Economics Journal: 10/09/14 SWBAT: Define GDP; explain three methods for calculating GDP; identify transactions that do and do not contribute to U.S. GDP.

In 2013 U.S. GDP was approximately $16800 Billion 27% of World Economic Production!

Gross Domestic Product Also Known As Aggregate Output or National Income

Gross Domestic Product (GDP) (Y) GDP: the total value of all final goods and services produced in the economy during a given period (usually a year) Three ways to measure GDP Measure value of production of final goods & services (value added) Measure spending on final goods & services Measure factor income Government statisticians use all three methods Total is the same because of circular flow

Method #1: Value Added Approach includes only domestically produced final goods & services Excludes intermediate goods & services In essence we are only considering each producer’s value added (the value of a producer’s sales minus the value of its purchases of inputs) Determined by surveying firms If pizza is a final good – what are intermediate goods? Why not count intermediate goods

Method #2: Expenditure Approach Consumer Spending + Investment Spending + Government Spending + Net Exports = GDP GDP = C + I + G + (X-M) GDP = C + I + G + NX

Consumer Spending (C) Approximately 70% of GDP Tangible goods – food, clothing, cars, etc. Intangible services – haircuts, doctor visits, concerts, etc.

Investment Spending (I) Approximately 12% Investment: spending on capital equipment, inventories, and structures (including purchases of new housing) Durable goods produced but not sold in the year count as investment spending Does not include stocks, bonds, mutual funds

Government Purchases (G) Approximately 21% Local, state, & federal Salaries of gov’t workers Military, infrastructure, education Does not include transfer payments Transfers spent on goods and services – would be double counting

Net Exports (X-M) (NX) Value of exports minus the value of imports Negative for the U.S. – large trade deficit Approximately -3%

What’s In, What’s Out Included Not Included Intermediate goods and services Inputs Used goods Transfer payments Financial assets Foreign-produced goods & services Purchases of illegal substances Housework Domestically produced final goods & services including Capital goods New construction Changes to inventories

Method #3: Income Approach Wages earned by labor Interest earned by those who lend savings to firms and the government Rent earned by those who lease land or structures to firms Profit earned by shareholders (the owners of the firm’s physical capital) - dividends

Circular Flow Magic All three methods (value added, expenditure, income) all come to (roughly) the same figure Total output = total expenditure = total income

Stock Market Journal: 10/13/14 Source WSJ ID market conditions Friday, October 10th: List 3 concerns re: international market conditions: Describe positive evidence supporting the claim that the Goldilocks Market will hold: Describe evidence supporting the claim that the bears are circling vulnerable S & P 500 companies: Who will be winners and losers when the Federal Reserve does raise interest rates? Highlight and respond:

Quiz Time. Determine if each of the following would contribute to U. S Quiz Time! Determine if each of the following would contribute to U.S. GDP. Coca-Cola builds a new bottling plant in the U.S. Delta sells one of its existing airplanes to Korean Air. Ms. Moneybags buys an existing share of Disney stock. A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada. An American buys a bottle of French perfume in Tulsa. A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories. A – yes – I increases B – no – existing good – not new production C – no – transfer of ownership, not new production D – Yes – export E – No – import F – Yes – addition to inventories

What GDP Tells Us Size of the economy, aggregate output But not a good measure of growth over time – unless we account for inflation To measure aggregate output we need to know real GDP

A Simple Economy Year Q Apples P Apples Q Oranges P Oranges Nominal GDP Real GDP (Year 1 Base) 1 2000 $0.25 1000 $0.50 $1000 2 2400 $0.30 1200 $0.70 $1560 $1200 3 2200 1100 $1.00 $2200 $1100 Nominal GDP: the total value of all final goods and services produced in the economy in a year, calculated with current prices Real GDP: the total value of all final goods and services produced in the economy in a year, calculated using constant prices

Nominal v. Real GDP in the U.S. Nominal GDP (trillions of current dollars) Real GDP (trillions of 2005 dollars) 2001 $10.3 $11.3 2005 $12.7 $12.6 2009 $14.2 $13.0

Real GDP in the U.S. Since 1945

Changes in Real GDP 2008-2012

GDP Cautions In order to make comparisons between countries we need to take population into account GDP per capita: GDP divided by the size of the population Only a very rough estimate of human welfare in a country Doesn’t include important factors related to happiness – leisure, volunteerism, housework, natural beauty GDP increases with spending on divorce, crime, natural disasters GDP doesn’t measure how a society uses its output