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.

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 IS THE MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED WITHIN A COUNTRY IN A GIVEN PERIOD OF TIME ( IN OTHER WORDS IT PUTS A DOLLAR VALUE FOR AN ECONOMIES PRODUCTION) Example-Fords made in Michigan go towards GDP Hondas made in Michigan go towards GDP-even though the company is from Japan. As long as it is in our borders it counts towards GDP

INVENTORY IS A FINAL GOOD Goods that are placed into inventory are considered to be “final” and included in GDP as a firm’s inventory investment.

GDP-FINAL AND INTERMEDIATE GOODS MEASURES THE FINAL GOOD IF A PAPER COMPANY MAKES PAPER AND SELLS IT TO HALLMARK WHICH THEN SELLS THE GREETING CARD ONLY THE FINAL PRICE OF THE GREETING CARDS IS MEASURED BY GDP INTERMIDIATE GOOD-THE PAPER FINAL GOOD-THE CARD.

GOODS AND SERVICES ARE MEASURED WITH GDP GOOD-CD OF MIKE JONES YOU BUY SERVICE- CONCERT OF MIKE JONES

WITHIN THE COUNTRY IF TOYOTA MAKES A CAR IN THE US THAT GOES TOWARDS THE US GDP IF EXXON SELLS GAS IN CHINA DOES NOT COUNT TOWARDS GDP

IN A GIVEN PERIOD OF TIME THE GOVT WILL TAKE THE GDP DATA AND AJUST IT FOR SEASONALITY FOR EXAMPLE XMAS IS A BIG BOOST TO GDP

If a Canadian citizen works temporarily in the United States, the value of his output is included in GDP for the United States. If an American owns a firm in Haiti, the value of the production of that firm is not included in U.S. GDP.

GDP GDP-GROSS DOMESTIC PRODUCT GDP MEASURES TWO THINGS AT ONCE TOTAL INCOME OF EVERYONE IN ECONOMY AND TOTAL EXPENDITURE ON THE ECONOMY’S OUTPUT OF GOODS AND SERVICES

GDP IT CAN MEASURE BOTH AT ONCE BECAUSE INCOME MUST EQUAL EXPENDITURES BECAUSE IF SOMEONE BUYS SOMETHING FOR 10 DOLLARS THEN THEY HAVE SPENT 10 DOLLARS(EXPENDITURE) AND SOMEONE HAS RECEIVED 10 DOLLARS(INCOME)

GNP – Ownership All goods/services produced legally for pay by citizens of a country. [ Citizenship mattered, not geography] Nike in Indonesia Plano, TX ChinaEurope BMW in Waco Provo,UT Honda in Ohio Honda in Ohio in Chicago GDP - Location All goods/services produced legally for pay in a country’s borders. [ Geography matters, not citizenship] The difference between GDP & GNP is about 2/10 of 1%.

PROBLEMS WITH CALCULATING GDP NONMARKET TRANSACTIONS- SERVICES OF STAY AT HOME MOMS OR A MECHANIC WHO FIXES THEIR OWN CAR NEVER GET COUNTED IN GDP

PROBLEMS WITH CALCULATING GDP DISTRIBUTION- DOESN’T SHOW THAT 90 PERCENT OF THE WEALTH IN THIS COUNTRY IS WITH LESS THEN 10 PERCENT OF THE PEOPLE

PROBLEMS WITH CALCULATING GDP KIND AND QUALITY OF PRODUCTS- A CRAPPY PRODUCT IS COUNTED JUST A MUCH AS ONE THAT LAST A LONG TIME.

1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers. B. KFC buys chickens to eventually sell to customers.

Value Added Value Added – increase in the market value at each stage $1 $4 $7 $8 $1 $1$1 $4 $4 $7 Value of Output($) $20 $12 $5 $1 Final Good Retail Shirt W holesale Shirt Cloth Cotton Value Added ($) Intermediate Good S um = $ 38 CottonFarmerTextileMill ShirtManufacturer 0 RetailStore $20 = sum 8 7 4 1 So, to avoid “multiple counting”, we count the $20 final price, not $38. $20 “ Wife-beater ” Shirt from Kohls Only Final Sales($20) Count [to prevent “multiple counting”($38) ]

[It has not been produced again in 1963 & would not count.] 2. 2nd Hand Sales – no current production. – no current production. A. 1957 Chevy bought in 2007 A. 1957 Chevy bought in 2007 The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 09. They also have not been produced again. Salesman’s commission would count. You are buying his services. Salesman Shoe salesman 57 Chevy [Gas was 30¢ gallon.] “Do Not Double Count” This falls under the rule of “Do Not Double Count”.

