Gross Domestic Product

1
Gross Domestic Product

• How do you measure economic growth?

2
Gross Domestic Product (GDP)

• Dollar Value of all new FINAL goods services
  produced domestically over one year.
• Currently 16.6 Trillion dollars
• Released quarterly by the Government (measured
  by growth)
• Recession Negative GDP growth for 2 consecutive
  quarters
• Historically U.S. GDP grows between 1 - 5
  annually
• Growth above 5 is considered too fast
• causes inflation
• Growth below 2 is considered too slow
• causes rising unemployment

3
GDP growth by quarter (3months)
Slow GDP growth recovery from great recession
2.0
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2 Ways to measure GDP

• Since every economic transaction has both a buyer
  a seller gt there are 2 ways to measure GDP
• GDP is the sum of all spending or all income
• 1) Expenditure Method add up all spending
• method used most of the time in AP Economics
• 2) Income Method add up all income (wages,
  rent, interest profits)

5
2 methods of calculating GDP continued
GDP Total Income
GDP Total Expenditures
Spending
Revenue











Income


Flow of inputs

and outputs

Flow of dollars
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NOT included in GDP
Intermediate Goods Only FINAL goods counts
(must avoid double counting) Example
steel used to make a car does not count
count only value of the entire car (not parts)

• Non-market transactions
• If you call a plumber it counts. If you fix
  your sink

It does not count

• Underground Economy
• illegal sale of goods (drugs), payments made
  under the table, etc

• Financial Transactions
• only a transfer of assets
• Govt Transfer Payments
• Govt transfers to person or company
• Example welfare, social security, etc

• International goods
• Only goods produced in USA count
• Second hand sales
• only NEW sales count

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Expenditure Equation for GDP
GDP C I G (X-M)
New Capital Machinery New Construction Unsold
Inventories
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Worksheet GDP Analysis
GDP C I G (NX)
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Primary Use of GDP

• Objective way to keep score on economic
  performance
• Politicians monitor GDP figures to determine
  Govt Policy
• Federal Reserve also base their policy decisions
  on GDP

10
U.S. GDP in Comparison

• U.S. 16.0 Trillion
• Entire World 70.0 Trillion
• China 7.0 Trillion
• Japan 6.0 Trillion
• Germany 3.3 Trillion
• India 1.8 Trillion

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Per Capita GDP

• GDP divided by a countries population
• Illustrates the value of economic output per
  person
• Current Statistics
• USA 310,000,000 Million people
• GDP 15,600,000,000,000 Trillion dollars
• Per Capital GDP 50,000

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Global Perspective Per Capita GDP

• World 8,600
• Luxembourg 104,000
• Denmark 56,000
• U.S. 46,000
• England 36,000
• Japan 39,000
• China 3,700
• Bhutan 1,800

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GDP Per Capita
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What GDP does Not Measure

• The mix of products
• all goods treated equally Guns versus Food
• How goods are distributed
• Is wealth concentrated evenly?
• The Quality of goods
• New computers with more memory

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GDP and Quality of Life

• Does not measure Leisure Time
• Vacation Days in Europe vs. U.S.
• Work 80 hours instead of 40 hrs/week, GDP
  increases
• What about quality of life?