1. Measuring Economic Growth-GDP
Unit 3, Lesson 3

2. Gross Domestic Product (GDP)
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)

3. Gross Domestic Product (GDP)
GDP is measured by totaling money spent on four categories:
Consumption (C)
Investment (I)
Government Spending (G)
Net Exports
Exports (X) - imports (M)
GDP= C+I+G+ (X-M)

4. Consumer and Government Spending
Consumer: The spending by households on goods and services.
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, healthcare
25-35% GDP

5. Spending GDP (Consumer and Government)
How Divided?
Housing 24%
Health 14%
Food 12%
Transport 10%
a Includes all consumer and government purchases of goods (e.g., vehicles and fuel) and services (e.g., auto insurance) and exports related to transportation. b Includes all other categories, such as entertainment, personal care products and services, and payments to pension plans.
Source: U.S. Department of Transportation, Bureau of Transportation Statistics, calculated from data in U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, October 2001

6. Investment Definition: Spending by businesses on capital
machinery, factories, equipment, tools, computers, new buildings, inventory
12-14% of total GDP

7. 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

8. 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 +
Investment Q x P = DV
Govt. Spend Q x P = DV
Net Exports (X- M)

9. 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 m buildings x $300,000= $600,000m
Govt. Spend. 1m roads x $5,000= $5,000m
Net Exports m apples (export) x $1= $40m(X)
50m apples (import) x $1= $50m (M)
GDP= $120,000m cars
$ 2,250m haircuts
$600,000m buildings
$ 5,000m roads
$727,350m
m net loss in apple exports
$727,250m

10. 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 house)
Underground economy
(illegal transactions)

11. 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 well-being not monetary transactions
Adds for
Increase in leisure and vacation time
volunteer and non-market work

12. Genuine Progress Indicator (GPI)
Subtracts for
Crime = $40 billion/yr
Pollution and loss of natural resources
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 negative
GDP can count as positive government spending