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Economic
Performance
Gross Domestic Product (GDP)
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dollar value of all final goods/ services produced
w/in a country in a given year.
What GDP Measures
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Final output—to avoid double counties goods
Current year—no used or old goods
Output produced within national borders—doesn’t matter
who makes it
Create a list of 5 things counted and 5 things not
counted in 2010 GDP.
GDP: How it is measured.
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Consumptive spending—purchase of consumer goods/services
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63% of GDP (largest component)
Investment-in the economy for capital goods
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availability of investment opportunities
consumer demand, gov’t tax policies, cost of new capital goods
cost & availability of investment funds
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Government spending
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accounts for 20% of GDP
Fastest one to increase during hard times (think Great Depression)
Net exports
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availability of loans and interest rates
difference between imports & exports
Always a negative number for U.S. these days. Why?
Give an example for each component that would increase AND
decrease GDP.
GDP: What it excludes.
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do-it yourself activities
housework
underground economy
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bartering or trading
getting paid “under the table”
illegal activities; robbers & drug dealers
social costs
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$100 million in cancer research v. $100 million in pornography
Worthless and/or polluting products still count
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doesn’t measure quality of life or exhaustion of natural resources
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irony is that the pollution creates jobs in the clean-up which are
also counted in the GDP
lumber mill near a beautiful river.
doesn’t measure the value of leisure time
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work less =more leisure=less money=decrease in GDP
GDP: Adjusting for Inflation
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Nominal GDP- output measured in current dollars
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this is when you compare the GDP over certain years by
using current dollar values
Real GDP- output measured in constant dollars
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constant dollars- is a measure used to adjust for inflation
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When comparing GDPs across years, put all dollar figures
into 1987 dollars after adjusting for inflation/deflation.
An American businessman & a
Mexican Fisherman
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An American businessman was at the pier of a small coastal Mexican
village when a small boat with just one fisherman docked. Inside the
small boat were several large yellowfin tuna. The American
complimented the Mexican on the quality of his fish and asked how
long it took to catch them. The Mexican replied only a little while. The
American then asked why didn't he stay out longer and catch more
fish? The Mexican said he had enough to support his family's
immediate needs.
The American then asked, but what do you do with the rest of your
time?
The Mexican fisherman said, "I sleep late, fish a little, play with my
children, take siesta with my wife Maria, stroll into the village each
evening where I sip wine and play guitar with my amigos. I have a full
and busy life, senor."
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The American scoffed, "I am a Harvard MBA and could
help you. You should spend more time fishing and with
the proceeds, buy a bigger boat. With the proceeds from
the bigger boat you could buy several boats. Eventually
you would have a fleet of fishing boats. Instead of selling
your catch to a middleman you would sell directly to the
processor, eventually opening your own cannery. You
would control the product, processing and distribution.
You would need to leave this small coastal fishing village
and move to Mexico City, then LA and eventually NYC
where you will run your expanding enterprise."
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The Mexican fisherman asked, "But senor, how long will this all
take?"
To which the American replied, "15-20 years."
"But what then, senor?"
The American laughed and said, That's the best part. When the time is
right you would announce an IPO and sell your company stock to the
public and become very rich, you would make millions."
"Millions, senor? Then what?"
The American said, "Then you would retire. Move to a small coastal
fishing village where you would sleep late, fish a little, play with your
kids, take siesta with your wife, stroll to the village in the evenings
where you could sip wine and play your guitar with your amigos."
Quiz Questions
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What is GDP a measure of?
What is the largest component of GDP?
What is something that GDP does not
include?
Does GDP really measure the health of an
economy? Why or why not?
If the U.S. government lowers taxes, what
effect does this have on GDP?
GDP: Uses for it
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Comparisons over time—GDP is calculated quarterly
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measures the performance of a nation’s economy
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economy is doing well; the GDP is growing
rate of growth determines the economic policies
 raise or lower taxes
 increase or decrease transfer payments
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GDP grows slowly or declines means that unemployment will increase
Comparisons between countries
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problems with this
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the available statistics are not easy to compare
cultural differences and life-styles
leisure now v. later
Positives
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you can compare like socio-economic systems
GDP: What it doesn’t tell us.
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Income distribution
external costs
Types of goods/ services produced
Value of leisure
Population
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must use GDP per capita
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GDP/population
Importance for Economic Growth
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Economic growth is an increase in real
GDP
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1.
2.
3.
real GDP per capita is designed to account for
population increase
Increasing the Standard of Living
Competing in the Global Market
Increasing Domestic Resources
Questions:
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Calculate the Gross Domestic Product for
Cullentopia for the year 2005.
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personal consumption-----$50,000,000
investment spending------$10,000,000
government spending-----$20,000,000
imports--------------------$5,000,000
exports--------------------$2,000,000
GDP=
What part(s) of a business cycle best
represent a period of recession?