The salesman’s commission does count. So again, second hand sales, let’s say from Salvation Army, do not count.So again, second hand sales, let’s say from Salvation Army, do not count.

Purely Financial Transactions 3. Purely Financial Transactions – stocks, bonds, CDs. no current production There is no current production. 100 shares of Dell stock Ex: If 100 shares of Dell stock is bought I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another [swapping bits of paper] Buying stock is not buying a product but buying ownership of the firm. Buying bonds is making a loan.

4. A. Public Transfer Payment s –welfare, unemployment, social securitynocontribution to final production security. [There is no contribution to final production] “Now that I’ve gotten my welfare check, I can get an iPhone 3G” Private Transfer Payments B. Private Transfer Payments, like your $250 cash for Christmas parents giving you $250 cash for Christmas, $100 “A” in economics or - $100 for making an “A” in economics. [Just transferring funds from one private individual to another private individual]

“legal” U nreported “legal” business activity [tax avoidance[ does not count. two-thirds“underground economy.” This is two-thirds of the “underground economy.” Then he has LASIK but the doesn’t report surgeon doesn’t report $500 $500 of his $3,400 bill? And what if this doesn’t waitress doesn’t report all tips report all tips? And what if the doesn’t dentist doesn’t report $400 for teeth whitening teeth whitening? Before LASIK Surgery

Making money illegally (drug money) and making it look like it was legally laundry mat earned (like buying a laundry mat car wash cash or car wash that deal in cash ) and report it as legally earned. Illegal business activity, because it goes unreported, also does 1/3 “underground economy,” not count. Making up 1/3 of the “underground economy,” also “black market” called the [“black market”] it includes murder for hire, gambling, drugs, prostitution, and money laundering. “Give me the money in your purse, but at least it will not count in GDP.” Money Laundering

S elf E mployed $255 O ther Legal $25 R ents & Royalties $ 30 C orporate Profits $50 Interest $55 Wages and Salaries $185 Drugs $120 Bribery $35 Gambling and Loan Sharking $10 Pornography $20 Fraud $30 Other Illegal $20 Prostitution $30 Stolen Goods $35 I llegal $300 B L egal $600 B What gets reported is the “Above Ground” W hat doesn’t get reported is the “Underground”

Underground Economy [compared to “above ground”] Unreported exchanges that take place - legal and Illegal [Hidden – “off the books”] Total illegal activities - $300 billion Total legal activities - $600 billion Total legal and illegal - $900 billion Underground Economy 1. Illegal business activities (1/3) – gambling, 1. Illegal business activities (1/3) – gambling, narcotics trade, prostitution, loan sharking, etc. narcotics trade, prostitution, loan sharking, etc. 2. Unreported legal business activities (2/3) 2. Unreported legal business activities (2/3) a. waitresses not reporting all of her tips a. waitresses not reporting all of her tips b. Cabdriver not reporting all of his income b. Cabdriver not reporting all of his income c. Self employed cheat the most. Off-the-books cash transactions c. Self employed cheat the most. Off-the-books cash transactions d. $300 billion d. $300 billion *IRS estimates that about $300 billion in income taxes from the underground economy escapes federal taxes each year. the underground economy escapes federal taxes each year. $300 B

Source: Journal of Economic Literature [as a Percentage of GDP for Select Nations] Mexico S. Korea India Italy Spain China Sweden Germany France United Kingdom Japan Switzerland United States 0 5 10 15 20 25 30 Percentage of GDP

own householdvolunteer work Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework.

own householdvolunteer work Work in your own household or volunteer work in the community does not count because there was no payment. don’t marry your maid, yardman, So, don’t marry your maid, yardman, fitness instructor or fitness instructor, or you will hurt GDP.

IfU. S. corporationsproduce goods overseas If U. S. corporations produce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. GM in France Nike in Indonesia

1. 1.Second Hand Sales[no production] 2. 2.Public/Private Transfer Payments 3. 3.Purely Financial Transactions 4. 4.Intermediate Goods 5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity

- W hen Outback buys potatoes for baked potatoes -When a tattoo business buys ink for tattoos -When Tom Thumb buys spam to sell it to you -When the popsicle maker buys the sticks -Dell buys a computer monitor frame -Ice cream that Braum’s buys for sundaes -A bakery buys an apple to put in its pies -W hen F ord buys a windshield wiper for a car -When hooker, J-Lo Ho, is paid $200.00

