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Ch. 12 Section 1 Gross Domestic Product Guiding Questions Why does it matter how the economy is doing to the individual? How do we determine if the economy is healthy? Gross Domestic Product Gross Domestic Product – The dollar value of all final goods and services produced within a country’s borders in a given year. Terms Defined: Dollar Value – average price of all goods. Final Goods/Services – only final products are counted, not intermediate products. Within the borders – no outsourced goods are counted. In a Given Year – Only this year’s products/services are counted. What does the GDP Show? GDP measures the amount of money brought into a nation in a single year through the selling of that nation’s goods and services. GDP is a measurement of how well a nation’s economy is doing for a particular year. A high GDP means the nation is doing well economically. A low GDP means the nation is doing poorly economically. What does GDP show? Basically, gross domestic product tracks exchanges of money. To understand GDP, you need to understand which exchanges are included in the final calculations—and which ones are not. What is GDP? Dollar Value YES – cash value of all goods and services NO – costs of producing those things Final Goods/Services YES – Goods/Services offered to consumers NO – Intermediate Goods Within a Country’s Borders YES – American or foreign countries producing in the US NO – American companies producing overseas. How to Calculate the GDP – Expenditure Approach 4 Components are included in the calculations of the GDP: Consumption (C) – durable and nondurable goods Investment (I) – Business goods and services Government (G) – Government Employees, Gov’t purchases. Net Exports – (NE) – Exports minus the cost of imports GDP = C + I + G + NE GDP = C + I + G + NE CONSUMPTION Largest Aspect of GDP Durable Goods = Lasting products Nondurable goods = Food, gasoline, shoes INVESTMENT =C = I = Business Purchases Business investment into equipment Purchasing a new mine, upgrading software NOT purchasing financial products (savings) GDP = C + I + G + NE GOVERNMENT Government expenditures on final goods. Salaries of public servants, purchases of weaponry NET SPENDING = G EXPORTS = NE Exports – Total production shipped elsewhere by businesses. Imports – Total purchases from other countries. Net = Exports minus Imports. Limitations of GDP Nonmarket Activities—GDP does not measure goods and services that people make or do themselves. The Underground Economy—GDP does not account for black market activities or people paid “under the table” without being taxed Negative Externalities—unintended economic side effects, like pollution or poverty, are not subtracted from GDP Quality of Life—a high GDP does not necessarily mean people are happier. Why is this? GDP per capita GDP per capita is gross domestic product divided by midyear population. So this shows the GDP per person in the economy. Higher value means higher GDP and economic success. Using growth in GDP per head rather than crude GDP growth reveals a strikingly different picture of other countries’ economic health GDP 2014 Rank Country/Region GDP (Millions of US$) [trillions] World[9] 77,269,168 European Union[n 1][9] 18,527,116 1 United States 17,348,075 2 China 10,356,508 3 Japan 4,602,367 4 Germany 3,874,437 5 United Kingdom 2,950,039 6 France 2,833,687 7 Brazil 2,346,583 8 Italy 2,147,744 9 India 2,051,228 10 Russia[n 2] 1,860,598 11 Canada 1,785,387 12 Australia 1,442,722 13 South Korea 1,410,383 14 Spain 1,406,538 15 Mexico 1,291,062 US GDP in Context 13 GDP per capita 2014 GDP per Capita 2014 Rank Country US$ 1 Luxembourg 103,187 2 Switzerland 82,178 3 Qatar 78,829 4 Norway 76,266 5 United States 55,904 6 Singapore 53,224 7 Australia 51,642 8 Denmark 51,424 9 Iceland 51,068 10 San Marino 49,139 11 Sweden 48,966 12 Ireland 48,940 13 Netherlands 44,333 14 United Kingdom 44,118 15 Canada 43,935 https://en.wikipedia.org/ wiki/List_of_countries_by_ GDP_(nominal)_per_capit a Overall What does the GDP show about the nation’s economy? How do the GDP and the GDP per capita change the conclusions about a country’s health economically?
