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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