GDP

1
Gross Domestic Product NIA
2
Gross Domestic Product market value of all
final legal output produced in a country in one
year.
Nominal (money) GDP 6.00
Year one
2.00
2.00
2.00
Nominal (money) GDP 6.10
Year Two
Recession - decrease in output
3.05
3.05
Real GDP measures only output. measures
current output at base-year prices (4), not
current prices (6.10).
3
17th Ed. National Income Accounting
GDP and its four cousins
-
C Ig G Xn X-M
GDPDepreciation what is for
sale NDP NFFIEUSStatistical discrepancy
NIUn Cor ProCor Inc Tax-Soc Sec-Taxes on pro
MTP PI is what you can spend, save,
or pay in taxes PI Personal Income Taxes
DI is what you can spend or save

Replacement capital
4
GNP Ownership All goods/services produced
legally for pay by citizens of a
country. Citizenship mattered, not geography
China
Europe
Nike in Indonesia
Plano, TX
GDP - Location All goods/services
produced legally for pay in a countrys
borders. Geography matters, not citizenship

in Chicago
Provo,UT
BMW in Waco
Honda in Ohio
The difference between GDP GNP is about 2/10 of
1.
5
N.F.F.I.
U.S.A. Profits Overseas Rest of World 220
bil.
Foreign Profits in U.S.A. 209 billion
N.F.F.I. 11 billion
If U.S. Profits in the ROW are greater 220
than foreign profits in the U.S. 209, add the
difference.
6
N.F.F.I.
U.S.A. Profits Overseas Rest of World 200 bil.
Foreign Profits in U.S.A. 209 bill.
N.F.F.I. -9 billion
If foreign profits in the U.S 209 are greater
than U.S. profits in the ROW 200, subtract
the difference.
7
Real Gross Domestic Product - Health of the
Economy
Real GDP-most imp. stat in economics.
8
EXPENDITURES APPROACH GDP C(66) Ig(18)
G(17) Xn
Personal Consumption Expenditure ( C )

• Durable Consumer Goods12
• Nondurables29soup soap
• Consumer Expenditures for Services59

