Gross Domestic Performance

GROSS DOMESTIC PRODUCT All the goods and services produced within our nations borders, within 1 year. C + I + G + (X-M) Consumer Spending + Investment (Business) Spending + Government Spending + (Exports – Imports) GDP measures aggregate spending, income, and output. GDP is the #1 indicator of how the economy is functioning. GDP per capita provides a better measure of individual well-being than GDP.

Different Ways to Calculate GDP Two ways to measure: 1) GDP as Expenditures (Expenditure Approach): Add up aggregate spending on domestically produced final goods, and services in the economy (C+I+G+(X-M)) 2) GDP as Income (Income Approach): Sum the total factor income earned by households from firms in the economy. (w+ r + i + p)

Consumer Spending Investment Spending Durable goods (cars, appliances, …) Non-durable goods (food, clothing, …) Services (plumbing, college, …) Consumer spending is the largest component of GDP Investment Spending Business spending on capital New Construction Change in unsold inventories

Government Spending Foreign Spending All levels of government spending on final goods and services and infrastructure count toward GDP. Government transfer payments do not count toward GDP. Foreign Spending Exports create a flow of money to the United States in exchange for domestic production. Imports create a flow of money away from the United States in exchange for foreign production.

Is This Counted as Part of GDP? A monthly check received by an economics student who has been granted a government scholarship. A farmer’s purchase of a new tractor. A plumbers purchase of a two-year-old used truck. The services of a mechanic in fixing the radiator on his own car. A Social Security check from the government to a retired store clerk. An increase in business inventories. The government’s purchase of a new submarine for the Navy. A barber’s income from cutting hair. Income received from the sale of Nike stock.

GDP: Is It Counted and Where? 1. You spend $7 to attend a movie 2. A family pays a contractor $100,000 for a house he built for them this year. 3. A family pays $75,000 for a house built three years ago. 4. An accountant pays a tailor $175 to sew a suit for her. 5. The government increases its defense expenditures by $1,000,000,000. 6. The government makes a $90 Social Security payment to a retired person. 7. You buy General Motors stock for $1,000 in the stock market.

GDP: Is It Counted and Where? 8. At the end of a year, a flour-milling firm finds that its inventories of grain and flour are $10,000 above the amounts of its inventories at the beginning of the year. 9. A homemaker works hard caring for her spouse and two children. 10. Ford Motor Company buys new auto-making robots. 11. You pay $300 a month to rent an apartment. 12. Apple Computer Company buys control of Nabisco. 13. R.J. Reynolds company buys control of Nabisco. 14. You buy a new Toyota that was made in Japan. 15. You pay tuition to attend college.

What is excluded in GDP? Transfer payments Intermediate products Investments Secondhand products Non-market transactions Underground economy

The Top (spending) and bottom (income) parts of the model are equal.

Aggregate Income GDP measures spending and income. Income = w+ r + i + p = factor payments w = wages (payment for labor) – largest portion r = rent (payment for natural resources) i = interest (payment from businesses for capital) p = profits (payment for entrepreneurship; corporate profits)

GDP

Nominal vs Real GDP “KEEP IT REAL” Nominal GDP: Current GDP measured at current market prices Nominal GDP may overstate the value of production because of the effects of inflation. (Price of that year x Quantity of that year) Real GDP: Real GDP is current GDP measured with a fixed dollar Real GDP holds the value of the dollar constant and is useful for making year to year comparisons (Price of Base Year x Quantity of that year) GDP is a P x Q measure. If prices rise, and Q stays the same, GDP will increase. This is misleading because the true size of the economy hasn’t increased, it has just gotten more expensive. “KEEP IT REAL”

Computing % change in GDP This year – Last Year Last Year

Nominal and Real GDP of apples Nominal GDP Year 1 $1,000 Nominal GDP Year 2: $1,200 Price Year 1: $0.50/lb Price Year 2: $0.55/lb Real GDP Year 2: $1,091 (2,182 ($1,200/$0.55) apples x $0.50/lb)

Corn Soybeans Year Tons Price/ Ton 2007 100 $100 80 $50 2008 110 $110 80 $100 Nominal GDP: 2007: (100 x $100) + (80 x $50) = $14,000 2008: (110 x $110) + (80 x $100) = $20,100 Nominal GDP rose by $6,100 or 43.6% ((20,100-14,000)/14,000) = .436 Was this due to an increase in output or higher prices??? Real GDP (Base Year 2007) 2007: $14,000 2008: (110 x $100) + (80 x $50) = $15,000 Real GDP rose by $1,000 or 7.1% ((15000-14,000)/14,000) = .071

Widgets Gizmos Thingamagigs Year Price Quantity Price Quantity Price Quantity 2006 $100 1 $10 8 $5 4 2007 $110 1 $11 10 $4 5 Calculate the nominal GDP for: 2006 2007 Compute the percentage change in nominal GDP from 2006 to 2007 Using 2006 as the base year, calculate the real GDP for 2007 Compute the percentage change in real GDP from 2006 to 2007

1. A. 100 + 80 + 20 = 200 B. 110 + 110 + 20 = 240 2. (240-200) / 200 = .2 = 20% 3. 100 + 100 + 25 = 225 4. (225-200) / 200 = .125 = 12.5%

GDP this year – GDP last year GDP last year Does not matter if you are using a older or newer year as the base year.

Per Capita Real GDP Economic growth is sometimes defined as an increase in Per Capita Real GDP: The real GDP divided by the population To measure whether there is more output per person, we need to look at the real GDP per person, “per capita”

Copyright © Cengage Learning. All rights reserved. GDP vs. GNP Gross Domestic Product (GDP) is the total value of final goods and services produced during a given period within the geographic boundaries of a country regardless of by whom. The goods and services are produced domestically. Gross National Product (GNP) is the total value of final goods and services produced during a given period by the citizens of a country no matter where they live. The goods and services are produced by the “nationals” of the country. GNP = GDP + receipts of factor income from the rest of the world – payments of factor income to the rest of the world