Download GDP

Gross Domestic Product
How do you measure economic growth?
Gross Domestic Product (GDP)
• Dollar Value of all new FINAL goods & services produced
domestically over one year.
– Currently = $16.6 Trillion dollars
• Released quarterly by the Government
(measured by % growth)
– Recession = Negative GDP growth for 2 consecutive quarters
• Historically U.S. GDP grows between 1% - 5% annually
– Growth above 5% is considered “too fast”
•
causes inflation…
– Growth below 2% is considered “too slow”
• causes rising unemployment
GDP growth by quarter
(3months)
Slow GDP growth recovery
from great recession = +2.0%
2 Ways to measure GDP
• Since every economic transaction has both a buyer & a seller => there
are 2 ways to measure GDP
– GDP is the sum of all spending or all income
– 1) Expenditure Method= add up all spending
– method used most of the time in AP Economics
– 2) Income Method= add up all income (wages, rent, interest & profits)
Resource Supplied
Labor
Land
Financial Capital
Entrepreneurial Talent
Income Received
Wages
Rent
Interest
Profit
2 methods of calculating GDP continued
GDP = Total Income
GDP = Total Expenditures
Spending
Revenue
Goods
and services
sold
PRODUCT MARKET
Goods and
Total Expenditures
must equal
Total Income
services
bought
FIRMS
HOUSEHOLDS
Labor, land,
capital & entrepreneurship
Factors of
production
FACTOR Market
Wages, rent,
Interest & profit
Income
= Flow of inputs
and outputs
= Flow of dollars
NOT included in GDP:
Intermediate Goods:
Only FINAL goods counts (must avoid “double counting”)
Example: steel used to make a car does not count
count only value of the entire car (not parts)
Non-market transactions:
– If you call a plumber it counts. If you fix your sink
It does not count
Underground Economy
• illegal sale of goods (drugs), payments made “under the table”, etc…
International goods:
• Only goods produced in USA count
Second hand sales
• only NEW sales count
Financial Transactions
only a transfer of assets
Gov’t Transfer Payments
Gov’t transfers to person or company
Example: welfare, social security, etc…
Expenditure Equation for GDP:
PRODUCT
Market
HOUSEHOLDS
FIRMS
FACTOR
Market
GDP = C + I + G + (X-M)
New Capital Machinery
New Construction
Unsold Inventories
Worksheet: GDP Analysis
GDP = C + I + G + (NX)
Primary Use of GDP
• Objective way to “keep score” on economic performance
• Politicians monitor GDP figures to determine Gov’t Policy
• Federal Reserve also base their policy decisions on GDP
U.S. GDP in Comparison
23% of World GDP
• U.S.
$16.0
Trillion
•
•
•
•
•
$70.0
7.0
6.0
3.3
1.8
Trillion
Trillion
Trillion
Trillion
Trillion
Entire World:
China
Japan
Germany
India
Per Capita GDP
• GDP divided by a countries population
• Illustrates the $ value of economic output per person
• Current Statistics:
– USA
310,000,000
Million people
– GDP
$15,600,000,000,000 Trillion dollars
– Per Capital GDP = $50,000
Global Perspective: Per Capita GDP
•
•
•
•
•
•
•
•
World
Luxembourg
Denmark
U.S.
England
Japan
China
Bhutan
$8,600
$104,000
$56,000
$46,000
$36,000
$39,000
$3,700
$1,800
GDP Per Capita
What GDP does Not Measure
• The mix of products:
– all goods treated equally: Guns versus Food
• How goods are distributed
– Is wealth concentrated evenly?
• The Quality of goods
– New computers with more memory
GDP and Quality of Life
• Does not measure Leisure Time
– Vacation Days in Europe vs. U.S.
• Work 80 hours instead of 40 hrs/week, GDP increases
– What about quality of life?