Gross Domestic Product The total dollar value of all final goods and services a nation’s industries produce within its borders in one year.
Quantity of goods produced in a year X price of each item = GDP
Dollar values (reported as is) – the way the government reports GDP
GDP adjusted for inflation from a base year.
Final goods and services – sold to ultimate users Intermediate goods – those used in the production of other goods. Tire example: may be either final or intermediate depending on who sells it.
Unsold inventories are counted in GDP- dealer is considered the final purchaser.
GDP includes only goods produced in the specified calendar year.
GDP measures only domestic production, things produced in the U.S. Toyota Tundra made in Texas?
1. Quantity of Goods X Price 2. Only final goods & services 3. Only goods produced during the calendar year. 4. Only includes domestic production.
Add all purchases in the four basic economic groups: › Households › Businesses › Government › foreign buyers
Households account for the greatest portion of the nation’s total purchases: $9,224.5 billion in Consumer Services – haircuts, education Consumer Durable Goods: life expectancy more than one year Consumer Non-durable Goods: wears out or used up in less than one year.
Trash bags Car stereo Suntan lotion Flip flops Prom dress Laundry detergent Home theater
Gross Private Domestic Investment (GPDI)- business investment Sum of all business spending on captial investment and unplanned inventories.
In 2006, Government spending accounted for about one-fifth of the GDP.
Consider the amount of goods a nation sells to other countries. Then subtract the amount that nation buys from other countries. That gives you the Net Exports. The U.S. has had a negative trade balance every year since the 1970s. (We buy more from other countries than we sell.)
GDP = C + I + G + NX
Purpose of GDP – tell government officials and economists how productive the economy has been at any given time. GDP is an estimate and is NOT precise.
Unrecorded Transactions – barter transactions, do-it-yourself activities, black market activities Counterproductive Items – pollution, environmental damage Inflation- GDP doesn’t recognize the true dollar value of production. Economists adjust for inflation to a base year = REAL GDP Changes in population – per capita GDP, wealth per person
Real GDP/total population = per capita real GDP
Negative balance of trade – buy more from foreign countries than you sell.
Positive balance of trade – Sell more to foreign countries than you buy.
Since 1976 the U.S. has run trade deficits. Trade deficits mean jobs leave the U.S. and go overseas where countries are producing more. Trade deficits indicate a decline in U.S. manufacturing. Trade deficits show that other countries are able to produce better or less costly products.
1. Domestic inability to produce some goods. 2. Better quality of some foreign goods. 3. Cheaper foreign materials. 4. Lower foreign wages. 5. Lower foreign capital costs. 6. Foreign subsidies – Gov’t pays producers to help with manufacturing costs.
Try to protect domestic manufacturing and jobs.
Support trade quotas which limit the quantity of goods that can be imported. Support tariffs which make imports more expensive and domestic products more competitive. Unintended Consequence: Costs rise for the American consumer causing a reduced demand for products.
Believes free markets will offer the best opportunities. Consumers are important to productivity. Say protectionism is similar to mercantilism (how?) Quotas and tariffs cause shippers and boatmen to lose jobs due to fewer imports.
If foreigners prosper from trade, they are able to purchase American products. Protectionist laws favors some businesses and industry and hurts others. (redistribution of unemployment)
Protectionism Non-competitive firms win Limits buyers choices Raises prices Free Trade Solid businesses may suffer Gives buyers more choices Lowers prices
What is it? Why is it important? What must be taken into consideration?