Maytag produced here
Ferrari produced here
9
Households As Spenders
COMPOSITION OF CONSUMER Spending, 2005
Total of 8,746 billion
Services 5,155 billion (59)
Durable Goods 1,027 billion (12)
Nondurable Goods 2,564 billion (29)
10
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Lets say this Porsche is produced by a
foreign co. in Plano, Texas.
Gross Private Domestic Investment (Ig)
3 Subcategories spending on output not
consumed A. Business fixed investment-purchase
of tools, machinery, plants B. Residential
fixed investment construction of new
houses can rent for financial return
apartments. C. Inventory investment change in
inventories A net increase in inventories
is investment a net decrease in
inventories is negative investment or
disinvestment (disinvestment represents
sale of output produced in a previous year)
U.S. capital stock is over 30 tril.
11
EXPENDITURES APPROACH
Personal Consumption Expenditure ( C )
Gross Private Domestic Investment ( Ig )
Government Purchases (G) state, local federal
G purchases of goods/svcs produced (not
transfer payments) 3 Subcategories of
Government A. Federal government 40 B. 50
State governments C. 84,000 local governments
60 for state and local
12
EXPENDITURES APPROACH
Personal Consumption Expenditure (C)
Gross Private Domestic Investment (Ig)
Government Purchases ( G )
Net Exports( Xn)
Net Exports (Xn)Exports (X)Imports (M) M
represents production outside a country
13
GDP 2006 13,487 Trillion
Consumption 9,429,300 70
Government purchases 2,570 19
Investment 2,186 16
Export Spending 1.210
-5
Import Spending 2.238
14
Average Increases in Real GDP, 1890-2006
GDP in Europe from 500-1500 was zero. That is
the reason they call it the dark ages.
Long Term Growth
5
4.5
3.5
3.8
4
3.3
3.2
3
2.7
2.8
2.6
2
0.8
1
0
1990 To 2000
1900 To 2006
1929 To 1940
1940 To 1950
1950 To 1960
1960 To 1970
1970 To 1980
1980 To 1990
1929 To 2000
15
GLOBAL PERSPECTIVE
Comparative GDPs in Trillions, 2006
0 1 2 3 4 5 6 7 8 9 10
11 12 13 14
U.S. Japan Germany China U.K. France Italy Canada
Spain Brazil S. Korea India Mexico Russia Australi
a
13
4.5
2.8
2.7
2.2
2.2
1.7
1.1
1.1
795
790
780
770
763
708
16
GLOBAL PERSPECTIVE
Comparative GDPs in Trillions, 2006
0 1 2 3 4 5 6 7 8 9 10
11 12 13 14
U.S. Japan Germany China U.K. France Italy Canada
Spain Brazil S. Korea India Mexico Russia Australi
a
13
4.5
2.8
If California and Texas were countries, where
would they rank?
2.7
2.2
2.2
1.7
Calif. 1.7
1.1
TX 1.1
1.1
795
.790
780
770
763
708
17
We make up 4.7 of the worlds population, but
produce 20 of GDP output.
Gross World Product is 66 trillion/6.6 bil.
10.200 So, World Per Capita is about 10,200.
China, India, Indonesia, Bangladesh have over
40 of the worlds population, but produce only
7 of the worlds GDP.
California, with a 1.7 trillion GDP would be
number 7.
Texas, at 1.1 trillion would be the 8th largest
country. Texas produces 20 more than India.
We have 27 of the worlds GDP, 25 of global
trade, 40 of world stock market capitalization,
and nearly 50 of the worlds largest companies.
18
Per Capita GDP 2005Selected Countries
Country Per Capit United Kingdom
24,700 Sweden 24,700 Italy 24,300 Australia
24,000 New Zealand 19,500 Greece 17,900 Hungary
12,000 Mexico 6,770 China
2,000 Pakistan 600 Rwanda
220 Liberia 110
Country Per Capita Luxembourg 55,600 Switzerland
48,230 U.S. 44,000 Japan 37,180 Norway
30,800 France 30,090 Denmark 29,800 Canada 29,70
0 Austria 27,000 Germany 27,000 Belgium 26,100
China and India are still poorer than he
U.S. was in 1900. 46 of Africans live on less
than 1 a day it is getting worse.
19
GDP Over The Decades
13 tril.
12 tril. 10 tril. 9 tril. 8 tril. 7 tril. 6
tril. 5 tril. 4 tril. 3 tril. 2 tril. 1
tril. 0
14 tril. Per Capita 46,000
If GDP increases, per capita income increases
4,152
3,187
2,416
1,665
1,204
773
709
1929 1940 1950 1960 1970
1980 1990 2006
20
46,000 2006
The World's Have-nots
There are 6.5 billion people on our planet 5
billion are in the Third World. 2.5 billion live
on less than 2 a day. The direst poverty is in
Africa, home of the worlds 10 poorest
countries. Over ½ the people of Sub-Sahara
