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Measuring Production
Gross Domestic Product
1
Circular Flow Diagram
Government
National
Income
Taxes
Households
Savings
Government K
Spending
Firms
Consumption
Stocks, Funds
Bonds, CD’s,
Life Insurance
Investment
Total
Production
How is this number
important?
National
Income
The more goods and services
we produce, the more Income
is generated and the better
our ability to satisfy needs.
Total
Production
15.8 T
3
2011
4
Does this mean that the
U.S. grows faster than
any other country?
2012
6
Does this mean that
Americans are the richest
in terms of income per
person?
2010-2011
U.S
Drops
from # 1
to #14
8
Does it mean all
Americans receive
$48,328/year?
Personal Income
Less than $25K
48.01%
$25K - $50K
27.23%
Less than $50K
75.24%
$50K - $75K
12.86%
$75K - $100K
5.29%
50K-100K
18.15%
Less than 100K
93.39%
~Half the population
makes less than
$25,000/year
~75% the population
makes less than
$50,000/year
Most of the population
makes less than
$100,000/year
Median Household Income = $50,000(2011)
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Poverty Thresholds for 2009 by Size of Family and Number of Related Children Under 18 Years
Related children under 18
years
Size of family unit
One person (unrelated
individual)....
Weighted
average None
threshold
s
One
Two
11,16111,161
65 years and over....................
10,28910,289
Two people............................
Householder under 65
years...........
Householder 65 years and
over......
13,991
Four
Five
Six
Seven
Eight
or more
~Half the population
makes less than
$25,000/year
10,956
Under 65 years.......................
Three
A family of four making
25,000 a year is $2,000
above the poverty
threshold
14,43914,366
14,787
12,98212,968
14,731
Three people..........................
17,09816,781
17,268
17,285
Four people...........................
21,95422,128
22,490
21,756
21,832
Five people...........................
25,99126,686
27,074
26,245
25,603
25,211
Six people............................
29,40530,693
30,815
30,180
29,571
28,666
28,130
Seven people..........................
33,37235,316
35,537
34,777
34,247
33,260
32,108
30,845
Eight people..........................
37,25239,498
39,847
39,130
38,501
37,610
36,478
35,300
35,000
Nine people or
more...................
44,36647,514
47,744
47,109
46,576
45,701
44,497
43,408
43,138
41,476
Note: The poverty thresholds are updated each year using the change in the average annual Consumer Price Index for All Urban
Consumers (CPI-U). Since the average annual CPI-U for 2009 was lower than the average annual CPI-U for 2008, poverty thresholds for
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2009 are slightly lower than the corresponding thresholds for 2008.
Source: U.S. Census Bureau.
12
Income Distribution U.S.
If we divide Income: The
richest ten percent of the
population gets a third, the
next thirty percent gets
another third, and the
bottom sixty percent get
the last third.
1% 35% Wealth
9% 38% Wealth
90% 27% Wealth
10% 1/3 Income
30% 1/3 Income
60% 1/3 Income
1% 43% Fin. Wealth
9% 40% Fin. Wealth
90% 17% Fin. Wealth
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One of the highest levels of income
inequality among high income countries
GDP alone is not a good measure
of wellbeing
We need to know how this income is
distributed.
Can not be used for cross country
comparisons unless we add both:
income distribution and population
size.
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Government
Ask
individuals
Interest
Incomes
how
much
Rent
income
Approach
Profits
they
Wages
earned
Pay taxes
Save
Households
Rest of
World
Buys goods
and services
Buys
goods
Buy goods and services
=300
Firms
Ask firms
Ask firms how
Goods
and
Expenditures
how Added
much
Value
much they
Approach
they
Services
Approach
SOLD
produced
GDP includes
ONLY NEW
production
GDP
Sum of expenditures on new, final goods and
services produced in the U.S during the
year.
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G
Circular Flow Diagram
to
Interest
Rent
Profits
Wages
T
S
G
Households
C
I
Rest of
World
NX
pay
Firms
Sold
GDP
Goods and
Services
The Expenditures Approach
GDP is the sum of
purchases made by
 Consumers
 Firms
 The Government

Other Countries
Consumption (C)
Investment (I)
Government (G)
Spending
Exports
19
The Expenditures Approach
20
GDP adds purchases of
Final Goods ONLY!
…Excludes intermediate goods
21
Final Good
A good (or service) available for
purchase by the ultimate or
intended (end) user
with no plans for further
transformation or as an input in
the production of other goods
that will be resold.
22
Final Goods can be…



