Download GDP

GDP
C
+
]
Ig
+
G
+
Xn [X-M]
Gross Domestic Product – market value of all final
legal output produced in a country in one year.
Nominal (money) GDP
=$6.00
Year one
$2.00
$2.00
$2.00
Nominal (money) GDP
=$6.10
Year Two
[Recession - decrease in output]
$3.05
$3.05
Real GDP – measures only output.
[measures current output at base-year
prices ($4), not current prices ($6.10)].
What’s a Gross
Domestic Product?
Broccoli?
I was gonna say
“Preparation H.”
So – “gross”, or “entire” means broccoli, Preparation H,
and the “entire sum of all products produced in a year.”
GNP – Ownership
China
All goods/services produced
legally for pay by citizens of a country.
[Citizenship mattered, not geography]
Plano, TX
Provo,UT
GDP - Location
All goods/services produced
legally for pay in a country’s borders.
[Geography matters, not citizenship]
BMW in Waco
The difference between GDP & GNP is about 2/10 of 1%.
Europe
Nike in
Indonesia
in Chicago
Honda in Ohio
Real Gross Domestic Product - Health of the Economy
Real GDP-most imp. stat in economics.
Economy’s Speed Limit at Full Employment is 4%, instead of 2.5%.
Can sustain a much greater increase in AD if the AS curve is
also shifting to the right, due to increasing productivity.
In the early 90’s, at FED, 2.5%
was the speed limit. AS shifted
slowly due to low productivity.
PL2
AD AD2 AS AS
2
1
1
Increasing productivity
PL3 of the
PL
1 growth
PL1
late 90’s allowed more
at full employment.
So, at FED, the “goldilocks
economy” has expanded.
Y*1 Y2 Y3
0
2.5%
Real GDP
<10 years without a recession>
*Represents “GDP Speed Limit” at full employment
EXPENDITURES APPROACH
GDP = C(66%) + Ig(18%) + G(17%) + Xn
Personal Consumption Expenditure ( C )
•Durable Consumer Goods[12%]
Ferrari produced here
Maytag produced here
•Nondurables[29%][soup & soap]
•Consumer Expenditures for Services[59%]
COMPOSITION OF CONSUMER SPENDING, 2012
Total of $11,109 billion
Services
$7,341 billion
(66%)
Durable Goods
$1,219 billion
(11%)
Nondurable Goods
$2,549 billion
(23%)
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases (G)
[state, local & federal]
[“G” purchases of goods/svcs produced
(not transfer payments)
3 Subcategories of Government
A. Federal government [55%]
B. 50 State governments
C. 89,000 local governments [45% for state and local]
Consumption
$8,534
Investment
Government
purchases
$2,085
$2,260
Export
Spending
$1,210
Import
Spending
$1,938
Consumption
$10,362
Investment
Government
purchases
$1,763
$2,974
Export
Spending
$1,729
Import
Spending
$2,228
Average % Increases in Real GDP, 1900-2006
5%
Long
Term
Growth
4.5%
3.5
3.8%
4%
3.3%
3.2%
3%
2.8% 2.7%
2.6%
2%
1% 0.8%
0
1929
To
1940
1940
To
1950
1950
To
1960
1960
To
1970
1970
To
1980
1980
To
1990
1990
To
2000
1929
To
2000
1900
To
2006
Comparative GDPs in Trillions, 2006
U.S.
Japan
Germany
China
U.K.
France
Italy
Canada
Spain
Brazil
S. Korea
India
Mexico
Russia
Australia
0
1
2
3
4
4.5
2.8
2.7
2.2
2.2
1.7
1.1
1.1
.795
.790
.780
.770
.763
.708
5
6
7
8
9
10 11 12
13
13
14
Comparative GDPs in Trillions, 2012
U.S.
China
Japan
Germany
France
U.K.
Brazil
Russia
Italy
India
Canada
Australia
Spain
Mexico
South Korea
0
1
2
3
4
5
6
7
8
8.4
6
3.4
2.6
2.4
1.7
2.2
2
2
795 1.87
1.72
1.5
1.3
1.18
1.12
9
10 11 12 13 14 15 16 17
16.2
We make up 4.45% of the world’s population,
but produce 19% of GDP [output].
Gross World Product is $85
/7.1 billion=$9,500
So, World Per Capita is about $12,000.
trillion
China, India, Indonesia, & Bangladesh have over 40%
of the world’s population, but produce only 23% of the
world’s GDP.
California, with a $2 trillion GDP would be number 9.
Texas, at $1.3 trillion would be the 13th largest country.
Texas produces approximately the same as Spain.