Africa live on less than 2 a day.
8 million people die each year because they are
too poor to stay alive.
½ of the worlds population have yet to make
their first phone call.
25,989 1996
The Poorest Nations Nation Per Capita 1.
Afghanistan 125 2. Sierra
Leone 510 3. Ethiopia 600 4.
Somalia 600 5. Congo 600 6.
Eritrea 710 7. Tanzania 710 8.
Burundi 720 9. Rwanda 900 10.
Malawi 900 11. Mozambique 1,000
Djibouti 1,300
GDP Per Capita in 1992 dollars
15,931 1967
6,538 1929
21
GDP measures legal production in U.S.
in one year.
What 8 Things Do Not Count In GDP
GDP measures all final goods/services
produced by workers and capital located in the
U.S., regardless of ownership.
Domestically located resources
22
What Eight Things Do Not Count In GDP?
1. Intermediate Goods components of the final
good. A. Ford buys batteries or tires for its
cars.
B. KFC buys chickens to eventually sell to
customers.
23
Value Added increase in the market value at
each stage
Only Final Sales(20) Count to prevent
multiple counting(38)
20 Wife-beater Shirt from Kohls
Final Good Retail Shirt
20
8
Intermediate Good
8
Wholesale Shirt
12
7
7
Value Added ()
Value of Output()
7
Cloth
5
4
4
4
4
Cotton
1
1
1
1
1
1
0
Shirt Manufacturer
Cotton Farmer
Textile Mill
Retail Store
20 sum
Sum 38
So, to avoid multiple counting, we count the
20 final price, not 38.
24
GDP - what is not counted 2
2. 2nd Hand Sales no current production.
A. 1957 Chevy bought in 2006
57 Chevy
salesman
It has not been produced again in 1963 would
not count.
The salesman is doing productive work. His
commission would count.
B. Boots produced in 1980 are bought in a Thrift
Store in 06.
They also have not been produced
again. Salesmans commission would count. You are
buying his services.
Shoe salesman
25
GDP what is not counted 3
3. Purely Financial Transactions stocks, bonds,
CDs. There is no current production. Ex
If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm.
Im not buying a Dell computer but part ownership
of Dell.
Exchanging one financial asset for another
26
GDP what is not counted 4.
4. Transfer Payments welfare, unemployment,
social security. There is no contribution to
final production
Now that Ive gotten my welfare check, I can get
an iPhone
27
5. Unreported Legal Business Activity
Unreported legal business activity does not
count. This is two-thirds of the underground
economy.
Before LASIK Surgery
And what if the dentist doesnt report 400
for teeth whitening?
Then he has LASIK but the surgeon doesnt report
500 of his 3,400 bill?
And what if this waitress doesnt report all
tips?
28
U.S. Underground Economy
Underground Economy compared to above
ground Unreported exchanges that take place -
legal and Illegal Hidden off the books
Total illegal activities - 300 billion Total
legal activities - 600 billion Total legal
and illegal - 900 billion
Underground Economy 1. Illegal business
activities (1/3) gambling, narcotics
trade, prostitution, loan sharking, etc.
2. Unreported legal business activities (2/3)
a. waitresses not reporting all of her tips
b. Cabdriver not reporting all of his income
c. Self employed cheat the most.
Off-the-books cash transactions d. 300
billion IRS estimates that about 300 billion in
income taxes from the underground economy
escapes federal taxes each year.
300 B
29
Shortcomings of GDP
Underground Economy as a Percentage of GDP -
Select Nations
Percentage of GDP
0 5 10 15
20 25 30
Greece Italy Spain Portugal Belgium Sweden Germany
France Holland United Kingdom Japan United
States Switzerland
Source Journal of Economic Literature
30
7. Non-market Transactions Are Not Counted
Work in your own household or volunteer work in
the community does not count because there was
no payment.
So, dont marry your maid, gardener, or fitness
instructor, or you will hurt GDP.
31
8. U.S. Corporations Producing Overseas
GM in France
Nike in Indonesia
If U. S. corporations produce goods
overseas, it does not count in GDP, but would
count in GNP. Remember, we are measuring
production inside the U.S. Imports represent
production outside of the U.S.
32
Eight Things Not Counted in GDP no production