Durable: last a relatively long
time.
Non-durable : perishable.
Services: intangibles, do not
represent production of
physical things.
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Intermediate Good
A good (or service) that is used as an
input or component in the production
of another good. Intermediate goods
are combined into the production of
final goods.
Intermediate goods will be further
processed before sold as final goods.
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Car Manufacturer purchase windows from
window manufacturer at $300 each
Consumer buys
the car for
$16,000.
Car Manufacturer purchase
tires from tire manufacturer at
$200 each
25
Total Sales
2 Windows = 600
4 tires = 800
1 car = 16,000
Total Sales = 17,400
Total Sales
Include twice the value of
the tires and the windows
GDP Excludes Intermediate
Goods
GDP seeks to measure the market value of
final goods.
The value of intermediate goods is included
in the value of final goods
Market transactions that capture the
value of intermediate goods are not
included separately in gross domestic
product.
To do so would create the problem
of double counting.
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Investment
The purchase of
capital goods
28
Capital Good
A good that is a manufactured (or
previously produced) factor of
production that is used to produce
other things.
Examples: factories, buildings, trucks,
tools, machinery, and equipment used
by businesses.
29
Depreciation
Flour
Sugar
Depreciates
Flour
Sugar
Oven
30
New Capital (Investment)
goods




Are used to produce other goods just
like intermediate goods.
Are not entirely used up in production
of the final good like intermediate
goods are.
Depreciate (are used up) as they are
used to produce final goods.
Purchases of capital goods are ADDED
into GDP at full value.
31
GDP Excludes Paper
Goods
Bonds, stocks, Certificates of Deposit (CD’s),
These do not represent a good or
service that satisfies needs but are
considered SAVING instruments.
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Payment for which
Government Purchases
G
the government
doesby
NOT
receive
 Include expenditures
federal,
a good or a sevice
state and local governments.
 Include final, intermediate and
capital goods purchased by the
government.
 Exclude transfer payments (social
security, unemployment benefits,
etc)
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








Bullet proof vests
purchased by military.
Bullet proof vest
purchased by Security
Company.
New goods
Intermediate Good
purchased by firms
Capital Good
Newly produced goods no
one purchased
House
Tools
Cash for clunkers




Computer purchased by
the government.
Coffee and pastries
purchased by the
government for their
offices.
Coffee and pastries
purchased by Ford for
their offices.
Goods manufactured in
other countries
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Final,
Foreign new,
Production in
the US
no paper
goods, no
Goods and services produced inside the U.S
unreported
including those produced by other countries.
Excludes goods and services produced by
U.S. Companies outside the U.S
Why is GDP measured in
dollars?




We measure GDP because we must
know how much we produced
We can not add apples and
computers.
We must use dollars as a “common
denominator” to be able to add.
We add dollars worth of apples +
dollars worth of computers…
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Questions to prepare
1. What is GDP? What is included? What is
excluded? What are its limitations?
2. Explain the difference between GDP & GNP,
NDP & GDP, between real GDP and nominal GDP.
Provide an example to illustrate your answer.
3. Explain how a loaf of bread can be considered
both a final good and an intermediate good.
Provide an example to illustrate your answer.
4. Is the purchase of a home included in the
calculation of GDP? If yes how and why? If not,
why not?
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Questions to prepare
5. Determine if the following items are included in GDP and under
what component C, I, G, X or M?
a.
Jane buys newly issued shares of stock in Macro.com. Inc.
b.
Ross buys a new pair of jeans at a local department store.
c.
Joey has his mustache trimmed at his hair salon.
d.
Rachel buys an antique chest at a resale shop.
e.
Phoebe grows her own herbs on her apartment balcony.
f.
Michael travels to France and buys French wine.
g.
John, a stay-at-home dad, takes care of his 4 year old twins.
h.
Mary sends her 3 year old to pre-school.
i.
Rose volunteers at a homeless shelter.
j.
Government pays farmers a 10 cent/pound subsidy.
k.
Amazon. COM buys books from a publisher.
l.
Mark buys a book from a publisher.
m.
Mitsubishi Co. builds a car in Illinois and ships it to Japan for
sale.
n.
Mike bets $500 on a basketball game.
o.
You buy land to build a home.
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200 Countries, 200
Years
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