4$14 trillion U.S. gross domestic product (2009)—over $14 trillion Haiti GDP (2009)—$6.5 billionEthiopia GDP (2009)—$32 billion$14 trillion
5$14 trillion Every country has a GDP. GDP—an important indicator of economic health
6Defining GDPGDP—the final market value of the total output of all goods and services produced within a country’s geographic boundaries during a year’s timeChina$4.9 trillionFinal market value:Does not include intermediate products (parts of other finished items)Always expressed in dollars
7Defining GDP Total output of all goods and services: Is comprehensive Includes exchanges made by consumers, businesses, and governmentGeographic boundaries—all output is included, regardless of ownership
8Categories of Goods & Services That Make Up GDP Personal consumption expenditures:All products purchased for consumption by individualsPurchases made by the household sectorPurchases made by U.S. citizens living abroad
9Categories of Goods & Services That Make Up GDP Personal consumption expenditures:Three types:Durable goods (last one year or more)Nondurable goods (last less than one year)Services (non-tangible products, such as education)
10Categories of Goods & Services That Make Up GDP Gross private domestic investmentInvestments in residential and nonresidential buildings and equipmentValue of changes in business inventoriesPurchases made by the business sector
11Categories of Goods & Services That Make Up GDP Government purchases of goods and servicesEverything purchased by local, state, and federal governmentsDoes not include transfer payments—payments made when no good or service has been produced, such as:Social SecurityDisaster-relief funds
12Categories of Goods & Services That Make Up GDP Net exports of goods and servicesAlso called balance of tradeThe difference between what a country imports and what it exportsTrade surplus—more exports than imports—raises GDPTrade deficit—more imports than exports—lowers GDP
13Formula for Calculating GDP Symbols:C = Personal consumption expendituresI = Gross private domestic investmentG = Government purchases of goods and servicesF = Net exports of goods and services
14Formula for Calculating GDP C + I + G (+ or -) F = GDP
15Problems With Calculating GDP Dynamic economyYou can’t stop it to measure it.GDP represents trends, not static figures.EconomyUncounted productionGoods and services that are not sold in the marketplaceNo money changes hands— value can only be estimated.
16Problems With Calculating GDP Underground economyTransactions in which money changes hands but no receipts are keptIncome is not reported to the government.Activities may be legal or illegal.
17Problems With Calculating GDP Double counting—mistakenly counting a product more than onceVast amount of information
18Problems With Calculating GDP InflationA rapid rise in prices that may occur when demand exceeds supply or when productivity declines and costs of labor go upCan distort GDP by making it seem higher than it actually is
19Explain the economic role of gross domestic product. ObjectiveExplain the economic role of gross domestic product.
20Why Countries Calculate GDP To check their economic performanceTo check the well-being of their citizensTo compare findings with other countries
21GDP Flaws Does not indicate types of products produced Does not indicate quality of products producedDoes not indicate distribution of wealth
22Importance of Economic Growth Supports a higher standard of livingMore products = more jobsMore jobs = more people able to satisfy their needs and wantsImproves government performanceMore jobs = more tax dollars
23Importance of Economic Growth Helps to resolve domestic economic problems—stronger economy helps to fight povertyHelps to develop trading partnerships with other countriesHaving products to exportBeing a market for imports
24Government & GDPGovernment is responsible for monitoring economic growth.When the economy is slow (recession), government can:Increase amount of money in circulationSpend more on goods and servicesLower the prime interest rate
25Government & GDPGovernment is responsible for monitoring economic growth.When the economy is slow (recession), government can:Decrease the discount rate for banks (interest rate at which banks borrow from the Federal Reserve)Lower taxes
26Government & GDPWhen the economy grows too fast (inflation), government can:Restrict amount of money in circulationSpend less on goods and servicesRaise the prime interest rateIncrease the discount rate for banksRaise taxes
27Businesses & GDP GDP—helps businesses with planning Guides decisions such as:Whether or not to expandWhether to increase or decrease productionWhether or not to borrow money
28Businesses & GDP GDP—helps businesses with planning Guides decisions such as:Whether to increase or decrease investmentsWhether or not to hire new employeesWhether to increase or decrease inventoriesBusinesses and suppliers are interrelated—changes in one affect the other.
29How are you contributing to your country’s gross domestic product? If you have a job, what goods or services are you producing and selling?As a consumer, what did you purchase in the past week that will be part of this year’s GDP?
30Underground transactions weaken GDP. Example: A person who makes and sells hair bows out of her homeShe sells them to family and friends and doesn’t make a lot of money.She just keeps the cash and does not report the income.
31Underground transactions weaken GDP. Example: Depending on how much she makes, this action may or may not become illegal.She believes her actions are acceptable, no matter what, since the law is really intended to catch “bigger fish” than she.
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