• Second Hand Salesno production
• Public/Private Transfer Payments
• Purely Financial Transactions
• Intermediate Goods

5. U.S. Corporations producing overseas 6.
Non-market transactions household or
volunteer work Underground Economy 7. Illegal
business activity 8. Unreported legal business
activity
33
Do These Count in GDP?

• - When Outback buys potatoes for baked potatoes
• When a tattoo business buys
• ink for tattoos
• When Tom Thumb buys
• spam to sell it to you
• When the popsicle maker buys the sticks
• Dell buys a computer monitor frame
• Ice cream that Braums buys for sundaes
• A bakery buys an apple to put in its pies
• When Ford buys a windshield wiper for a
  car
• When hooker, J-Lo Ho, is paid 200.00

34
Is It Counted In GDP?
On the next slide, read each sentence and
determine, To Be or Not To Be Counted? That is
the question. If Yes, put Y and tell if it
is C, Ig, G, or X. If No, put N and
give the number from below on why it is not
counted in GDP.
GDP DOES NOT INCLUDE 1. Second hand sales no
current production but the salesmans
commission counts 2. Public/Private transfer
payments no current production 3. Purely
financial transactions no current production
brokers fees do count 4. Intermediate goods
component of final good 5. U.S. corporations
producing overseas. 6. Non-market transactions
household or volunteer work. Underground
Economy not reported 7. Illegal business
activity prostitution, murder-for-hire, illegal
drugs, etc. 8. Unreported legal business
activity off the books
Example
Y
C
___ ___ 1. New Toyota Tundra truck manufactured
in San Antonio and sold to your
economics teacher the year it was produced. ___
___ 2. You buy a new Wii at GameStop in 2007.
Does it count if you resell
it on eBay in March of 2008?
1
N
35
Is It Counted In GDP?
___ ___ 1. Jerry Falwell bought a purple Tinky
Winky from Wal-Mart. ___ ___ 2. You and your
family paint your house. labor involved ___ ___
3. You marry your housemaid. working-for-love
her services ___ ___ 4. You buy 100 shares of
Microsoft Corporation. ___ ___ 5. You volunteer
to babysit your little sister to help your
parents while they work. ___ ___ 6. Bob buys a
1965 ford Mustang convertible which is in mint
condition. ___ ___ 7. The salesman gets a
commission pay for selling that 1965 Ford
Mustang. ___ ___ 8. You and your friend volunteer
to cook at the senior class picnic. ___ ___ 9.
Dr. Smith does 1,000 worth of dental work but
reports only 500 of it. Does the 500 the
dentist keeps and doesnt report count? ___ ___
10. You are given s suitcase full of 100 bills
from the sale of smuggled drugs. ___ ___ 11. Your
mother is teaching you to read and not having
much success. ___ ___ 12. Your dad bakes you a
home-baked loaf of bread. his labor ___ ___ 13.
You buy a loaf of bread from Krogers Grocery
Store. ___ ___ 14. The U.S. government purchases
5 more B-2 Bombers for 2 billion each. ___ ___
15. Ford buys a ton of sheet metal used in making
car doors. ___ ___ 16. You buy a new iPod Video
from the Apple store, ___ ___ 17. You send in a
50 check to your dentist for cleaning your
teeth. ___ ___ 18. Your family buys a new house
which sits next to the mansion of Bill Gates. ___
___ 19. 100 additional teachers are hired by the
Frisco ISD. ___ ___ 20. GM invest in 500 million
worth of robots to assemble their cars. ___ ___
21. You volunteer 10 hours a week of your time to
work for senior citizens. ___ ___ 22. Ford
produces 25,000 new F150s which are not sold by
the end of the year. ___ ___ 23. Russia buys
3,000 Dell computers as they become Rusky Dell
Dudes. ___ ___ 24. A mans wife does all his
cooking and sewing, working for him 16 hours per
day. ___ ___ 25. Nike produces 10 million worth
of Nike Air Jordans in Indonesia.
Y
C
N
6
N
6
N
3
6
N
N
1
Y
Y
6
N
8
N
7
N
N
6
N
6
Y
C
G
Y
4
N
Y
C
Y
C
Ig
Y
Y
G
Y
Ig
N
6
Ig
Y
Y
X
N
6
N
5
36
17th Ed. NIA 2005 12,487
U Can See Those Thunderducks
8,746 C Consumption 66
-Depreciation 1,574
-460 Undis Cor Pro -378 Corp Inc Tax -817
Soc Sec Con -917 Taxes on pro. M
N.F.F.I. 34
Y earned/not received
10,913 Replacement capital births-dea
ths Available for sale
Y received/not earned
-Statistical Discrep. 43 to make the income
approach match the expenditure approach
1,970 Trans Pay

