GDP How a nation’s wealth is measured…

GDP Gross Domestic Product, the total dollar value of all final goods and services produced within a country during one calendar year.Gross Domestic Product, the total dollar value of all final goods and services produced within a country during one calendar year. –Measures total cash value of sales of all goods/services. –Products sold in form sold to consumers (computers; not the computer chips) –Goods produced in US (even by foreign nations) –Calculates sales at its original sale (no used goods) –Measures only official/legal market transactions (No drug sales or services that do not involve cash transactions) (No drug sales or services that do not involve cash transactions)

How is GDP calculated? GDP = C + I + G + (X – M) The Expenditure Approach

C Consumer purchases of goods and services (includes “durable” and “nondurable” goods.Consumer purchases of goods and services (includes “durable” and “nondurable” goods.

I Investment spending by businesses on capital goods such as machinery, factories, equipment, tools, and construction of new buildings.Investment spending by businesses on capital goods such as machinery, factories, equipment, tools, and construction of new buildings.

G Spending by government on goods and services, such as military, schools, and highways.Spending by government on goods and services, such as military, schools, and highways.

(X – M) Net Exports or spending of spending by people abroad on the U.S. Net Exports or spending of spending by people abroad on the U.S.  X – Exports (goods and services sold by the U.S. to other countries.  M – Imports (goods and services bought by the U.S. from other countries)

The Income Approach You can also calculate GDP by adding the income that people receive from the sale of goods and services Rent / Wages / Interest / Profit

Which of the following are counted or not counted in U.S. GDP and why? New U.S. manufactured Goodyear tire sold to the General Motors Corporation New U.S. manufactured Goodyear tire sold to Mr. Lefkowitz Cost paid by computer factory for computer chips A new Tundra manufactured in San Antonio by Japanese company Toyota. A new F-150 manufactured in Mexico for the American company Ford

Nominal GDP vs. Real GDP Nominal GDP is current GDP measured at current market prices (overstates the value of production) 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) Real GDP is the IMPORTANT ONE!!!

Real GDP Calculated Year 1 Let’s say total prod. Includes 1,000 I-Phones sold at $ Total Output: $200,000 Year 2 (With 2% inflation) Assuming that the same number of I-Phones are sold, but the price has increased 2% for the I-phone. Total Output: 1000 x $ = $204,000 What happened?

Limitations of GDP Does not measure activities people make/do by themselves Does not count unreported income Does not account for “negative externalities” (ie., pollution) Quality of Life (“Happiness”)