Download Gross Domestic Product

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
Top GDPs of the World
GDP is a measure of the income and
expenditures 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
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Plac
e=N&FromView=YES&Freq=Qtr&FirstYear=2011&LastYear=2011&3Place=N&Update=Update&JavaBox=no
Consumer Spending
+Business Spending
71% (Consumption)
13 %
(Investment)
+Government Spending 20%
+Foreign Spending -4 % (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 Definition of
Gross Domestic Product
GDP is the dollar value of all
final goods and services
produced within a country in a
given year.
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)
D. 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]
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
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
– what is not counted
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.”
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 housekeeper, gardener,
or
fitness instructor, or you will hurt GDP.
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).
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
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.
Calculating Nominal GDP:
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($2 per hot dog x 150 hot dogs) + ($3 per hamburger x 100 hamburgers) = $600
2003
($3 per hot dog x 200 hot dogs) + ($4 per hamburger x 150 hamburgers) = $1200
Nominal GDP versus Real GDP
• 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.
Calculating Real GDP (base year 2001):
2001
($1 per hot dog x 100 hot dogs) + ($2 per hamburger x 50 hamburgers) = $200
2002
($1 per hot dog x 150 hot dogs) + ($2 per hamburger x 100 hamburgers) = $350
2003
($1 per hot dog x 200 hot dogs) + ($2 per hamburger x 150 hamburgers) = $500
GDP Deflator
•
•
•
An accurate view of the economy
requires adjusting nominal to real GDP
by using the GDP deflator.
The GDP deflator measures the current
level of prices relative to the level of
prices in the base year.
It tells us the rise in nominal GDP that is
attributable to a rise in prices rather
than a rise in the quantities produced.
GDP Deflator
The GDP deflator is calculated as follows:
Nominal GDP
GDP deflator =
 100
Real GDP
Converting Nominal GDP to Real
GDP
Nominal GDP is converted to real
GDP as follows:
(Nominal GDP20xx )
Real GDP20xx =
X 100
(GDP deflator20xx )
GDP Growth
• How fast GDP grows determines to a large
extent the level of economic prosperity a
country enjoys.
• For a nation to enjoy continued prosperity
GDP must grow at a faster rate than the
population.
• GDP growth can be determined using the
rate of change formula.
Current GDP – Previous GDP x 100
Previous GDP
GDP and Economic
Well-Being
•
•
•
GDP is the best single measure of
the economic well-being of a society.
GDP per person (per capita) tells us
the income and expenditure of the
average person in the economy.
Higher GDP per person indicates a
higher standard of living.
GDP IS NOT A PERFECT MEASURE
• Does not include the value of leisure
time.
• Does not include value of labor done at
home or on a volunteer basis.
• Excludes any measure of the quality of
the environment.
• Does not account for the unequal
distribution of income.
• May overstate incomes & production
because of inflation
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