• Personnel
• Taxes
• -1,210

10,248 PI is what we can spend, save, or pay
in taxes. Income received by households, whethe
r earned or unearned
Gross Private Domestic Investment 2,105
10,904 Income earned by U.S.
resources plus taxes on pro- duction imports
9,038 DI is what we can SPEND or SAVE.
ROW264 U.S. 230 NFFI 34
Government Purchases 2,363
Xn(X-M) -727
NDP
PI
GDP
NI
DI
37
Depreciation, Investment Disinvestment
Positive Net Investment Ig exceeds Depreciation
Negative Net Investment Depreciation exceeds Ig
Ig 2,105 Trillion
Investment of 531 bil.
Depreciation 1933 7.6 billion in current
dollars
Disinvestment of 6 billion
Great Depression 1933
Expanding productive capacity
Declining productive capacity
Depreciation 2005 1,574 Trillion
Ig 1.6 billion
Ig(1.6) - D(7.6) (Disinv. of 6) (Disinvest.
of 6) D(7.6)(1.6) Ig(1.6)Disinv.(6)(Depr
. of 7.6)
Ig(2,105) - D(1,574) (In of 531) In(531)
D(1,574) (Ig of 2,105) Ig(2,105)-In(531)(De
pr. of 1,574)
38
A Century of GDP Changes
39
N.F.F.I.
U.S.A. Profits Overseas Rest of World 220
bil.
Foreign Profits in U.S.A. 210 billion
N.F.F.I. 10 billion
If U.S. profits in the ROW 220 are greater
than foreign profits in the U.S. 210, add
the difference.
40
N.F.F.I.E.U.S.
U.S.A. Profits Overseas Rest of World 200 bil.
Foreign Profits in U.S.A. 212 bill.
N.F.F.I.E.U.S. -12 billion
If foreign profits in the U.S. 212 are greater
than U.S. profits in the ROW 200, subtract
the difference.
41
Simon Kuznets and Sir Richard Stone

Simon Kuznets Father of NIA - gave
quantitative precision to to economic entities
Sir
Richard Stone After WWII, Stone headed a
U.N. project that developed a standard NIA
model for other countries. Today, most
countries follow these guidelines, making
international comparisons possible.
42
17th Ed National Income Accounting
GDP and its four cousins
iPod Videos are imports because they are
produced in China.
-
C Ig G XnX-M
GDPDepreciation what is for
sale NDP NFFIEUSStatistical Discrepancy NI
Undis Corp ProCorp Inc Taxes -Soc Secur-Taxes on
pro. MTP PI is what you can
spend, save, or pay in taxes PI Personal
Income Taxes DI is what you can spend
or save
Replacement capital
43
17th Edition NIA
Practice How To Do It Personal taxes
403 -Undistributed corp. profits 46
Imports 362 -Social Security contrib.
169 Transfer payments
283 Personal consumption 2,316
-Corporate Income Taxes 88 Gross private
domes invest. 503 -Taxes on prod.
imports 231 Government purchases
673 Exports 465 Depreciation Capital
consumption 307 Statistical Discrepancy
10 N.F.F.I.E. in the U.S. -12

