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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