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Gross Domestic Product What’s a Gross Domestic Product? Broccoli? I was gonna say “Preparation H.” GDP Is the most important measure of economic activity. Is a measure of the income and expenditures of an economy. The Circular-Flow Diagram Revenue Goods & Services sold Market for Goods and Services Firms Inputs for production Wages, rent, and profit Spending Goods & Services bought Households Market for Factors of Production Labor, land, and capital Income GDP is used to compare economies world wide The Measurement of GDP GDP is the dollar value of all final goods and services produced within a country in a given year. The Measurement of GDP • Production is measured as a $$$ dollar value $$$: the price that Consumers, Businesses, Government and International buyers pay or earn for goods and services. 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 Wages + Rents (income from natural resources) + Interest (income from capital investments) + Owner’s Income (sole proprietorship and partnerships) + Corporate Profits - Corporate Income Taxes - Dividends - Undistributed Corporate Profits GDP measures FINAL GOODS 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 both tangible GOODS (nondurable goods: food & clothing, durable goods: cars and refrigerators) and intangible SERVICES (haircuts, housecleaning, doctor visits). 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. Salesman’s commission would count. You are buying his services. The Measurement of GDP • It measures the value of production WITHIN A COUNTRY’S BORDERS regardless of who owns the company. Provo,UT in Chicago BMW in Waco 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). 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