C
Ig
G
Xn Gross
Domestic Product (GDP) -Consumption of
fixed capital Net Domestic Product (NDP)
Net For. Factor Inc. Earn. U.S.
-Statistical Discrepancy National Income
(NI) -Undistributed Corporate Profits
-Corporate income taxes
-Social Security
Contributions
-Taxes on prod. imports Transfer payments
Personal Income (PI)
-Personal Taxes Disposable Income
(DI)
Im going through an academic recession.
2,316
______ ______ ______ ______ ______ ______ ______
_ ______ ______ ______ ______ ______ ______ _____
__ _______ _______ ________ _______
503
English C Accounting
C American History D Economics
F
673
103
ROW 100
3,595
-307
3,288
-12
-10
112
3,266
-46
-88
-534
-169
NFFI -12
-231
283
3,015
-403
2,612
44
National Income Accounting
45
17th
Edition Personal taxes
370 -Undistributed corp. profits 65
Statistical Discrepancy 12
-Social Security contrib. 158
Transfer payments 330 Personal
consumption 1,820 -Corporate Income
Taxes 98 Gross private domes invest.
447 -Taxes on prod. imports 265 Government
purchases 587 Exports
377 Depreciation capital consumption 317
Imports
348 N.F.F.I.E. in the U.S. 10
NIA 1
C Ig G Xn
Gross Domestic Product (GDP)
-Consumption of fixed capital Net Domestic
Product (NDP) Net For. Factor Inc.
Earn. U.S. -Statistical
Discrepancy National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. imports
Transfer payments
Personal Income (PI) -Personal
Taxes Disposable Income (DI)
1,820 447 587 29 2,883 -317 2,566 10 -12 2,56
4 -65 -98 -158 -265 330 2,308 -370 1,938
ROW 110
100
NFFI 10
46
17th Edition
Exports
95 -Undistributed corp. profits 37
Imports 75 -Social Security contrib.
25 Transfer payments 39 Personal
consumption 310 -Corporate Income Taxes
55 Gross private domes invest. 85
-Taxes on prod. imports 15 Government
purchases 130 Personal taxes
60 N.F.F.I.E. -18 Statistical Discrepancy
15 Depreciation 25
NIA 2
C Ig G Xn
Gross Domestic Product (GDP)
-Consumption of fixed capital Net Domestic
Product (NDP) Net For. Factor Inc.
Earn. U.S. -Statistical
Discrepancy National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. imports
Transfer payments
Personal Income (PI) -Personal
Taxes Disposable Income (DI)
310 85 130 20 545 -25 520 -18 -15 487 -37 -55
-25 -15 39 394 -60 334
ROW 100
118
NFFI -18
47
17th Edition
Personal taxes 50 -Undistributed corp.
profits 23 Exports
109 -Social Security contrib.
40 Imports 89 Personal consumption
358 Transfer payments 41 Gross
private domes invest. 130 -Corporate
income taxes 38 Government purchases
165 -Taxes on prod. imports
21 Depreciation capital consumption
45 Statistical Discrepancy 8 N.F.F.I.E. in
the U.S. -23
NIA 3
C Ig G Xn
Gross Domestic Product (GDP)
-Consumption of fixed capital Net Domestic
Product (NDP) Net For. Factor Inc.
Earn. U.S. -Indirect business
taxes National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. and imports
Transfer payments
Personal Income (PI) -Personal
Taxes Disposable Income (DI)
358 130 165 20 673 -45 628 -23 -8 597 -23 -38
-40 -21 41 516 -50 466
ROW 100
123
NFFI -23
48
17th Edition
Personal taxes 60 -Undistributed
corp. profits 16 Exports
37 -Social Security contrib.
32 Imports 23 Personal consumption
312 Transfer payments 50 Gross
Investment 104 -Corporate income
taxes 42 Government purchases
110 -Taxes on prod. imports 34 N.F.F.I.E.
in the U.S. -30 Depreciation
cap. Consumption 24 Statistical Discrepancy
14
NIA 4
C Ig G Xn
Gross Domestic Product (GDP)
-Consumption of fixed capital Net Domestic
Product (NDP) Net For. Factor Inc.
Earn. U.S. -Statistical
Discrepancy National Income (NI)
-Undistributed Corporate Profits
-Corporate income taxes
-Social Security Contributions
-Taxes on prod. and imports
Transfer payments
Personal Income (PI) -Personal
Taxes Disposable Income (DI)
312 104 110 14 540 -24 516 -30 -14 472 -16 -42
-32 -34 50 398 -60 338
A streaker
ROW 100
130
NFFI -30
49
GDP