We have 19% of the world’s GDP, 18% of global trade,
30% of world stock market capitalization, and nearly
26% of the world’s largest companies.
Per Capita GDP – 2005
[Selected Countries]
Country
Per Capita
Luxembourg 55,600
Switzerland 48,230
U.S.
$44,000
Japan
Norway
37,180
30,800
France
Denmark
30,090
29,800
Canada
Austria
29,700
27,000
Germany
Belgium
27,000
26,100
Country
United Kingdom
Sweden
Per Capit
$24,700
24,700
Italy
Australia
24,300
24,000
New Zealand
Greece
19,500
17,900
Hungary
Mexico
12,000
6,770
China
Pakistan
1,290
600
Rwanda
Liberia
220
110
In 2005 China and India are still poorer than he U.S. was in 1900.
46% of Africans live on less than $1 a day & it is getting worse.
Per Capita GDP – 2013
[Selected Countries]
Country
Qatar
Per Capita
$145,894
Luxembourg 90,333
U.S.
$53,001
Japan
Norway
36,654
64,363
France
Denmark
39,813
43,080
Canada
Austria
43,253
44,402
Germany
Belgium
43,475
40,760
Country
United Kingdom
Sweden
Per Capit
$36,208
43,407
Italy
Australia
34,103
45,138
New Zealand
Greece
33,626
25,126
Hungary
Mexico
23,236
17,390
China
Pakistan
11,868
4,574
Rwanda
Liberia
1,608
887
China and India are still poorer than he U.S. was in 1940.
Turns out that the percentage of $1 per day is dropping!!!
13 tril.
13 tril.
12 tril.
10 tril.
9 tril.
8 tril.
Per
Capita
[If GDP increases, per capita income increases] $44,000
7 tril.
6 tril.
5 tril.
4 tril.
4,152
3 tril.
3,187
2,416
2 tril.
1,665
1 tril.
709
0
1929
773
1,204
1940
1950
1960
1970
1980
1990
2006
$44,000
There are 6.5 billion people on our planet; 5 billion are in the Third
World. 2.5 billion live on less than $2 a day. The direst poverty
is in Africa, home of the world’s 10 poorest countries. Over ½
the people of Sub-Sahara Africa live on less than $2 a day.
8 million people die each year because they are too poor to stay alive.
The Poorest Nations
½ of the world’s
population have
yet to make their
1. Afghanistan
2. Sierra Leone
3. Ethiopia
4. Somalia
5. Congo
6. Eritrea
7. Tanzania
8. Burundi
9. Rwanda
10. Malawi
11. Mozambique
Djibouti
first phone call.
Nation
Per Capita
$125
$510
$600
$600
$600
$710
$710
$720
$900
$900
$1,000
$1,300
$25,989
GDP Per Capita
[in 1992 dollars]
$15,931
$6,538
1929
1967
1996
2006
GDP – measures legal 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.
Only Final Sales($20) Count [to prevent “multiple counting”($38)]
Value Added – increase in the
market value at each stage
$20 “Wife-beater”
Final Good
Shirt from Kohls
Retail Shirt
$20
$8
8
Wholesale
Shirt
$7
$12
$7
7
Cloth
$5
$1
0
$4
$4
$4
Cotton
$1
Cotton
Sum = $38 Farmer
$1
Textile
Mill
$1
Shirt
Manufacturer
$1
Retail
Store
Value Added ($)
Value of Output($)
Intermediate Good
4
1
$20 = sum
So, to avoid “multiple counting”, we count the $20 final price, not $38.
Value Added
$2.02
.
GDP - what is not counted [#2]
2. Second Hand Sales – no current production.
A. If a 1957 Chevy is bought in 2005
57 Chevy
Car salesman
[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.
Shoe salesman
GDP – what is not counted [#3]
3. Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
Ex: If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm.
I’m not buying a Dell computer
but part ownership of Dell.
Exchanging one financial asset for another
GDP – what is not counted [#4].
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 an
iPod nano and listen to
1,000 songs”
5. Unreported “Legal” Business Activity
Unreported “legal” business activity does not count.
This is two-thirds of the “underground economy.”
Before LASIK Surgery
Then he has LASIK but the
surgeon doesn’t report
$500 of his $3,400 bill?
And what if this
waitress doesn’t
report all tips?
And what if the
dentist doesn’t
report $400 for
teeth whitening?
6. Illegal business activity is also not counted.
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.
“I’m getting $1,000 to kill
you, Ziggy, but at least it
will not count in GDP.”
