Download Chpt 11 PP

Gross Domestic Product
Economics for Today by Irvin Tucker, 6th edition
©2009 South-Western College Publishing
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What puzzles will I
learn to solve?
• Why doesn’t economic growth include
increases in spending for welfare,
Social Security, and unemployment
programs?
• Can one newscaster report that the
economy grew, while another reports
that for the same year the economy
declined, and both be correct?
• How is the calculation of national
output affected by environmental
damage?
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What is national
income accounting?
The system used to
measure the aggregate
income and expenditures
for a nation
3
Who was
Simon Kuznets?
He explained the first
national accounting
system, he is called
the father of GDP
4
What is gross
domestic product?
GDP is the most widely
reported measure of a
nation’s economic
performance
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What does GDP
measure?
The market value of all
final goods and
services produced in a
nation during a period
of time, usually a year
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What is an advantage
of using GDP?
GDP measures value
using dollars, rather than
a list of the number of
goods and services
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Does GDP measure
secondhand
transactions?
No, Current GDP does not
include the sale of a used
car or the sale of a home
constructed some years ago
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What are
intermediate goods?
Goods and services used
as inputs for production
of final goods
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Does GDP count
intermediate goods?
No, to avoid double
counting, GDP only
measures final goods and
services
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What are final goods?
Finished goods and
services produced
for the ultimate user
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Does GDP measure
nonproductive
financial transactions?
No, GDP does not count
purely private or public
financial transactions
such as giving gifts,
stocks, bonds, or
transfer payments
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What is a
transfer payment?
A government payment to
individuals, not in
exchange for goods or
services currently produced
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Does GDP measure the
whole economy?
Yes, GDP includes
markets for products,
resources, consumers,
workers, and businesses
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What is a
circular flow model?
A model that show us
how all the pieces of
the puzzle fit together
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Product
markets
Basic
Circular
Businesses Flow Households
Model
Factor
markets
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What is a flow?
A rate of change in a
quantity during a
given time period
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What is a stock?
A quantity measured
at one point in time
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What additional
sectors does a
complex circular flow
model contain?
• Financial markets
• Government
• Foreign markets
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What leakages are
present in the more
complex model?
• Household saving
• Household taxes paid
• Income spent on imports
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What injections are
present in the more
complex model?
• Business spending
• Government spending
• Foreign spending
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What point is
the economy
tending toward?
Where the dollar value of
leakages equals the
dollar value of injections
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How do we
measure GDP?
We add all the spending
for final goods and
services by the four
sectors of GDP
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What are the four
sectors of GDP?
• Consumption
• Investment
• Government
• Foreign (X - M)
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GDP = C + I + G + (X - M)
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What is a
conclusion?
GDP is a quantitative,
rather than qualitative,
measure of the output
of goods and services
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$13,247
$4,367
$2,897
$2,630 $2,373
$2,231
$1,269
U.S.
Japan
Germany China
U.K.
France
$979
Canada Mexico
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What are
shortcomings of GDP?
• Nonmarket transactions
• Distribution, kind, &
quality of products
• Neglect of leisure time
• Underground economy
• Economic bads
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What other national
accounts measure
economic performance?
• National Income
• Personal Income
• Disposable Personal Income
• Nominal and Real GDP
• GDP Chain Price Index
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What is
national income?
NI is the total earned by
resource owners,
including wages, rents,
interest, and profits
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What is
personal income?
PI is the total income
received by households
that is available for
consumption, saving, and
payment of personal taxes
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What is disposable
personal income?
DI is the amount of
income that households
have to spend or save
after payment of
personal taxes
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What is nominal GDP?
The value of all final
goods based on the
prices existing during
the time period of
production
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What is real GDP?
The value of all final
goods produced during a
given time period based
on the prices existing in a
selected base year
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What is the
chain price index?
A measure that compares
changes in the prices of
all final goods during a
given period to the
prices of those goods in
a base year
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Real GDP =
nominal GDP x 100
GDP chain price index
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END
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