• GDP can be measured either by total spending on
  U.S. production or by total income received from
  that production.
• Expenditure approach CIgGXn
• Adds up the aggregate expenditure on all final
  goods and services produced during that year
• Income approach
• Adds up the aggregate income earned during the
  year by those who produce that output

50
Two Approaches to GDP
Expenditure Approach
Income Approach
Consumption by Households
Wages


Rents
Investment by Businesses

G D P



Interest

Government Purchases

Profits

Expenditures By Foreigners
Statistical Adjustments
51
The Circular-Flow Diagram
Resource Market
1

2

• Goods/services?
• Consumer expenditures?
• Land, labor, capital and
• entrepreneurial ability?
• Rent, wages, interest,
• and profits?

Households
Businesses


3
4
Product Market
52
THE INCOME APPROACH

• Compensation of Employees
• Rents
• Interest
• Proprietors Income
• Corporate Profits
• Corporate Income Taxes
• Dividends
• Undistributed Corporate Profits

53
Receipts Expenditures Approach____ Allocations
Income Approach____ C 8746 Compensation of
employees 7125 Ig 2105 Rents
73 G 2363 Interest 498 Xn
-727 Proprietors income
939 Corporate Profits 1352 Taxes on
production imports 917 National Income
10,904 Net Foreign Factor Inc
-34 Statistical Discrepancy
43 Consumption of fixed capital 1574 NFF
IEUS 10 GDP 12,487 GDP
12,487
Expenditure and Income Approach to GDP 2005
54

• 3. 8 pts Indicate whether each of the following
  is counted in
• the U.S. GDP for the year 2006. Explain each
  of your answers.
• (a) The value of used textbook sold through
  online auction in 2006.

FRQ 2007
Answer No, it was counted the year it was
produced. Because it was not produced again, it
would not be counted. That would be double
counting. 2 pts 1 pt for saying not included
and 1 pt for saying not produced in 2006
b. Rent paid in 2006 by residents in an apartment
building built in 2000
Answer Yes, rents consist of the income
received by the households and businesses
that supply property resources. The properties
have to be maintained or serviced each year. It
is included in the income approach to GDP. 2
pts 1 pt for yes and 1 pt for saying this is
the payment for services
c. Commissions earned in 2006 by a stockbroker
Answer Yes, payment is being made for
productive services of the broker. So the
purchase of stocks would not count but his work
would. 2 pts 1 pt for yes and 1 pt for saying
this is the payment for services
d. The value of autos produced in 2006 entirely
in South Korea by a firm fully owned by U.S.
citizens
Answer No, GDP measures production inside the
U.S. regardless of ownership.
These autos were produced in South Korea. 2
pts 1 pt for not included and 1 pt for saying
produced in Korea
55
Importance of Real GDP in Determining a Recession
Real GDP measures current output at base-year
prices.
Apple GDP Example A country
produces 10 apples in base year x 1 Nominal
and Real GDP both 10 Year 2 A country
produces 10 apples x 1.25 Nominal GDP12.50
(no recession but worse off) Real GDP would
10 (10 apples x 1) Or Year 2 A country
produces 9 apples x 1.25 Nominal GDP11.25 but
real is 9 (9 apples x 1) (recession although
nominal GDP is up)
56
Nominal money GDP v. Real GDP
An increase in prices and/or output will
increase nominal GDP. Only an increase in output
will increase real GDP. Nominal GDP could
increase even if output falls. Real GDP
Nominal Y/GDP deflator x 100 So, nominal GDP
measures output prices. Real measures only
output actual production Constant (real) GDP
v. current (money) GDP
57
Nominal GDP v. Real GDP
Base year50/501x100100
46/50x10092 deflation of 8
Price of
Market Basket(2001) nominal GDP
64 GDP Price Index Price of same Market
Basket(1998)x100 Real GDP 50x100128 GDP
Deflator in the base year (1998)
64/128 x 100 50
Nominal Current) GDP v. Real (constant) GDP
58
The GDP Balloon
6,736.9/126.1 x 100 5,342.5
takes
Nominal measured in terms of
money. Realmeasured in terms of goods/services.
59
No Recession Real GDP must decline
for 6 months
60
RecessionReal, not nominal GDP has
declined
Inflation component
Real GDP
1990-91
61
The Business Cycle in U.S. History11 Recessions
since WWII, from 6 months to 16 months
Recessions
20
Annual growth
15
10
5
3
GROWTH RATE (percent per year)
0
-5
Zero growth
Long-term average growth (3)
-10
2005
1930
1940
1950
1960
1970
1980
1990
2000
62
Positive Net Investment IggtD
Gross Investment
-
Depreciation