Illegal
$300 B
Legal
Drugs $120
Self Employment
$600 B
$255
Wages and
Salaries $185
What doesn’t get reported
is the “Underground”
What gets reported is
the “Above Ground”
Underground Economy [compared to “above ground”]
Unreported exchanges that take place - legal and
Illegal [Hidden – “off the books”]
Total illegal activities - $300 billion
Total legal activities - $600 billion
Total legal and illegal - $900 billion
Underground Economy
1. Illegal business activities (1/3) – gambling,
narcotics trade, prostitution, loan sharking, etc.
2. Unreported legal business activities (2/3)
a. waitresses not reporting all of her tips
b. Cabdriver not reporting all of his income
c. Self employed cheat the most. Off-the-books cash transactions
d. $300 billion
$300 B
*IRS estimates that about $300 billion in income taxes from
the underground economy escapes federal taxes each year.
Underground Economy as a Percentage of GDP
[Select Nations]
Percentage of GDP
0
Greece
Italy
Spain
Portugal
Belgium
Sweden
Germany
France
Holland
United Kingdom
Japan
United States
Switzerland
5
10
15
20
25
30
Source: Journal of Economic Literature
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.
You need to do some of
this housework.
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
GM in
France
Nike in
Indonesia
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
[no production]
1. Second Hand Sales[no production]
2. Public/Private Transfer Payments
3. Purely Financial Transactions
4. Intermediate Goods
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
- 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
- A bakery buys an apple
to put in its pies
- When Ford buys a windshield wiper
for a car
Is It Counted in GDP?
Answers to “Is It Counted in GDP?”
Does Her Work Count?
It depends on whether she is the maid or housewife.
And – What About This Work?
Depends on whether he is the owner or hired mechanic.
Simon Kuznets and Sir Richard Stone
Simon Kuznets
Father of GDP - gave “quantitative precision to to economic entities”
Sir Richard Stone
After WWII, Stone headed a U.N. project that developed a standard
NIA model for other countries. Today, most countries follow these
guidelines, making international comparisons possible.
GDP
• GDP can be measured either by total
spending on U.S. production or by total
income received from that production.
• Expenditure approach [C+Ig+G+Xn]
– Adds up the aggregate expenditure on all final
goods and services produced during that year
• Income approach
– Adds up the aggregate income earned during
the year by those who produce that output
Importance of Real GDP in Determining a Recession
Real GDP measures current output at base-year prices.
Apple GDP Example
A country produces 10 apples in base year x $1;
Nominal and Real GDP both = $10
Year 2: A country produces 10 apples x $1.25;
Nominal GDP=$12.50
(no recession but worse off)
[Real GDP would = $10 (10 apples x $1)]
Or Year 2: A country produces 9 apples x $1.25;
Nominal GDP=$11.25 but real is $9 (9 apples x $1)
(recession although nominal GDP is up)
Nominal
[money]
GDP v. Real GDP
An increase in prices and/or output will increase
nominal GDP.
Only an increase in output will increase real GDP.
Nominal GDP could increase even if output falls.
Real GDP = Nominal Y/GDP deflator x 100
So, nominal GDP measures output & prices.
Real measures only output [actual production]
Constant (real) GDP v. current (money) GDP
Nominal [
]
GDP v. Real
GDP
Base year[$50/$50=1x100=100] $46/$50x100=92 [deflation of 8%]
Price of Market Basket(2001)
[nominal GDP]
$64
= Price of same Market Basket(1998)x100; [Real GDP] $50x100=128
[GDP Deflator] in the base year (1998)
[$64/128 x 100 = $50]
GDP Price Index
Nominal [Current) GDP
v.
Real (constant) GDP
The “GDP” Balloon
$6,736.9/126.1 x 100 = $5,342.5
takes
Nominal
– measured in terms of money.
Real–measured in terms of goods/services.
No Recession
[Real GDP must decline for 6 months]
Recession
[Real, not nominal GDP has declined]
Inflation
component
Real GDP
1990-91
The Business Cycle in U.S. History
[10 Recessions since WWII, from 6 months to 16 months]
GROWTH RATE (percent per year)
Recessions
20
Annual
growth
15
10
5
3
0
-5
Zero growth
-10
1930
1940
1950
1960
1970
Long-term average
growth (3%)
1980
1990
2000 2005
SHORTCOMINGS OF GDP
Non-market Transactions don’t count
Leisure isn’t factored in
Improved Product Quality
The Underground Economy
GDP’s impact on the Environment
Per Capita Output
Countries with low GDP per capita have more infants with
low birth weight, higher rates of infant mortality, higher rates
of maternal mortality, higher rates of child malnutrition, and
less common access to safe drinking water. Also, fewer go
to school and they have fewer teachers. They have fewer
TVs and telephones, fewer paved roads. They also win fewer
Olympic medals.