Download Chapter 12 GDP

ECONOMIC MEASURES
• In order to ensure that our economic goals
of full employment, stable prices and
economic growth are met our government
constantly takes measurements of the
economy.
• Three important measurements are
– Gross Domestic Product (GDP)
– Unemployment rate
– Inflation rate
Gross Domestic Product
What’s a Gross
Domestic Product?
Broccoli?
I was gonna say
“Preparation H.”
GDP
This is the most important measure of
economic activity.
GDP is used to compare economies’
standard of living world wide
The Definition of GDP
GDP is the dollar value of all
final goods and services
produced within a country in a
given year.
GDP is a measure of the spending and
income of an economy.
Expenditures
Goods & Services
Market for
Goods
and Services
Firms
Inputs for
production
Income
Expenditures
Goods & Services
Households
Market for
Factors
of Production
Labor, land,
and capital
Income
EXPENDITURES APPROACH
Consumer Spending
+Business Spending
70% (Consumption)
17 %
(Investment)
+Government Spending 18%
+Foreign Spending -5% (Net Exports)
Net Exports = Exports – Imports
[Imports represent production outside a country]
THE INCOME APPROACH
This approach adds together all the income
earned in the production of goods & services
Wages (income from labor)
+ Rents (income from natural resources)
+ Interest (income from capital investments)
+ Owner’s Income (profit earned by sole
proprietorship and partnerships)
+ Corporate Profits
= TOTAL INCOME EARNED
The Expenditure Approach
• In calculating GDP we need to be careful
to not double-count items, so we leave out
the value of the following:
– Intermediate goods
– Second-hand sales
– Transfer payments
GDP measures FINAL GOODS AND
SERVICES (products in the form sold to
consumers) not
intermediate goods
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.
It includes goods and services CURRENTLY PRODUCED,
not transactions involving goods produced in the past.
Second Hand Sales = no current production.
A. If a 1957 Chevy is bought in 2009
Chevy
[It has not been produced again so would not count.]
B. Boots produced in 2000 are bought in a Resale Store in 09.
They also have not been produced again.
A salesman’s commission on a used good
would count. You are buying his services.
– what is not counted
Transfer Payments –welfare, unemployment, social security.
[This money will be counted when the unemployed or
Grandma go spend it]
“Now that I’ve gotten
my welfare check, I
can get a mini iPod.”
The Expenditure Approach
• Since GDP measures the dollar value of
goods and services produced, purchased
and reported within a year, there are
several other things that are left out of the
calculations.
– Purely financial transactions
– Unreported legal and illegal market activities
– Non-market activities
– what is not counted
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
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,
and drugs
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.”
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.
The Measurement of GDP
•
•
It measures the value of production
WITHIN A COUNTRY’S BORDERS
regardless of who owns the company.
It does NOT measure production by U.S.
companies outside the U.S.
Provo,UT
in Chicago
BMW in Waco
Europe
China
Nike in
Indonesia
The Measurement of GDP
It measures the value of production
that takes place WITHIN A SPECIFIC
TIME PERIOD, usually a year or a
quarter (three months).
Nominal GDP versus Real GDP
• We use GDP to evaluate whether or not
our economy is growing.
• If we produce more goods and services
this year than last year we can conclude
that we are growing.
• Because GDP is measured by adding up
our spending on output (PRICE X quantity)
this is not always clear since prices tend to
rise from year to year.
Nominal GDP versus Real GDP
• Nominal GDP is the dollar amount we
spent this year on goods and services.
– It is found by multiplying output bought at
current price level. If we have inflation
nominal GDP goes up.
• Real GDP is corrected for the effects of
inflation.
– It is found by multiplying output bought at a
constant price level. If Real GDP has
increased then output has increased.
Year 1 Nominal GDP
Suppose an economy‘s entire output is cars and
trucks.
This year the economy produces:
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
Since we have used the current year’s prices to
express the current year’s output, the result is a
nominal GDP of $350,000.
Year 2 Nominal GDP
In the second year, the economy’s output
does not increase, but the prices of the cars
and trucks do:
10 cars at $16,000 each = $160,000
+ 10 trucks at $21,000 each = $210,000
Total = $370,000
This new GDP figure of $370,000 is misleading.
GDP rises because of an increase in prices.
Economists prefer to have a measure of GDP
that is not affected by changes in prices. So they
calculate real GDP.
Year 3 Real GDP
To correct for an increase in prices, economists
establish a set of constant prices by choosing
one year as a base year. When they calculate
real GDP for other years, they use the prices
from the base year. So we calculate the real
GDP for Year 2 using the prices from Year 1:
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
Real GDP for Year 2, therefore, is $350,000
CHANGES IN GDP
The level of output (income and expenditures) is changed
if there is a change in AGGREGATE DEMAND.
Price Level
AS1
b
P2
a
P1
AD2
AD1
o
Q1 Q2
Real Gross Domestic Product
CHANGES IN GDP
The level of output (income and expenditures) is changed
if there is a change in AGGREGATE SUPPLY.
Price Level
AS1
AS2
a
P1
P2
b
AD1
o
Q1
Q2
Real Gross Domestic Product
EXPENDITURES APPROACH
Personal
Spending ( Consumption )
Spending by Households
•Durable Goods[12%]
•Nondurable Goods[29%][soup & soap]
•Services[59%]
EXPENDITURES APPROACH
Investment - Spending by Businesses
4 Subcategories
A. Tools, equipment , machinery
B. Buildings (offices, factories)
C. Residential buildings (your house)
C. Inventory adjustments
EXPENDITURES APPROACH
Government Purchases
[state/local & federal]
Government purchases of goods/services
produced
(not transfer payments)
3 Subcategories
A. Federal government
B. 50 State governments
C. 84,000 local governments
37%
63% for state and
local
EXPENDITURES APPROACH
Net Exports
Net Exports = Exports – Imports
[Imports represent production outside a country]