New Toyota Tundra truck ___ ___ 1. New Toyota Tundra truck manufactured in San Antonio and sold to your economics teacherthe year it was produced sold to your economics teacher the year it was produced. ___ ___ 2. You buy a new Wii at GameStop in 2009. Does it resell it on eBay in March of 2010 count if you resell it on eBay in March of 2010? On the next slide, read each sentence and determine, “To Be or Not To Be Counted?” That is the question. If “Yes”, put “Y” and tell if it is “C”, “Ig”, “G”, or “X”. If “No”, put “N” and give the number from below on why it is not counted in GDP. GDP DOES NOT INCLUDE Second hand sales 1. Second hand sales [no current production] [but the salesman’s commission counts] transfer payments 2. Public/Private transfer payments [no current production] Purely financial transactions 3. Purely financial transactions [no current production] [broker’s fees do count] Intermediate goods 4. Intermediate goods [component of final good] U.S. corporations producing overseas 5. U.S. corporations producing overseas. Non-market transactions 6. Non-market transactions [ household or volunteer work. Underground Economy [not reported] Underground Economy [not reported] Illegal business activity 7. Illegal business activity [prostitution, murder-for-hire, illegal drugs, etc.] Unreported legal business activity 8. Unreported legal business activity [“off the books”] Example: YC 1N

“Tinky Winky” ___ ___ 1. You buy a purple “Tinky Winky” from Wal-Mart. paint your house ___ ___ 2. You and your family paint your house. [labor involved] marry your housemaid ___ ___ 3. You marry your housemaid. [“working-for-love”] [her services] buy 100 shares of Microsoft ___ ___ 4. You buy 100 shares of Microsoft Corporation. babysit your little sister ___ ___ 5. You volunteer to babysit your little sister to help your parents while they work. 1965 ford Mustang ___ ___ 6. Bob buys a 1965 ford Mustang convertible, in 2010, which is in mint condition. commission1965 Ford Mustang ___ ___ 7. The salesman gets a commission [pay] for selling that 1965 Ford Mustang in 2010. volunteer to cook ___ ___ 8. You and your friend volunteer to cook at the senior class picnic. ___ ___ 9. Dr. Payne does $1,000 worth of dental work but reports only $500 of it. $500 the dentist keeps Does the $500 the dentist keeps and doesn’t report count? $100 billssmuggled drugs ___ ___ 10. You are given s suitcase full of $100 bills from the sale of smuggled drugs. mother is teaching you to read ___ ___ 11. Your mother is teaching you to read [& not having much success]. bakes you a home-baked loaf of bread ___ ___ 12. Your dad bakes you a home-baked loaf of bread. [his labor] buy a loaf of bread ___ ___ 13. You buy a loaf of bread from Kroger’s Grocery Store. government purchases 5 B-2 Bombers ___ ___ 14. The U.S. government purchases 5 B-2 Bombers for $2 B each. ton of sheet metal used in making car doors ___ ___ 15. Ford buys a ton of sheet metal used in making car doors. “iPad” ___ ___ 16. You buy a new “iPad” from the Apple store. cleaning your teeth ___ ___ 17. You send in a $90 check to your dentist for cleaning your teeth. buys a new house ___ ___ 18. Your family buys a new house next to the mansion of Bill Gates. teachers are hired ___ ___ 19. 100 additional teachers are hired by the Frisco ISD. $500 million worth of robots ___ ___ 20. GM invest in $500 million worth of robots to assemble their cars. volunteer 10 hours a week ___ ___ 21. You volunteer 10 hours a week of your time to work for senior citizens. 25,000 F150s ___ ___ 22. Ford produces 25,000 F150s in Denver which are not sold by the end of the year. 3,000 Dell computers, Rusky Dell Dudes ___ ___ 23. R ussia buys 3,000 Dell computers, produced in NY, as they become Rusky Dell Dudes. man’s wifeworking for him 16 hours per day ___ ___ 24. A man’s wife does all his cooking and sewing, working for him 16 hours per day. producesNike Air Jordan’s in Vietnam ___ ___ 25. Nike produces $10 million worth of Nike Air Jordan’s in Vietnam. YC N6 N 6 N3 N6 N1 YC N 8N N 7 N 6 6 N 6 YC Y G N 4 Y C YC Y Ig YG YIg N6 Y Ig YX N6 N5 1.2 nd Hd sales 2.Transfers 3.Financial 4.Intermediate 5.Overseas 6.Non-market 7.Illegal 8.Unreported

It depends on whether she is the maid or housewife.

It depends on whether he is the owner or hired mechanic.

