Gross Domestic Product GDP=C + I +G + (X-M) Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC Economics, Unit: 06 Lesson: 01

Learning Targets Define GDP Explain How Gross Domestic Product is calculated Explain the difference between nominal GDP and real GDP Explain difference between GNP & GDP Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

Gross Domestic Product Dollar value of all final goods and services produced within a nation’s borders in one year. * GDP measures Aggregate “total” Spending, Income and Output Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC 1

Economic growth is one of the major goals of U.S. Economic growth - increasing production of goods and services To do this, we must use our productive resources wisely and efficiently. Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

How to use Factors of Production Wisely Land or natural resources – don’t waste, but conserve Labor or human resources – make sure workforce has adequate training & education Capital goods/resources – save more and invest more in capital goods Entrepreneurship – new business vital, encourage entrepreneurs to start new business ©2012, TESCCC

How is GDP determined? -GDP combines spending of the 3 sectors within the national economy including households (consumer spending), business firms (investment), and the government (government spending) -GDP also calculates international trade (exports and imports) as a contributing factor ©2012, TESCCC 3

C = Consumer Spending on GDP=C + I + G + (X-M) C = Consumer Spending on - durable goods (cars, appliances…) non-durable goods (food, clothing,…) services (plumbing, college…) ©2012, TESCCC 5

I = Investment (business) spending on capital goods GDP=C + I + G + (X-M) I = Investment (business) spending on capital goods Spending in order to increase future output or productivity (new construction, new inventories, etc.) ©2012, TESCCC 6

C + I + G + (X-M) = GDP G = government spending *government transfers DO NOT count toward GDP - All levels of government spending on final goods and services and infrastructure count toward GDP. ©2012, TESCCC 7

C + I + G + (X-M) = GDP Exports – Imports X-M 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. ©2012, TESCCC 8

C + I + G + (X-M) = GDP C = consumer spending I = investment (business) spending G = government spending (X-M) = net export (exports - imports) ©2012, TESCCC 9

If below zero, it means there are more imports than exports GDP Foreign = Net Export If below zero, it means there are more imports than exports ©2012, TESCCC

Not included in GDP: - GDP counts all final, domestic production for which there is a market transaction in that year. Used and intermediate goods* are not counted in order to avoid double-counting. *Goods used in the production of another good (We wait and count the final product). ©2012, TESCCC 10

Cost of denim fabric not counted Instead, we count the value of the finished product, jeans. Left: (2012). Blue jean. (2012). [Web Photo]. Retrieved from http://www.reekielum.com/backgrounds.htm Right: Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

NEW TRUCK or final product not counted not counted New Goodyear Tires New Stereo NEW TRUCK or final product counted in GDP Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC 11

Used products - These products were counted the year they were made so we will not count them again this year or the year it was purchased. For example, if you buy a used car, just 1 year old with only 10,000 miles, it is not counted in this year. Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

Non-market activities These are activities that a person does themselves such as painting your house instead of hiring a painter. (i.e. babysitting for the neighbor) Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

Illegal market This includes all of the underground “black market economy or illegal transactions. Such as: gambling drugs stolen property Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

Financial Transactions This includes things like stocks and bonds. Nothing is produced; just paper showing a claim of some sort, not a good or service. Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

Gifts or Transfer You receive money for your birthday, or pay taxes or pay child support. Nothing is produced; simply transferring money from one group to another Microsoft. (Designer). (2010). Clip art [Web Graphic]. Retrieved from http://office.microsoft.com/en-us/images/ ©2012, TESCCC

Different Types of GDP Nominal GDP: no adjustment for inflation (“current” dollar value used). Is “current” GDP measured at current market prices. May overstate the value of production because of inflation. Real GDP: adjusted for inflation (converted to base year prices). Measured with a “fixed dollar” that is held constant & is useful for making year to year comparisons. THIS IS THE IMPORTANT ONE!!!! ©2012, TESCCC 12

GDP & GNP GNP – Gross National Product: all goods & services produced by a nation’s citizens inside and outside of borders. GDP – Gross Domestic Product: all final goods & services produced within a nation’s border during a year ©2012, TESCCC

Limitations of GDP Non-market activities The underground economy Negative externalities Quality of life http://www.learner.org/vod/vod_window.html?pid=2467 ©2012, TESCCC