Download Gross Domestic Product

Gross Domestic Product
11.1
OBJECTIVES
Describe what the gross domestic product
measures.
Learn two ways to calculate the gross
domestic product, and explain why they
are equivalent.
• The Great Depression of the 1930s
convinced economists to get a better
handle on what was happening with the
economy.
• P. 321: In the News –
– Tracking a $12 Trillion Economy
• Why is it important for the U.S.
government to keep track of the economy
& why should people care about
production?
– The U.S. gov. keeps track of the economy in
order to ensure the welfare of citizens &
businesses.
– People should care about production because
it will give them an insight into the health of
the economy & help them make better
personal decisions.
• Macroeconomics overall performance of
the national economy
• Economy – describes structure of
economic activity in a geographic area.
– What is produced, how
• Measured:
– Value of production
– Number employed
– Total income
GDP
Gross domestic product
• Measures all final goods and services
during a given period (year)
– Goods: bikes, toothbrush,contact lenses
– Services: pedicures, bus rides
• Includes production in the U.S. by foreign
firms
• Excludes foreign production by the U.S.
firms.
Final goods and services
• Only goods sold to final end users are
counted.
• No Double Counting
– Intermediate goods and services are not
counted.
• Purchased for additional processing and resale
– Secondhand & used goods are also ignored
• Increased value is included
2
• Why wouldn’t you add $100 to GDP if you
produced a table that you sold for $100?
• You had to pay for wood, screws, and
varnish to construct the table. Therefore,
including the entire price of the table in
GDP would have resulted in double
counting.
√1
• What does the Gross Domestic Product
Measure?
• The GDP measures the market value of all
final goods and services produced in the
U.S. during a given period.
Calculating GDP
• Calculating the value of production is
complicated.
• Marvin bakes a cake that sells for $10.00.
• Did Marvin produce $10.00 worth of value?
• What resource costs had to be paid beyond his
labor?
• Why is the task of measuring the value of
production much easier when only the value of
final goods and services measured.
Calculating GDP
Cake sold for $10.00
•
•
•
•
•
•
•
•
Cake mix
Other ingredients
Electricity
Share of rent
Share of marketing
Share of management
Other costs
Total
$1.89
$0.83
$0.21
$0.33
$0.25
$0.20
$0.48
$5.19
Measure the
price of
Marvin’s
contribution
How much of the of
the $10.00 price
should be allocated
to profit for the
owner’s
entrepreneurship?
Calculating GDP
Cake sold for $10.00
• Assume that Marvin earns $7.00 per hours
and used 30 minutes to bake the cake.
• What’s Marvin’s labor worth?
• ($7.00 / 2 = $3.50)
• How much profit did the owner receive?
• ($10.00 – 3.50 – 5.19 = $1.31)
Calculating GDP
• The national accounts are based on the
idea that one person’s spending is another
person’s income.
• Double entry bookkeeping: GDP can be
measured by either total spending or by
total income.
3
• Money spent by one person is income
received by someone else.
• Further, this is the only way to receive
income. (Wages are a form of spending
because employers are buying labor.
Interest is a form of spending because
borrowers are buying the use of someone
else’s money, etc.)
• Therefore, the value of spending must
equal the value of income.
Expenditure Approach
• Adds up the spending on all final goods and
services produced in the economy.
• Components:
– Consumption: purchases by households (2/3 of all
spending)
• Nondurable goods: soap
• Durable goods: expected to last at least 3 years
– Investment: spending on current production that is
not used for current consumption. (15% of US GDP)
• New Physical capital (existing physical capital is not counted)
• inventories
Expenditure Approach
• Components: (cont.)
– Government purchases (20% of GDP)
• Spending by all levels of government for goods
and services.
– Net exports
• Spending on imports does not count of GDP
• The value of imports must be subtracted from
value of exports.
– (X-M)
4
• When a business builds a new factory and
the government builds a new road, they
are both using current production in ways
that do not addd to current consumption.
Aggregate (total) expenditure
• Consumption + Investment + government
purchases + net exports (X-M)
• C + I + G + (X-M) = GDP
• If the value of imports exceeds the value of
exports, that means net exports are negative.
• Negative exports means that the sum of
consumption, investment and government
purchases exceeds GDP.
5
• “Aggregate” means “total”. So, this
statement means that the total income
received by all students in the class was
$52,315.28 last year.
Income approach to GDP
• Adds up the total income earned by production.
Double entry bookkeeping ensures :
Total expenditure = GDP = Total income
You avoid double counting either by focusing on
the market value of the product when it is sold or
by calculating the value added at each stage of
production
√2
• The two ways to calculate GDP are the
expenditure approach and the income approach.
• According to the expenditure approach,
C+I+G+(X-M) = GDP, where C is the sum of
consumption, I is investment, G is government
purchases, X is exports, M is imports, and (X-M)
is net exports.
• According to the income approach, GDP equals
aggregate income.
• They are equivalent because they both measure
the market value of the final goods and services
produced.
6
Government spending and investment spending were larger parts of GDP in 1970.
This corresponded to a relatively smaller share of share of GDP being allocated to
personal consumption. A large part of 2000 spending was used to buy imported
goods that caused a negative net trade.
7
• The price of a gallon of gasoline would be
$1.00
If the value of the gasoline
at each step in its
• $20/40= $.50
production process were
• $.50+$.18 = $.68
added, the total value
• $.68 x 1.25 = $.85 would far exceed the price
• $.85 + $.07 = $.92 charged to consumers.
This is why only the final
• $.92 = $.08 = $1.00
price is included when
calculating GDP
8
• French fries were produced using more
resources, particularly labor. This justifies
their greater value and contribution.