Net Investment
Net Investment
Gross Investment
Depreciation
Increased
increasing product. capac.
Consumption and Government Spending
Stock of Capital
Stock of Capital
December 31
January 1
Years GDP
63
Depreciation, Investment Disinvestment
Positive Net Investment Ig exceeds Depreciation
Negative Net Investment Depreciation exceeds Ig
Ig 2,105 Trillion
Investment of 531 bil.
Depreciation 1933 7.6 billion in current
dollars
Disinvestment of 6 billion
Great Depression 1933
Expanding productive capacity
Declining productive capacity
Depreciation 2005 1,574 Trillion
Ig 1.6 billion
Ig(1.6) - D(7.6) (Disinv. of 6) (Disinvest.
of 6) D(7.6)(1.6) Ig(1.6)Disinv.(6)(Depr
. of 7.6)
Ig(2,105) - D(1,574) (In of 531) In(531)
D(1,574) (Ig of 2,105) Ig(2,105)-In(531)(De
pr. of 1,574)
64
Expanding/Static/Declining Productive Capacity
Expanding Productive Capacity
Maintaining our production possibilities
Static Productive Capacity
Declining Productive Capacity
65
SHORTCOMINGS OF GDP

• Non-market Transactions dont count
• Earthquakes, divorces, etc. increase GDP
• Leisure isnt factored in
• Improved Product Quality
• The Underground Economy
• GDPs impact on the Environment
• Per Capita Output
• Countries with low GDP per capita have more
  infants with low birth weight, higher rates of
  infant mortality, higher rates of maternal
  mortality, higher rates of child malnutrition,
  and less common access to safe drinking water.
  Also, fewer go to school and they have fewer
  teachers. They have fewer TVs and telephones,
  fewer paved roads. They also win fewer Olympic
  medals.

66
NIA NS 1-10
1. GDP is the monetary value of all final
domestic goods/services produced (by/within)
a nation in one year. 2. If N.F.F.I. is positive,
which means U.S. profits are greater in the
ROW than foreign profits in the U.S., then
(GDP/GNP) is larger. 3. Double or multiple
counting can be avoided by counting only
(intermediate/final) goods. 4.
(Final/Intermediate) goods and services refer to
products purchased by the ultimate users. 5.
Transfer payments when you take tax money from
those who are working give it to those who
are not working (do/do not) count in GDP
because they (do/do not) reflect current
production. 6. (The purchase of 100 shares of
Playboy stock/ The purchase of a drill press)
is not considered real investment. 7. If
depreciation exceeds gross private domestic
investment, it can be concluded that In is
(positive/negative) we have declining
productive capacity. 8. Depreciation can be
determined by (adding/subtracting) In from Ig. 9.
The largest component of GDP (spending) is
(C/Ig/G/Xn) and the smallest is
(C/Ig/G/Xn). 10. NDP is (GDP-indirect business
taxes/GDP-Depreciation).
67
GDP NS 11 and 14-15
11. Real GDP and nominal GDP differ because real
GDP has been adjusted for changes in
(depreciation/price level).
14. Which economy has expanding productive
capacity(positive Ig)? (A/B/C). Which has
declining productive capacitynegative Ig?
(A/B/C). Which has static productive capacity?
(A/B/C).
68
If this is Pat then this is The End.