Gross%20Domestic%20Product

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Gross Domestic Product

• A Starting Point

2
Gross Domestic Product

• The market value of all final goods and services
  produced within a nation in a given time period
• Measuring GDP
• The value of what is produced
• The value of what is demanded and purchased

3
The Circular-Flow Diagram

• a simple depiction of the macroeconomy
• illustrates GDP as spending, revenue, factor
  payments, and income
• Preliminaries
• Factors of production are inputs like labor,
  land, capital, and natural resources.
• Factor payments are payments to the factors of
  production (e.g., wages, rent).

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The circular-flow diagram
Households buy goods and services from firms, and
firms use their revenue from sales to pay wages
to workers, rent to landowners, and profit to
firm owners. GDP equals the total amount spent by
households in the market for goods and services.
It also equals the total wages, rent, and profit
paid by firms in the markets for the factors of
production.
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Measurement of Gross Domestic Product

• Gross domestic product (GDP)
• Market value of all final goods and services
• Produced within a country
• In a given period of time
• GDP is the market value
• Market prices - reflect the value of the goods
• of all
• All items produced in the economy
• And sold legally in markets
• Excludes most items
• Produced and sold illicitly
• Produced and consumed at home
• final
• Value of intermediate goods is already included
  in the prices of the final goods

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Measurement of Gross Domestic Product

• goods and services
• Tangible goods intangible services
• produced
• Goods and services currently produced
• within a country
• Goods and services produced domestically,
  regardless of the nationality of the producer
• in a given period of time
• A year or a quarter

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The Components of GDP

• Y C I G NX
• Identity
• Y GDP
• C consumption
• I investment
• G government purchases
• NX net exports

8
The Components of GDP

• Consumption
• Spending by households
• On goods and services
• Exception purchases of new housing
• Investment
• Spending on capital equipment, inventories, and
  structures
• Including household purchases of new housing
• Inventory accumulation

9
The Components of GDP

• Government purchases
• Government consumption expenditure and gross
  investment
• Spending on goods and services
• By local, state, and federal governments
• Does not include transfer payments

10
The Components of GDP

• Net exports Exports - Imports
• Exports
• Spending on domestically produced goods by
  foreigners
• Imports
• Spending on foreign goods by domestic residents

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U.S. GDP and Its Components, 2007
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A C T I V E L E A R N I N G 1 GDP and its
components

• In each of the following cases, determine how
  much GDP and each of its components is affected
  (if at all).
• A. Debbie spends 200 to buy her husband dinner
  at the finest restaurant in Boston.
• B. Sarah spends 1800 on a new laptop to use in
  her publishing business. The laptop was built in
  China.
• C. Jane spends 1200 on a computer to use in her
  editing business. She got last years model on
  sale for a great price from a local manufacturer.
  
• D. General Motors builds 500 million worth of
  cars, but consumers only buy 470 million worth
  of them.

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A C T I V E L E A R N I N G 1 Answers

• A. Debbie spends 200 to buy her husband dinner
  at the finest restaurant in Boston.
• Consumption and GDP rise by 200.
• B. Sarah spends 1800 on a new laptop to use in
  her publishing business. The laptop was built in
  China.
• Investment rises by 1800, net exports fall by
  1800, GDP is unchanged.

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Real Versus Nominal GDP

• Total spending rises from one year to the next
• Economy - producing a larger output of goods and
  services
• And/or goods and services are being sold at
  higher prices
• Nominal GDP
• Production of goods and services
• Valued at current prices
• Real GDP
• Production of goods and services
• Valued at constant prices

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Gross Domestic Product

• does not allow for the health of our children,
  the quality of their education, or the joy of
  their play.

It does not include the beauty of our poetry or
the strength of our marriages, the intelligence
of our public debate or the integrity of our
public officials.
It measures neither our courage, nor our wisdom,
nor our devotion to our country.
It measures everything, in short, except
that which makes life worthwhile, and it can tell
us everything about America except why we are
proud that we are Americans. - Senator Robert
Kennedy, 1968
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GDP Does Not Value

• the quality of the environment
• leisure time
• non-market activity, such as the child care a
  parent provides his or her child at home
• an equitable distribution of income

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Then Why Do We Care About GDP?

• Having a large GDP enables a country to afford
  better schools, a cleaner environment, health
  care, etc.
• Many indicators of the quality of life are
  positively correlated with GDP. For example

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GDP and Life Expectancy in 12 countries
Indonesia
Japan
China
U.S.
Mexico
Germany
Brazil
Pakistan
Life expectancy (years)
Russia
India
Bangladesh
Nigeria
Real GDP per capita
18
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GDP and Literacy in 12 countries
Russia
China
U.S.
Germany
Japan
Mexico
Brazil
Indonesia
Adult Literacy ( of population)
Nigeria
India
Pakistan
Bangladesh
Real GDP per capita
19
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GDP and Internet Usage in 12 countries
Japan
U.S.
Germany
Internet Usage ( of population)
Brazil
Indonesia
Mexico
Pakistan
Russia
China
Nigeria
India
Real GDP per capita
Bangladesh
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