1. GDP Gross Domestic Product

2. I. Gross Domestic Product (GDP) A. Remember the definition of Gross Domestic Product (GDP) 1. GDP is how many dollars worth of goods and services are made in America over time. 2. Typically over a year’s time. B. How big is U.S. GDP compared with other nations of the world?

4. II. What’s counted as GDP? A. Every time we make something in America in a year, we need to add it to GDP 1. How do we know how much to add for each item? 2. We add the dollar amount that the item sold for. 3. If we made a coffee table in America last year that sold for $400, then $400 would be added to GDP for last year. 4.If we made an identical coffee table in America this year that sold for $500, the $500 would be added to GDP this year.

5. II. What’s counted as GDP? B. However, we have to be careful not to count the same thing twice – Double counting. 1. For example, let’s pretend that you make and sell knitted clothing for a living. 2. You buy some yarn for $5, knit it into a scarf, and sell the scarf for $10. 3. If we added $5 to GDP when you bought the yarn and $10 to GDP when someone else bought your scarf, the same yarn would be counted twice,… because the yarn that you bought for $5 is also in the scarf that your customer bought for $10, giving us a false GDP of… $15.

6. II. What’s counted as GDP? 4. But the same yarn was not made twice, so we cannot count it twice. 5. Otherwise, It will look like we made more goods and services than we actually did. 6. To avoid this double counting, we only add the price of FINAL goods to GDP, not INTERMEDIATE goods. a.) Final goods – goods that are to be used by customers as they are. b.) Intermediate goods – goods that businesses make other goods out of.

7. II. What’s counted as GDP? c.) In our example, the intermediate good was the… Yarn that sold for… $5. The final good was the… Scarf which sold for… $10. So total GDP from our story should be $______ $10.

8. II. What’s counted as GDP? 7. Can the purchase of something like yarn ever be counted? Yes a.) If I don’t own a knitted clothing business and I buy yarn to use at home for whatever I want, even to knit a scarf for myself or for my family, then it is considered a final good that should be counted. b.) Only if I buy the yarn to make something out of to sell as part of my business is the yarn considered an intermediate good that should not be counted.

9. II. What’s counted as GDP? C. Another way to double count is to count used goods. 1. For example, let’s say that I bought a brand new video game system this year for $300 and then I sold it to you 6 months later for $250. 2. If we counted both purchases toward GDP, the same video game system would count twice and GDP would be $550. 3. But since we did not make 2 video game systems this year, we must only count the video game system when it was sold as new. 4. The sale of used goods are not counted toward GDP.

10. II. What’s counted as GDP? D. Goods and services that are made and sold but are not officially reported to the government are also not counted toward GDP. 1. For example, if one of my students made me a very cool looking toy Magic Wand which I bought for $5, this would not count toward GDP, because the sale was never reported to the government. 2. Another example would be if one of you baby-sat for the neighbors for $10. Since the sale of this service would not be reported, it would not count toward GDP 3. Another example would be the sale of illegal products since these are obviously not reported.

11. II. What’s counted as GDP? E. Finally, if you make something for yourself or do some work around your own home, these goods and services are not counted toward GDP. 1. Even though goods and services are being produced, they also are not reported to the government. 2. For example, if you fix your own car rather than paying a repair businesses to do it, it is a service that you provided for yourself, but it is not counted toward GDP

12. II. What’s counted as GDP? 3. Another example would be if you made wooden furniture yourself for your home. It would not count toward GDP. 4. Question, when you bought the wood to use, was that counted toward GDP? - YES - Because you are using to wood for yourself at home. 5. If you owned a business that made wooden furniture and bought wood to make your furniture out of and then sold the furniture, then would the sale of the wood count? NO

13. II. What’s counted as GDP? F.So when adding up GDP, we do not count… 1. Intermediate goods - The yarn bought to make a scarf from. 2. Used goods - the video game system re-sold 3.Goods and services that are made and sold but not reported to the government. - You babysitting for your neighbor. 4.Goods and services that you make and use yourself - You paint your own house.

14. III. Counted or Not Counted? 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 – NO – It’s an intermediate good – New U.S. manufactured Goodyear tire sold to your father? – Yes

15. Counted or Not Counted? Which of the following are counted or not counted in U.S. GDP and why? – Baby-sitting services provided by my daughter for the neighbor’s kid – No – Child-care services from a daycare center in town? – Yes

16. Counted or Not Counted? Which of the following are counted or not counted in U.S. GDP and why? – I hire a professional from a home improvement business to paint my house – Yes – I paint my own house – No

17. IV. Calculating GDP - Since we add to GDP every time someone buys a new US good or service, who buys US goods and services?

18. IV. Calculating GDP A. (C) Consumption Consumers like you and me buy US goods and services. 1. This kind of purchasing is called Consumption 2. Most of GDP comes from consumers buying goods and services.

19. IV. Calculating GDP B. (Ig) Gross Investment Businesses buy goods called capital. 1. Capital is tools, factories, and equipment used to make other goods and services. 2. Since businesses buy these things to grow their businesses, buying capital is called investment. 3. The “g” in (Ig) stands for “Gross” 4. Gross means total, so Ig means gross or total investment

20. IV. Calculating GDP C. (G) Government Spending The government also buys US-made goods and services. 1. For example, the government buys cars for the president and computers for his secretaries 2. It also buys the goods and services needed to build roads, bridges, and countless other things throughout the country.

21. IV. Calculating GDP D. (Xn) Net Exports People in other countries also buy US goods and services. 1. These are called Exports. 2. Exports count toward our GDP so we add them. 3. However, if we buy imports from other nations, that does not count toward our GDP. So we have to subtract that out. 4. The “n” in (Xn) stands for “net.” In this case, net means “total exports minus total imports.” 5. So Xn means “net exports” or “exports minus imports.”

22. IV. Calculating GDP E. So if we add up all of the spending done by all of these different groups of people on US made goods and services, we come up with the formula for GDP GDP = C + I G + G + X N 1. C = Consumption 2. I G = Gross Private Investment 3. G = Government Spending 4. X N = Net Exports