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Macroeconomics
The GDP:
National
Economic
Measurement
The GDP
 To compare our system with other
countries’ systems, and to compare the
strength of our own economy year to
year, economists use something called
the
 Gross Domestic Product (or GDP), which
is the total dollar value of all final goods
and services produced within a country
during one calendar year.”
How economists
calculate the GDP:
 They use final output: total production within
the nation’s borders in one year without
counting products more than once.
 Which of these would be counted in the GDP?
 A. A tree cut by a woodcutter who sells it to a
lumber yard.
 B. The lumber bought by the lumber yard who then
sells it to a furniture manufacturer.
 C. A table made by the manufacturer now sold to a
couple in Detroit, Michigan.
 The answer is C.
Calculating the GDP


They use only products produced in the
current year. This would exclude
things bought at yard sales.
Which of the following was used in the
calculation of the GDP in 2013?
A. A car manufactured in 2008 but sold in
2013.
B. A used 2004 Toyota that was sold to Ms.
Simpson in Memphis in 2006.
C. A Ford F150 produced and sold in 2013.
 The answer is C
Calculating the GDP
 They use only items produced within
national borders.
 Would this include or exclude Coca-Cola
(a U.S. company) produced at a plant in
Russia?
 Exclude
 GDP: A measure of the strength of our
economy
Famous Economic
Formula
 GDP= C+I +G+(X-M)
 C= Personal consumption
expenditures (consumer spending).
Includes
 durable goods: a lifetime of more than one
year, and
 non-durable goods: a lifetime of less
than one year, and services.
I = Gross Investment
 Total value of all capital goods
produced in a given nation
during one year.
 Fixed investment: Buildings,
machinery, equipment
G = Government
Purchases
 the dollar amount that federal, state, and
local governments spend on items
 IE: highways, education, defense, etc.
Net Exports
 X=Exports: the value of goods and
services produced domestically but sold
in other countries.
 M=Imports: the value of goods and
services produced in other countries, but
bought domestically.
 If we begin comparing GDP for each
year, will price increases (inflation) cause
more recent years to appear “inflated?”
 YES
Real vs. Nominal GDP
 To adjust GDP for price increases
economists calculate both
 NOMINAL GDP: the current GDP
expressed in current prices
 REAL GDP: which is adjusted for price
increases-inflation
“Real” GDP
GDP for one year expressed in
the dollar of another, base year
Ex: 2013 GDP in 2001 dollar
value
Also known as Constant GDP
“Nominal” GDP
GDP expressed in the dollar value
of a given year.
Ex: 2010 GDP in 2010 dollar value
Also known as Current GDP
GDP measures
economic growth or
decline
Changes in Real GDP helps to
determine if the economy has
increased or decreased its actual
production of new products
Limitations of GDP
 Non-market activities: GDP does not
include goods and services that people
make or do themselves
 i.e. baby-sitting, mowing the lawn, cooking
dinner, washing cars
 Underground economies: production
and income not reported to the
government
 i.e. black market products: illegal drugs,
weapons, stolen goods, exotic pets
Limitations of GDP
 Negative Externalities: unintended
economic side effects, or externalities
that have monetary value not reflected in
the GDP
 Quality of Life: Some things that
improve well-being cannot be included in
GDP
 i.e. pleasant surroundings, ample leisure
time, personal safety
GDP does NOT include:





value of used products
value of volunteer work
purely financial transactions
value of intermediary goods
Transfer of assets
GNP
 Gross National Product: annual income
earned by U.S. owned firms and U.S.
citizens
 Market value of all goods produced by
Americans all over the world in one
year