenditure approach sometimes called the
output-expenditure approach.
It works this way…
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1st economists estimate the annual expenditures
(amount spent) on four categories of final G & S.
a. Consumer Goods & Services
b. Business Goods & Services
c. Government Goods & Services
d. New export or imports of goods and services
G. D. P.
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Consumer Goods include Durable Goods –
those goods that last for a relatively long time
under general use. DVD Player, cars, and etc.
Consumer Goods also include Nondurable
Goods – those goods that last a short period of
time. Sneakers, light bulbs, food, and etc.
Economists total up all four columns and that
equals GDP. This is a practical way to measure
GDP.
G. D. P.
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Income Approach…
 It calculates GDP by adding up all the incomes
in the economy.
 The house example (a house built by you) the
price of that house would be divided up among
all the people that contributed things to build
that house.
G. D. P.
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Government policymakers measure gross
domestic product to find out how well the
economy is performing.
Economists distinguish between two measures
of GDP.
Nominal GDP – GDP measured in current
prices.
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We calculate by the current year’s prices by adding up
all the products sold.
G. D. P.
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The only problem with nominal GDP is a general
rise in prices appears to make GDP rise, when
in fact output has not risen.
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Real GDP – GDP expressed in constant or
unchanging dollars.
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Year 1 – 10 cars @ $ 15,000/each = $ 150,000
10 trucks @ $ 20,000/each = $ 200,000
This is the base year.
G. D. P.
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Limitations of GDP…{This is not a perfect system}
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Non-market Activities
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The Underground Economy
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Does not calculate the goods and services that people make
or do for themselves.
A large production and income is never recorded or reported
to the government. i.e. black market for illegal drugs, etc.
Selling your car to your best friend is not reported as well.
Negative Externalities
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Unintended economic side effects have a monetary value that
often is not reflected in GDP. i.e. a power plant spends money
to reduce damage caused by pollution.
G. D. P.
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Quality of Life
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Politicians and some Economists interpret rising GDP
as a sign of rising well-being. This does not mean that
economy is doing so well.
G. D. P.
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Other Income & Output Measures
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Gross National Product
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Depreciation
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The annual income earned by U.S.-owned firms and U.S.
citizens.
The loss of the value of capital equipment that results from
normal wear and tear. This is not counted in GDP.
The loss of replacing these items reduces the value of what
we produce.
Net National Product (NNP)
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Measure of Net Output for one year. Output made after
adjustments for depreciation.
G. D. P.
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National Income – Subtracting sales and excise
taxes from NNP we get NI.
Personal Income – money people make from
working at a job.
Disposable Personal Income (DPI) – what is left
after we take out personal income taxes and
subtract individual income taxes.
G. D. P.
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Influences on GDP:
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Economists add up the total supply of goods and
services produced for sale in the economy.
Price Level – the average of all prices on the
economy.
Aggregate Supply – the total amount of goods
and services in the economy available at all
possible price levels. With rising price levels,
business is enticed to produce more goods or
services.
G. D. P.
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Aggregate Demand – the amount of goods and
services in the economy that will be purchased
at all possible price levels.
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Lowering price level translate into greater purchasing
power for the consumer and they will buy more of that
good or service.
G. D. P.
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Aggregate Supply and Aggregate Demand
Equilibrium. Just like when we did Supply and
Demand to find out equilibrium Price and
Quantity. It happens to the Aggregate Supply
and Demand. This is the AS/AD Equilibrium.
Either curve can shift and cause the
Equilibrium to move as well.