Download GDP

GDP
How a nation’s wealth is measured…
GDP
• Gross Domestic Product, the total dollar value of all
final goods and services produced within a country
during one calendar year.
– Measures total cash value of sales of all
goods/services.
– Products sold in form sold to consumers
(computers; not the computer chips)
– Goods produced in US (even by foreign nations)
– Calculates sales at its original sale (no used goods)
– Measures only official/legal market transactions
(No drug sales or services that do not involve cash
transactions)
How is GDP calculated?
GDP = C + I + G + (X – M)
The Expenditure
Approach
C
• Consumer purchases of goods and services
(includes “durable” and “nondurable” goods.
I
• Investment spending by businesses on capital
goods such as machinery, factories, equipment,
tools, and construction of new buildings.
G
• Spending by government on goods and services,
such as military, schools, and highways.
(X – M)
Net Exports or spending of spending by people
abroad on the U.S.
 X – Exports (goods and services sold by the U.S.
to other countries.
 M – Imports (goods and services bought by the
U.S. from other countries)
The Income Approach
• You can also calculate GDP by adding the
income that people receive from the sale
of goods and services
• Rent / Wages / Interest / Profit
Which of the following are counted or not
counted in U.S. GDP and why?
• New U.S. manufactured Goodyear tire sold to
the General Motors Corporation
• New U.S. manufactured Goodyear tire sold to
Mr. Lefkowitz
• Cost paid by computer factory for computer chips
• A new Tundra manufactured in San Antonio by
Japanese company Toyota.
• A new F-150 manufactured in Mexico for the
American company Ford
Nominal GDP vs. Real GDP
• Nominal GDP is current GDP measured at
current market prices (overstates the value of
production)
• Real GDP is current GDP measured with a fixed
dollar (Real GDP holds the value of the dollar
constant and is useful for making year to year
comparisons)
Real GDP is the IMPORTANT ONE!!!
Real GDP Calculated
Year 1
Let’s say total prod. Includes 1,000 I-Phones sold at
$200.00
Total Output: $200,000
Year 2 (With 2% inflation)
Assuming that the same number of I-Phones are sold, but
the price has increased 2% for the I-phone.
Total Output: 1000 x $ 204.00 = $204,000
What happened?
Limitations of GDP
• Does not measure activities people make/do by
themselves
• Does not count unreported income
• Does not account for “negative externalities” (ie.,
pollution)
• Quality of Life (“Happiness”)