Download UNIT 3 - Gross Domestic Product

UNIT 3 - Gross Domestic
Product

Gross Domestic Product Definition
Gross Domestic Product, or GDP, is the
value of all final goods and services
produced during a period of time in a
certain area or country.
UNIT 3 - Gross Domestic
Product

United States GDP
For United States GDP data, see Unit
3, Section 3 of our CD, or visit
http://www.bea.gov/
UNIT 3 - Gross Domestic
Product

Gross Domestic Product Definition
Excluded in the calculation of GDP are




Intermediate goods (car tires, flour).
Any good sold this year, but produced in an other
year (used car, existing houses).
Any transaction not directly representing production
(welfare payments, purchases of stocks and bonds).
Goods and services that are difficult to measure
(fixing your own car) or that we choose not to
measure (illegal drugs, illegal prostitution).
UNIT 3 - Gross Domestic
Product

Gross Domestic Product Definition
Using the expenditure approach, GDP is:
C+I+G+X
Consumption + Investment + Government +
net e
Xports
Using the income approach, GDP is:
W + I + R + P + IBT + CCA
wages) + interest + rent + profit + Indirect Business Taxes
Consumption Allowance (depreciation)
+
Capital
UNIT 3 - Gross Domestic
Product

Gross Domestic Product Definition
Because all intermediate products are
excluded, GDP does not accurately
reflect ALL production in a country.
In the GDP definition, two-thirds is
consumption goods. In actuality,
production of consumer goods is much
less than two-thirds of all production.
UNIT 3 - Gross Domestic
Product

Gross Domestic Product Calculation
Example 1
Let’s say that we produce 5,000 cups
of yogurt at $1 per cup.
And let’s say that we produce 100 cell
phones at $40 per phone.
What is GDP?
UNIT 3 - Gross Domestic
Product

GDP Calculation
Example 1 answer:
The value of the yogurt cups is:
5,000 times $1 = $5,000.
The value of the cell phones is:
100 times $40 = $4,000.
GDP = $5,000 + $4,000 = $9,000.
UNIT 3 - Gross Domestic
Product

GDP Calculation
Example 2
Let’s say that we produce 5,000 cups of
yogurt at $2 per cup.
And let’s say that we produce 100 cell
phones at $80 per phone.
What is GDP?
UNIT 3 - Gross Domestic
Product

GDP Calculation
Example 2 answer:
The value of the yogurt is:
5,000 times $ 2 = $10,000.
The value of the cell phones is:
100 times $80 = $8,000.
GDP is $10,000 + $8,000 = $18,000.
GDP has doubled compared to example 1. Has
the economy improved?
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP
Year X nominal GDP uses year X prices
times year X quantities.
Year X real GDP uses a base year’s prices
times year X quantities.
When comparing real GDP between
various years, only the quantity changes.
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP Calculation
Example 1
Let’s say that in year X, production is 20 cars
and 10 computers. Prices are $100/car and
$30/computer.
Let’s say that in year Y, production is 22 cars
and 9 computers. Prices are $120/car and
$25/computer.
What are nominal and real GDP for year X and
year Y?
In the previous question, nominal GDP
for year 1 is ___ and for year 2 is ___
1.
2.
3.
4.
5.
6.
0 of 30
$2,250;
$2,250;
$2,856;
$2,300;
$2,300;
$4,040;
$2,856
$2,478
$2,200
$2,865
$2,450
$5,359
:10
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP Calculation
Example 1 answer for nominal GDP
Nominal GDP in year X is
(20 x $100) + (10 x $30) = $2,000 + $300 =
$2,300.
Nominal GDP in year Y is
(22 x 120) + (9 x $25) = $2,640 + $225 =
$2,865.
Nominal GDP has increased.
In the previous question, real GDP for
year 1 is ___ and year 2 is ___ (using
year 1 prices)
1.
2.
3.
4.
5.
6.
7.
0 of 30
$2,250;
$2,856;
$2,250;
$2,250;
$2,300;
$2,300;
$2,300;
$2,856
$2,250
$3,298
$2,490
$2,470
$2,610
$3,298
10
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP Calculation
Example 1 answer for real GDP
Real GDP in year X (using year X prices) is
(20 x $100) + (10 x $30) = $2,000 + $300 =
$2,300.
Real GDP this year (using year X prices):
(22 x 100) + (9 x $30) = $2,200 + $270 =
$2,470.
Real GDP has also increased.
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP Calculation
Example 2
Let’s say that in year X, production is 30
cameras and 50 pizzas. Prices are $80/camera
and $5/pizza.
Let’s say that in year Y, production is
25 cameras and 60 pizzas. Prices are
$100/camera and $8/pizza.
What are nominal and real GDP for year X and
year Y?
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP Calculation
Example 2 answer for nominal GDP
Nominal GDP in year X is
(30 x $80) + (50 x $5) = $2,400 + $250 =
$2,650.
Nominal GDP in year Y is
(25 x 100) + (60 x $8) = $2,500 + $480 =
$2,980.
Nominal GDP has increased.
UNIT 3 - Gross Domestic
Product

Nominal and Real GDP Calculation
Example 2 answer for real GDP
Real GDP in year X (using year X prices) is
(30 x $80) + (50 x $5) = $2,400 + $250 =
$2,650.
Real GDP in year Y (using year X prices) is
(25 x $80) + (60 x $5) = $2,000 + $300 =
$2,300.
Real GDP has decreased.
UNIT 3 - Gross Domestic
Product

Per Capita GDP
is GDP per person (GDP divided by
population).
For per capita GDP data, see unit 3,
section 2 of the CD (Bouman), or visit
http://www.bea.gov/.
UNIT 3 - Gross Domestic
Product

Per Capita GDP
For data on per capita GDP of the
various states in the United States,
see unit 3, section 4 of our CD, or visit
http://www.bea.gov/
UNIT 3 - Gross Domestic
Product

GDP and the Environment
Is there a trade-off between increased
production and pollution?
UNIT 3 - Gross Domestic
Product

GDP and the Environment
Some environmentalists support to stop
economic growth in order to preserve the
environment, natural resources, and
wildlife.
UNIT 3 - Gross Domestic Product

GDP and the Environment
Others believe that economic progress
through technological advances will continue
to find solutions to environmental and social
problems, and actually improve the
environment (electric
cars; computers).
UNIT 3 - Gross Domestic
Product

GDP and Leisure Time
Does greater production mean a sacrifice
of leisure time?
UNIT 3 - Gross Domestic
Product

GDP and Leisure Time
Some people sacrifice leisure
time for greater production.
Most people have experienced increases in
GDP and leisure time.
For these people, the income effect of a
higher wage is greater than the
substitution effect.