Download FINAL GOOD OR SERVICE!!!

Gross Domestic Product
Chapter 12, section 1
Objectives –
Explain how gross domestic product (GDP) is calculated
Explain the difference between nominal and real GDP
List the main limitations of GDP
Describe the Income and Expenditure approaches of
GDP
Identify factors that influence GDP
What is Gross Domestic
Product?
Gross Domestic Product is the dollar value
of all goods and services produced within
a country’s borders in a given year.
Que?!
Let’s take a look at this definition part by part to understand it better.
Dollar Value is the total of the selling prices
of all goods and services produced in one
calendar year.
Everything you buy in a year shows up on GDP!!
As long as it is a…
FINAL GOOD OR SERVICE!!!
Sometimes… Intermediate Goods can also be Final Goods…
A final good or service is what is sold to
consumers.
Final Goods
An Intermediate Good
is used in the production of final goods.
Intermediate Goods
Produced within a country’s borders…
Even materials and goods & services made
by an Italian company in a U.S. factory
counts for the U.S. GDP.
So now, do we understand the phrase:
“The dollar value of all final goods and
services produced within a country’s
borders within a given year”?
If so, then we understand…
GDP
Now that we understand GDP, how is it
measured? There are two systems.
Expenditure Approach
Income Approach
The expendiTure ApproAch is…
Economists estimate the amount spent in four categories:
•
All consumer goods and services
•
All business goods and services
•
Government goods and services
•
Net exports or imports of goods and services (this can be a negative value)
Durable Goods, or goods that last for a long time (DVD players, cars)
AND
Non-Durable Goods, or goods that last a short time (food, light bulbs, shoes)
ARE BOTH COUNTED!
The income ApproAch is…
A more accurate way to measure GDP based on the
combined incomes of all individuals who earn money
within that country.
Expenditure Approach: Car sells for $100,000 dollars and it
is added directly to the GDP.
The income approach however…
Takes the individual incomes of all workers involved in
production to make up GDP
=
Salesman
Factory Worker
Corporate Manager
$30,000
$30,000
$40,000
$100,000
Nominal vs. Real GDP
Nominal GDP is GDP that is measured in current prices.
Real GDP is GDP measured in constant, unchanging, prices.
Did productivity actually increase from year one to
year two?
But what does this look like?
What is the problem then in using Nominal GDP?
What actually increased if it wasn’t the productivity?
Year 1 Nominal GDP
10 Cars at $15,000 each
Year 2 Nominal GDP
Year 2 Real GDP
Economists pick one
year to use to establish
base prices, and all
following years use
those base prices.
10 Cars at $16,000 each
+ 10 Trucks at $20,000 each
+ 10 Trucks at $21,000 each
Total = $350,000
Total = $370,000
So what would be the
Real GDP of Year Two
using Year One as the
base year?
Limitations of GDP
Nothing is perfect, even GDP has some economic activities that aren’t included
such as:
* Non-market activities
GDP does not measure goods and services that
people make or do themselves like mowing the lawn or cooking dinner. But if
you pay someone to do it, that counts as GDP.
* The underground economy
A large amount of production is never
recorded or reported to the government. Illegal goods, drugs, stolen cars
are included in this. So are babysitters!
* Negative externalities
Unintended side effects can have a monetary
value. Cleaning up an oil spill costs money and would show up on GDP
but the damage done to the environment is not.
* Quality of life
Many view rising GDP as rising quality of life, but
more goods and services does not always mean a better lifestyle.
GDP only measures output and income in an economy, nothing more!
Gross National Product (GNP) is all goods and services produced by AMERICANS
around the world. Depreciation, the loss of value in a product, is not calculated in GDP.
The Questions!?
What is the difference between intermediate
and final goods?
How does GDP differ from GNP?
How does Nominal GDP differ from Real
GDP?
What economic activities are not included in
GDP?
Why is GDP calculated by both the
expenditure and the income approach?
Need help? Further reading? Pg 300-308