Gross Domestic Product How do you measure economic growth?

Gross Domestic Product (GDP) Dollar Value of all new FINAL goods & services produced domestically over one year. 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” Growth below 2% is considered “too slow”

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

2 Ways to measure GDP Every economic transaction has both a buyer & a seller You measure GDP by either adding all spending or all income: Expenditure Method= total spending Income Method= wages, rent, interest & profits Resource Supplied Income Received Labor Wages Land Rent Capital Interest Entrepreneurial Talent Profit

NOT included in GDP: 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) 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… 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/company (welfare)

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

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

The Recovery is very weak by historical standards!

GDP growth by quarter (3months)

Day2: GDP Equation GDP = C + I + G + (NX)

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

U.S. GDP in Comparison U.S. 15.6 Trillion Entire World: 65.0 Trillion 24% of World GDP U.S. 15.6 Trillion Entire World: 65.0 Trillion China 5.8 Trillion Japan 5.6 Trillion Germany 3.3 Trillion India 1.7 Trillion

Per Capita GDP GDP divided by a countries population Illustrates the $ value of economic output per person Current Statistics: USA 310,000,000 Million people GDP $15,600,000,000,000 Trillion dollars Per Capital GDP = $50,000

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

GDP Per Capita

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

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?

Want to move to Bhutan? GDP Per Capita $1,800 Benefits Costs

Denmark Video Why? USA Trade off