Download What Eight Things Do Not Count In GDP?

adapted from “Econ, Econ”
by
Gross Domestic Product
What’s a Gross
Domestic Product?
Broccoli?
I was gonna say
“Preparation H.”
GNP – Ownership
China
legally for pay by citizens of a country.
[Citizenship mattered, not geography]
Plano, TX
All goods/services produced
GDP - Location
All goods/services produced
legally for pay in a country’s borders.
[Geography matters, not citizenship]
Provo,UT
BMW in Waco
The difference between GDP & GNP is about 2/10 of 1%.
Europe
Nike in
Indonesia
in Chicago
Honda in Ohio
– measures production in U.S. in one year.
GDP is a $$ measure of all final
goods/services produced by
workers and capital located
the U.S.A., regardless of
ownership within a one year
period.
– measures production in U.S.
in one
year.
GDP measures all final goods/services produced by workers
and capital located in the U.S., regardless of ownership.
[Domestically located resources]
What Eight Things Do Not Count In GDP?
1. Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.
B. KFC buys chickens to eventually sell to customers.
- what is not counted [#2]
2. Second Hand Sales – no current production.
A. If a 1957 Chevy is bought in 2005
Chevy
[It has not been produced again so would not count.]
The salesman is doing productive work. His commission would count.
B. Boots produced in 1980 are bought in a Thrift Store in 05.
They also have not been produced again.
Salesman’s commission would count.
You are buying his services.
[#3]
– what is not counted
3. Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
A. If 100 shares of Dell stock is bought
I’m going to buy 100
shares of Dell Stock.
Exchanging one financial asset for another
[#4].
– what is not counted
4. Transfer Payments –welfare, unemployment, social security.
[There is no contribution to final production]
“Now that I’ve gotten
my welfare check, I
can get a mini iPod.”
5. Unreported “Legal” business Activity
Unreported “legal” business activity does not count.
This is two-thirds of the “underground economy.”
What if an eye surgeon
doesn’t report $500 of his
his $3,400 IntraLASIK bill?
And what if this
waitress doesn’t
report all tips?
And what if the
dentist doesn’t
report $400 for
teeth whitening?
Illegal business activity, because it goes unreported,
also does not count. Making up 1/3 of the “underground
economy,” it includes murder for hire, gambling,
drugs, and prostitution.
6. Illegal business activity is also not counted.
“I’m getting $1,000 to kill
you, Ziggy, but at least it
will not count in GDP.”
7. Non-market Transactions Are Not
Counted
Work in your own household or volunteer work
in the community does not count because there was
no payment.
So, don’t marry your maid, gardener, or
fitness instructor, or you will hurt GDP.
8. U.S. Corporations Producing Goods
Overseas
Chevy in France
Nike in Djibouti
If U.S. corporations produce goods overseas,
it does not count in GDP, but would count in GNP.
Remember, we are measuring production inside
the U.S. Imports represent production outside of
the U.S.
Eight Things Not Counted in GDP
NON-PRODUCTION
• Second Hand Sales
• Public/Private Transfer Payments
• Purely Financial Transactions
• Intermediate Goods
NON-INCOME
5. U.S. Corporations producing overseas
6. Non-market transactions
[household or volunteer work]
Underground Economy
7. Illegal business activity
8. Unreported legal business activity
Do These Count in GDP?
- When Outback buys potatoes for baked potatoes
- When a tattoo business buys
ink for tattoos
- When Tom Thumb buys
spam to sell it to you
- When the popsicle maker buys the sticks
- Dell buys a computer monitor frame
- Ice cream that
Braums buys for sundaes
- Tippins buys an apple
to put in its pies
- When Ford buys a windshield wiper
for a car
The Circular-Flow
Diagram
Resource
Market
1
$
2
$
A.
B.
C.
Goods/services?
Consumer expenditures?
Land, labor, capital and
entrepreneurial ability?
Rent, wages, interest,
and profits?
D.
Businesses
$
Households
$
3
4
Product Market
EXPENDITURES APPROACH
GDP = C(66%) + Ig(18%) + G(17%) + Xn
Personal Consumption Expenditure ( C )
•Durable Consumer Goods[12%]
•Nondurables[29%][soup & soap]
•Consumer Expenditures for Services[59%]
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Let’s say this Porsche is
produced by a foreign co.
in Plano, Texas.
Gross Private Domestic Investment (IG)
3 Subcategories [spending on Y not consumed]
A. Business fixed investment-tools, machinery, & plants
B. Residential fixed investment–construction of new
houses [can rent for financial return] & apartments.
C. Inventory investment – change in inventories
[A net increase in inventories is investment; a net
decrease in inventories is negative investment or
disinvestment (disinvestment represents
sale of output produced in a previous year)
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases (G)
[state, local & federal]
[“G” purchases of goods/svcs produced
3 Subcategories
A. Federal government
B. 50 State governments
C. 84,000 local governments
(not transfer payments)
40%
60% for state and local
EXPENDITURES APPROACH
Personal Consumption Expenditure (C)
Gross Private Domestic Investment (Ig)
Government Purchases ( G )
Net Exports( Xn)
Net Exports (Xn) = Exports (X) – Imports (M)
[M represents production outside a country]
THE INCOME APPROACH
•
•
•
•
•
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
• Corporate Income Taxes
• Dividends
• Undistributed Corporate
Profits
Expenditure and Income Approach to GDP
Receipts: Expenditures Approach____ Allocations: Income Approach______
C
Ig
G
Xn
$7304
1593
1973
-424
Compensation of employees
Rents
Interest
Proprietor’s income
Corporate income taxes
Dividends
Undistributed corporate profits
National Income
Indirect business taxes
Consumption of fixed capital
NFFIEUS
GDP
$10,446
GDP
$5977
142
684
757
213
434
141
$7560
695
1393
10
$10,446