2. C + Ig + G + Xn[X-M] C + Ig + G + Xn[X-M] = GDP GDP – Depreciation = [what is for sale] NDP NDP – NFFIEUS –I ndirect B usiness Taxes = NI UCST NI –U ndis C orp P rofits –C orp I nc T axes -S oc S ecur +TP = PIspend, save, or pay in taxes [ PI is what you can spend, save, or pay in taxes ] PI – Personal Income Taxes = DIspend or save [ DI is what you can spend or save ] [“Replacement capital”] [GDP and its four cousins] -

3. GDP - Location All goods/services produced legally for pay in a country’s borders. [ Geography matters, not citizenship] GNP – Ownership All goods/services produced legally for pay by citizens of a country. [ Citizenship mattered, not geography] The difference between GDP & GNP is about 2/10 of 1%. Nike in Indonesia Plano, TX ChinaEurope BMW in Waco Provo,UT Honda in Ohio Honda in Ohio in Chicago

5. Personal Consumption Expenditure ( C ) EXPENDITURES APPROACH GDP = C(66%) + Ig(18%) + G(17%) + Xn D urable C onsumer G oods[12%]D urable C onsumer G oods[12%] N ondurable s[29 %][soup & soap]N ondurable s[29 %][soup & soap] Consumer Expenditures for Services[59%]Consumer Expenditures for Services[59%] Ferrari produced here

6. Personal Consumption Expenditure ( C ) 3 S ubcategories 3 S ubcategories [*spending on output not consumed] A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment – construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories investment [A net increase in inventories is investment; a net negative investment decrease in inventories is negative investment or disinvestment disinvestment (disinvestment represents sale of output produced in a previous year) Let’s say this Porsche is produced by a foreign co. in Plano, Texas. Gross Private Domestic Investment (I G )

7. G overnment P urchases (G) [state, local & federal] Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH [“G” purchases of goods/svcs produced (not transfer payments) 3 Subcategories A. Federal government [40%] B. 50 State governments C. 84,000 local governments [60%] for state and local

8. United States China Japan Germany United Kingdom France Italy Canada Mexico Spain Brazil India Korea, Rep. Netherlands Australia 0 1 2 3 4 5 6 7 8 9 10 11 12 Comparative GDPs in Trillions, 2004 World GDP is around $46 trillion /6 billion = $7,666 World Per Capita GDP is about $7,666. California, with a $ 1.5 trillion GDP would be number 5. Texas, at $800 billion would be the 10 th largest country. Texas produces 21% more than India. We have 25% of the world’s GDP, 25% of global trade, 40 % of world stock market capitalization, and nearly 50% of the world’s largest companies. We make up 4.7 % of the world’s population, but produce 25 % of GDP [output]. but produce 25 % of GDP [output].

9. – measures production in U.S. in one year. GDP measures all final goods/services produced by workers and capital located in the U.S., regardless of ownership. [Domestically located resources]

10. What Eight Things Do Not Count In GDP? 1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers. B. KFC buys chickens to eventually sell to customers.

11. Value Added Value Added – increase in the market value at each stage $1 $4 $7 $8 Value of Output($) $20 $12 $5 $1 Final Good Retail Shirt W holesale Shirt Cloth Cotton Value Added ($) Intermediate Good S um = $ 38 CottonFarmerTextileMill ShirtManufacturer 0 RetailStore $20 = sum 8 7 4 1 So, to avoid “multiple counting”, we count the $20 final price, not $38. $20 “ Wife-beater ” Shirt from Kohls Only Final Sales($20) Count [to prevent “multiple counting”($38) ]

12. [It has not been produced again so would not count.] Chevy - what is not counted [#2] 2. Second Hand Sales – no current production. A. If a 1957 Chevy is bought in 2005 A. If a 1957 Chevy is bought in 2005 The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 05. They also have not been produced again. Salesman’s commission would count. You are buying his services. Car salesman Shoe salesman

13. Purely Financial Transactions 3. Purely Financial Transactions – stocks, bonds, CDs. no current production There is no current production. 100 shares of Dell stock A. If 100 shares of Dell stock is bought what is not counted [#3] – what is not counted [#3] I’m going to buy 100 shares of Dell Stock. Exchanging one financial asset for another

14. –what is not counted [#4] – what is not counted [#4]. 4. Transfer Payment s –welfare, unemployment, social security 4. Transfer Payment s –welfare, unemployment, social security. [There is no contribution to final production] “Now that I’ve gotten my welfare check, I can get an iPod nano and listen to 1,000 songs”

15. 5.Unreported “Legal” Business Activity 5. Unreported “Legal” Business Activity “legal” Unreported “legal” business activity does not count. two-thirds“underground economy.” This is two-thirds of the “underground economy.” Then he has LASIK but the doesn’t report surgeon doesn’t report $500 $500 of his $3,400 bill? And what if this doesn’t waitress doesn’t report all tips report all tips? And what if the doesn’t dentist doesn’t report $400 for teeth whitening teeth whitening? Before LASIK Surgery

16. 6. Illegal business activity is also not counted. Illegal business activity, because it goes unreported, also does not count. Making up 1/3 of the “underground economy,” it not count. Making up 1/3 of the “underground economy,” it includes murder for hire, gambling, drugs, and prostitution. includes murder for hire, gambling, drugs, and prostitution. And, what about “Jane Ho”? “I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.”

17. Self Employment $255 O ther Legal $25 R ents & Royalties $ 30 C orporate Profits $50 Interest $55 Wages and Salaries $185 Drugs $120 Bribery $35 Gambling and Loan Sharking $10 Pornography $20 Fraud $30 Other Illegal $20 Prostitution $30 Stolen Goods $35 I llegal $300 B L egal $600 B What gets reported is the “Above Ground” W hat doesn’t get reported is the “Underground”

18. Underground Economy [compared to “above ground”] Unreported exchanges that take place - legal and Illegal [Hidden – “off the books”] Total illegal activities - $300 billion Total legal activities - $600 billion Total legal and illegal - $900 billion Underground Economy 1. Illegal business activities (1/3) – gambling, 1. Illegal business activities (1/3) – gambling, narcotics trade, prostitution, loan sharking, etc. narcotics trade, prostitution, loan sharking, etc. 2. Unreported legal business activities (2/3) 2. Unreported legal business activities (2/3) a. waitresses not reporting all of her tips a. waitresses not reporting all of her tips b. Cabdriver not reporting all of his income b. Cabdriver not reporting all of his income c. Self employed cheat the most. Off-the-books cash transactions c. Self employed cheat the most. Off-the-books cash transactions d. $300 billion d. $300 billion *IRS estimates that about $300 billion in income taxes from the underground economy escapes federal taxes each year. the underground economy escapes federal taxes each year. $300 B

19. 0 5 10 15 20 25 30 Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland GLOBAL PERSPECTIVE The Underground Economy as a Percent of GDP

20. 7. Non-market Transactions Are Not Counted own householdvolunteer work Work in your own household or volunteer work in the community does not count because there was no payment. don’t marry your maid, gardener, or So, don’t marry your maid, gardener, or fitness instructor fitness instructor, or you will hurt GDP.

21. 8. U.S. Corporations Producing Goods Overseas IfU. S. corporationsproduce goods overseas If U. S. corporations produce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. GM in France Nike in Indonesia

22. Eight Things Not Counted in GDP [no production] 1.Second Hand Sales[no production] 2.Public/Private Transfer Payments 3.Purely Financial Transactions 4.Intermediate Goods 5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity

23. Is It Counted in GDP?