Download Gross Domestic Product

Chapter 12, Section 1
• Used to think the economy
would automatically correct
itself
• Great Depression- 1929World War II
• Must find a way to monitor
the economy’s performance
to predict downturns and try
to prevent them
• National Income Accounting: collects statistics
on production, income, investment, and savings
• National Income and Product Accounts (NIPA)
• Used to determine economic policies
• One of the measures included in the NIPA
• The dollar value of all final goods and services
produced within a country’s borders in a given
year
• Let’s break it down...
• The total of the selling prices of all goods and
services produced in a country in one calendar
year added up
• Products in the form sold to consumers
• Not intermediate goods- used in the production
of final goods
• Cars produced in America and sold by a
Japanese company
• Cars produced in Brazil and sold in America
• Sarah sells her house, which was built in 1982.
What year’s GDP is that house included in?
• What about the realtor fees?
• James buys a brand
new house. Is this
included in GDP?
• What about the costs
of the lumber, nails,
windows, doors, and
shingles?
• Add together the amounts spent to produce
goods and services during the year
• 4 categories:
• Consumer goods and services
• Business goods and services
• Government goods and services
• Net exports or imports of goods and services
• Calculate this country’s GDP using the
expenditure approach.
• This year, the country produced:
• 750 big screen televisions at $1,000 each
• 500 coffee tables at $50 each
• Exported 75 sofas at $250 each
• More accurate
• Add up all the incomes in the economy
• The prices goods are sold for is equal to the
amount of income earned by all of the people
who helped, however indirectly, to produce the
product
• Calculate this country’s GDP using the income
approach.
• This country produces houses and employs:
• 2 architects at $20,000 each
• 15 contractors at $18,000 each
• 4 interior designers at $15,000 each
• Nominal GDP: use the current year’s prices to
calculate the value of the current year’s output
750 big screen TVs at $1,000 each = $750,000
+ 500 coffee tables at $50 each = $25,000
Total = $775,000
• The next year, prices rise but productivity does
not. This falsely inflates the GDP measure.
750 big screen TVs at $1,050 each = $787,500
+ 500 coffee tables at $75 each = $37,500
Total = $825,000
• To correct for this increase in prices, economists
choose one year as a base year and use the
prices from that year to calculate real GDP.
750 big screen TVs at $1,000 each = $750,000
+ 500 coffee tables at $50 each = $25,000
Total = $775,000
750 big screen TVs at $1,000 each = $750,000
+ 500 coffee tables at $50 each = $25,000
Total = $775,000
745 big screen TVs at $1,000 each = $745,000
+ 513 coffee tables at $50 each = $25,650
Total = $770,650
• Nonmarket activities: goods or services people
make or do themselves
• Underground economy: black market, illegal
gambling, selling a car to a friend, etc.
• Negative externalities: value of clean
environment not counted in GDP
• Quality of life: additional goods and services
to not necessarily make people any happier
• Aggregate supply
• As price levels rise, there is an incentive for firms to
increase their output (more profit)
• As price levels drop, firms reduce their output (less
profit)
• Aggregate supply shows the relationship between
prices and output supplied
• How does this affect GDP?
• Aggregate demand
• As price levels go up and down, individuals and
businesses change how much they buy
• Lower price level = greater purchasing power
[falling prices increase wealth and demand]
• Higher price level = less goods and services
demanded
• How does this affect GDP?
• Aggregate supply/aggregate demand
equilibrium
• See book: p. 308