Gross Domestic Product (GDP)

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Transcript Gross Domestic Product (GDP)

Measuring Economic GrowthGDP
Unit 3, Lesson 3
Gross Domestic Product
Definition: The market
value of all final
goods and services
produced in a
country in a year
– Current/nominal GDP
(measured for the given year,
reflects inflation )
– Real GDP
(set on a constant base year)
Gross Domestic Product
GDP is measured by
totaling money
spent on four
– Consumption (C)
– Investment (I)
– Government Spending
– Net Exports
• Exports (X) - imports (M)
– GDP= C+I+G+ (X-M)
Consumer and Government
• Consumer: The spending by
households on goods and
– A new car, food, clothes,
college tuition, sporting
event, health insurance.
– Makes up 66% of GDP
• Government: Spending by
all levels of government on
goods and services
– Military, education, roads,
– 25-35% GDP
Spending GDP
(Consumer and Government)
• How Divided?
• Definition:
Spending by
businesses on
– machinery, factories,
equipment, tools,
computers, new
buildings, inventory
– 12-14% of total GDP
Net Exports
• Definition: Spending by
people outside the United
States on US produced
goods and services (exports,
or X) minus spending by
people in the United States
on foreign goods and service
(imports, or M)
– (X-M) = Net Exports
– (X) Jonas Brothers sell CDs
in Japan
– (M) You buy a camera made
in China
Gross Domestic Product
How to Calculate
• GDP is calculated by multiplying
the quantity of each final good
and service produced (Q) in a
year by their estimated price (P)
to get the dollar value (DV), and
then adding all dollar values of
each to get the total GDP.
• GDP = C + G +I + (X-M)
Consumer Spending Q x P = DV
Q x P = DV
Govt. Spend
Q x P = DV
Net Exports
(X- M)
Gross Domestic Product
How to Calculate
Calculation Example
# in the millions
Cons. Goods 6m cars x $20,000= $120,000m
Cons. Service 150m haircuts x $15= $2,250m
Bus. Invest. 2m buildings x $300,000= $600,000m
Govt. Spend. 1m roads x $5,000= $5,000m
Net Exports 40m apples (export) x $1= $40m(X)
50m apples (import) x $1= $50m (M)
$120,000m cars
$ 2,250m haircuts
$600,000m buildings
$ 5,000m roads
10m net loss in apple exports
Gross Domestic Product
What’s Not Included
The GDP includes only final
goods and services that have
been purchased for final use.
Not Included
Intermediate goods
• (battery comes with computer,
wood to make paper)
Resale goods
• (used car, selling your home)
Financial assets
• (stocks and bonds)
Public or Private Transfer payments
• (unemployment and social
security, $ from parents)
Non-market service
• (babysitting, painting your own
Underground economy
• (illegal transactions)
An Alternative to GDP:
GPI - Genuine
Progress Indicator
Developed in 1995
Attempts to measure factors
not measured by GDP
Adjusts for income distribution
Focuses on economic wellbeing not monetary
Adds for
– Increase in leisure and
vacation time
– volunteer and non-market
Genuine Progress Indicator (GPI)
Subtracts for
• Crime = $40 billion/yr
• Pollution and loss of natural
– Counts $1.2 billion in toxic
clean-up costs decrease
• Health care expenditures for
preventable illness
– Heart attacks
– High blood pressure
• Loss in infrastructure
– From natural disasters or war
• Foreign debt counts as
– GDP can count as positive
government spending