1. Gross Domestic Product How do you measure economic growth?

2. Gross Domestic Product (GDP) Dollar Value of all new FINAL goods & services produced domestically over one year. –Currently = $16.6 Trillion dollars Released quarterly by the Government (measured by % growth) –Recession = Negative GDP growth for 2 consecutive quarters Historically U.S. GDP grows between 1% - 5% annually –Growth above 5% is considered “too fast” causes inflation… –Growth below 2% is considered “too slow” causes rising unemployment

3. GDP growth by quarter (3months) Slow GDP growth recovery from great recession = +2.0%

4. 2 Ways to measure GDP Since every economic transaction has both a buyer & a seller => there are 2 ways to measure GDP –GDP is the sum of all spending or all income –1) Expenditure Method= add up all spending –method used most of the time in AP Economics –2) Income Method= add up all income ( wages, rent, interest & profits) Resource Supplied Income Received LaborWages LandRent Financial CapitalInterest Entrepreneurial TalentProfit

5. Spending Goods and services bought Revenue Goods and services sold Labor, land, capital & entrepreneurship Income = Flow of inputs and outputs = Flow of dollars Factors of production Wages, rent, Interest & profit FIRMS HOUSEHOLDS FACTOR Market PRODUCT MARKET GDP = Total Expenditures GDP = Total Income Total Expenditures must equal Total Income 2 methods of calculating GDP continued

6. NOT included in GDP: Non-market transactions: –If you call a plumber it counts. If you fix your sink It does not count Underground Economy illegal sale of goods (drugs), payments made “under the table”, etc… Intermediate Goods: Only FINAL goods counts (must avoid “double counting”) Example: steel used to make a car does not count count only value of the entire car (not parts) International goods: Only goods produced in USA count Second hand sales only NEW sales count Financial Transactions only a transfer of assets Gov’t Transfer Payments Gov’t transfers to person or company Example: welfare, social security, etc…

7. GDP = C + I + G + (X-M) Expenditure Equation for GDP: PRODUCT Market FACTOR Market FIRMS HOUSEHOLDS New Capital Machinery New Construction Unsold Inventories

8. Worksheet: GDP Analysis GDP = C + I + G + (NX)

9. Primary Use of GDP Objective way to “keep score” on economic performance Politicians monitor GDP figures to determine Gov’t Policy Federal Reserve also base their policy decisions on GDP

10. U.S. GDP in Comparison U.S. $16.0Trillion Entire World: $70.0 Trillion China 7.0 Trillion Japan 6.0 Trillion Germany 3.3 Trillion India 1.8 Trillion 23% of World GDP

11. Per Capita GDP GDP divided by a countries population Illustrates the $ value of economic output per person Current Statistics: –USA310,000,000 Million people –GDP$15,600,000,000,000 Trillion dollars –Per Capital GDP = $50,000

12. Global Perspective: Per Capita GDP World$8,600 Luxembourg $104,000 Denmark$56,000 U.S. $46,000 England$36,000 Japan$39,000 China $3,700 Bhutan $1,800

13. GDP Per Capita

14. What GDP does Not Measure The mix of products: –all goods treated equally: Guns versus Food How goods are distributed –Is wealth concentrated evenly? The Quality of goods –New computers with more memory

15. GDP and Quality of Life Does not measure Leisure Time –Vacation Days in Europe vs. U.S. Work 80 hours instead of 40 hrs/week, GDP increases –What about quality of life?