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GDP: The dollar value of all final goods and
services produced within a country within a
given amount of time.
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What are we measuring?

Output!
 The amount of money that is flowing through our
economies factories, shops, and businesses each
month, quarter, or year.
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Final Goods and Services: When measuring
GDP the key is Final goods… a tire is used in
the production of a car, but is not a final
good, the car is the final good.
Intermediate goods are not counted in the
GDP, they are goods used to produce a final
good, like a tire. If we counted intermediate
goods in the GDP we would be counting
those goods twice (Double Counting).
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What about goods that are not sold within
the specific amount of time (year)?
 All goods produced within a specified amount of
time are counted.
 Ex. Cars produced in 2010, but not sold in 2010
(still sitting at the car dealership). Those goods
are still counted in the GDP because they were
produced.

What about multi-national corporations?
 Ex. My Nike’s are designed by a U.S. owned
company, but made in the Philippines they still
get counted in the GDP right? NO!
 Only goods produced in that country are
counted. The shoe’s would count toward the GDP
of the Philippines.
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Public Transfer Payments:
Social Security Payments,
Welfare Payments, Veteran’s
Payments

Private Transfer Payments:
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Family gifts, money exchanged
from person to person.

Stock Market Transactions:
Buying and selling stock is like
swapping paper no good is
being produced
Secondhand Sales: These
transactions contribute nothing
to current production.
No new production
(good/service) is gained
from these payments so
they are not counted in
GDP.
There are two ways GDP can be calculated:
1)The GDP of an economy can be reached by
totaling the expenditures on goods and services
produced during the specified amount of time.
2)GDP can be calculated by summing the
income payments to the resource suppliers of
the things used to produce those goods and
services.
• The Dollar Flow of Expenditures on Final
Goods=The Dollar Flow of income from Final
Goods

Expenditure Approach: The GDP of an
economy can be reached by totaling the
expenditures on goods and services produced
during the specified amount of time.

Consumption Purchases (C): largest GDP
Component, when individuals or businesses
purchase nondurable goods or services. Ex.
Food, Clothing, recreation, medical services,
legal services, gas.

Investment Spending (I): Production or
Consumption of CAPITAL goods that will
benefit production in the future. Ex.
Machinery, New Home, Business Inventories,
Construction
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
Government Purchases (G): All government
purchases except Transfer Payments.
Transfer Payments= Money paid to
individuals that don’t increase production.
Ex. Social Security, Welfare, etc…


Net Exports(X): The Total Exports-Total
Imports. Generally this number has been
negative because our country tends to import
more than we export.
So…
 C+I+G+X=GDP

If adding up all the expenditures gives us the
GDP, then…
 Adding up all the money needed to produce those
goods and services must give us the same result.

Resource Cost/Income Approach:
 Sum of the costs incurred and income (including
profits) generated producing goods and services
during the period.

Resource Cost/Income Approach
Components:
 Employee Compensation
 Self-Employment income
 Rents
 Interest
 Corporate Profit
 = National Income
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Real vs. Nominal=
Nominal is the actual (current) monetary
value of our GDP on a year to year basis.
Real is the monetary value minus inflation,
measured in base year prices.
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This allows economists to compare the true
(real) market values of GDP from year to year.
%Growth rate= GDP year2-GDP year1
GDP year1
Or…
new – old x 100 = Percent Change
old
x100

Is GDP an accurate way to measure the
productivity (total output) and the well being
of a countries citizens?

GDP is reasonably accurate and highly useful
to measure how well or poorly an economy is
performing, but there are several
shortcomings.

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Nonmarket Activities
Leisure
Improved Product Quality
The Underground Economy
GDP and the Environment
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We must also take into consideration:
 Indirect Business Taxes: These are taxes collected
on the production or sale of a good that don’t go
to the business as income, but must still be
calculated.
 Ex. You buy a candy bar for $1 with 6% sales tax. The
candy bar costs you $1.06 but the business only collects $1
in revenue. So we need to add the taxes to account for the
extra money being spent.

Depreciation: The estimated amount of
capital that is being used each year. This
amount is not paid to anyone, but allows us
to not overstate or understate profit each
year.

Net Foreign Income Factor:
 National Income vs. Domestic Income
▪ National income is all the money made by Americans no
matter where they live.
▪ Domestic income is all the money made inside the U.S.
no matter nationality.
 So we must take:
▪ Income foreigners earn in the U.S. minus the income
Americans earn abroad.
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Components:
 Wages, Rents, Self Employment Income, Interest,
Corporate Profit, Indirect Business Taxes,
Depreciation, and Net income of foreigners
 Together these components equal the
expenditure approach