1 Gross Domestic Product ©2006 South-Western College Publishing

2 What is gross domestic product? GDP is the most widely reported measure of a nation’s economic performance

3 What does GDP measure? The market value of all final goods and services produced in a nation during a period of time, usually a year

4 Does GDP measure secondhand transactions? No, Current GDP does not include the sale of a used car or the sale of a home constructed some years ago

5 What are intermediate goods? Goods and services used as inputs for production of final goods

6 Does GDP count intermediate goods? No, to avoid double counting, GDP only measures final goods and services

7 What are final goods? Finished goods and services produced for the ultimate user

8 Does GDP measure nonproductive financial transactions? No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments

9 What is a transfer payment? A government payment to individuals, not in exchange for goods or services currently produced

What Is Not Counted in GDP? GDP excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs.

11 Does GDP measure the whole economy? GDP consists of many puzzle pieces to fit together, including markets for products, resources, consumers, workers, and businesses

12 Product markets Households Factor markets Businesses Basic Circular Flow Model

13 What additional sectors does a complex circular flow model contain? Financial markets Government Foreign markets

14 What are the two approaches we use to measure GDP? Expenditure Income

15 What is the expenditure approach? The national income accounting method that measures GDP by adding all the spending for final goods and services

16 What are the four sectors of GDP? Consumption Investment Government Foreign (X - M)

17 GDP = C + I + G + (X - M)

The Components of GDP Consumption (C): u The spending by households on goods and services, with the exception of purchases of new housing. Investment (I): u The spending on capital equipment, inventories, and structures, including new housing.

The Components of GDP Government Purchases (G): u The spending on goods and services by local, state, and federal governments. u Does not include transfer payments because they are not made in exchange for currently produced goods or services. Net Exports (NX): u Exports minus imports.

20 What are shortcomings of GDP? Nonmarket transactions Distribution, kind, & quality of products Neglect of leisure time Underground economy Economic bads

21 $11,733 $4,621 $2,672 $2,128$1,986 $1,649 U.S.JapanCanadaU.K.GermanyMexicoFranceChina $663 $970

GDP and Its Components (1998)

Consumption 68 %

Investment 16% GDP and Its Components (1998) Consumption 68 %

Consumption 68 % Government Purchases 18% GDP and Its Components (1998) Investment 16%

Net Exports -2 % GDP and Its Components (1998) Consumption 68 % Investment 16% Government Purchases 18%

Other Measures of Income Gross National Product (GNP) Net National Product (NNP) National Income Personal Income Disposable Personal Income

28 What is nominal GDP? The value of all final goods based on the prices existing during the time period of production

29 What is real GDP? The value of all final goods produced during a given time period based on the prices existing in a selected base year

30 Real GDP = nominal GDP x 100 GDP price index

(Periods of falling real GDP) Real GDP in the United States ,000 4,000 5,000 6,000 7,000 Billions of 1992 Dollars ,000

GDP and Economic Well-Being GDP is the best single measure of the economic well-being of a society. GDP per person tells us the income and expenditure of the average person in the economy.

GDP and Economic Well-Being Higher GDP per person indicates a higher standard of living. GDP is not a perfect measure of the happiness or quality of life, however.

GDP and Economic Well-Being Some things that contribute to well-being are not included in GDP. u The value of leisure. u The value of a clean environment. u The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

GDP, Life Expectancy, and Literacy