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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?