Manufacturing 22% Government 10% THE MIX OF OUTPUT IN 1900 Construction and Mining 9% Farming 37% Services 22% Services 54% Government 18% Manufacturing 20% Construction and Mining 6% THE MIX OF OUTPUT IN 2000 Farming 2%

Lets’ take a look at some “Is It Included In GDP” questions on the 2007 FRQ.

[8 pts]counted in 3. [8 pts] Indicate whether each of the following is counted in the U.S. GDP the U.S. GDP for the year 2006. E xplain each of your answers. used textbook (a) The value of used textbook sold through online auction in 2006. Answer: No, it was counted the year it was produced. Because it was not produced again, it would not be counted. That would be double counting. [2 pts: 1 pt for saying not included and 1 pt for saying not produced in 2006] Rent b. Rent paid in 2006 by residents in an apartment building built in 2000 Answer: Yes, payment is being made for productive services of the broker. So the purchase of stocks would not count but his work would. [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services] Commissions c. Commissions earned in 2006 by a stockbroker Answer: Yes, rents consist of the income received by the households and businesses that supply property resources. The properties have to be maintained or “serviced” each year. It is included in the income approach to GDP. [2 pts: 1 pt for “yes” and 1 pt for saying this is the payment for services] d. The value of autos produced in 2006 entirely in South Korea by a firm fully owned by U.S. citizens Answer: No, GDP measures production inside the U.S. regardless of ownership. These autos were produced in South Korea. ownership. These autos were produced in South Korea. [2 pts: 1 pt for “not included” and 1 pt for saying produced in Korea]

Y= STANDS FOR GDP C=CONSUMPTION(CONSUMERS BUYING STUFF) I=INVESTMENT-FACTORIES/HOUSING G=GOVERNMENT SPENDING ON STUFF NX=NET EXPORTS(EXPORTS –IMPORTS)

THE EQUATION TO MEASURE GDP Y=C+I+G+NX WHAT IS THAT CRAP?

“Y.” in equilibrium GDP expenditures must be equal to income. The “Y” stands for income because the letter “I” is used for investment

Y=C+I+G+NX OR GDP=CONSUMPTION + INVESTMENT +GOVERNMENT PURCHASES + NET EXPORTS

Y=C+I+G+NX CONSUMPTION- SPENDING BY HOUSEHOLDS ON GOODS AND SERVICES- YOU GOING TO JACK IN THE BOX OR PAYING ME TO TAKE YOU FISHING!

Definition of Consumption: spending by households on goods and services, with the exception of purchases of new housing.

Y=C+I+G+NX INVESTMENT- PURCHASE OF CAPITLAL EQUIPMENT, INVENTORIES, AND STRUCTURES, SUCH AS THE GM FACTORY. ALSO INCLUDED IS BUYING OF NEW HOUSES.

Housing is Weird The value of housing services is somewhat difficult to measure. a.If housing is rented, the value of the rent is used to measure the value of the housing services. b.For housing that is owned (or mortgaged), the government estimates the rental value and uses this figure to value the housing services.

Investment goods (such as structures and vehicles used in production) are not intermediate goods. Investment goods represent products purchased for final use by business firms.

Definition of Investment: spending on capital equipment, inventories, and structures, including household purchases of new housing.

Y=C+I+G+NX GOVERNMENT PURCHASES- INCLUDES SPENDING ON GOODS AND SERVICES BY LOCAL, STATE AND FEDERAL GOVENRMENTS. EXAMPLES AIR FORCE BUYING A PLANE FROM BOEING. MAGNOLIA HIRING ME TO TEACH. (GOODS AND SERVICES)

Definition of Government Purchases: spending on goods and services by local, state, and federal governments. 1.Salaries of government workers are counted as part of the government purchases component of GDP. 2.Transfer payments are not included as part of the government purchases component of GDP.

TRANSFER PAYMENTS Government purchases and transfer payments. Transfer payments are actually negative taxes representing payments from the government to individuals (with no good or service provided in return) rather than payments from individuals to the government.

TRANSFER PAYMENTS Examples of transfer payments commonly issued by a government are all associated with providing assistance in basic living needs for citizens of the country. Some of the transfer payments that are issued are to provide temporary help during a personal crisis, such as when individuals lose their jobs. Unemployment compensation falls under the classification of transfer payments, since the recipient is usually not expected to repay the funds issued. In like manner, any type of relief, disability, or welfare paymentsUnemploymentwelfare

Y=C+I+G+NX NET EXPORTS- DOMESTIC GOODS PURCHASE FROM FOREIGNERS(EXPO RTS) – THE DOMESTIC PURCHASES OF OF FOREIGN GOODS (IMPORTS) IN OTHER WORDS- EXPORTS-IMPORTS

NET EXPORTS EXPLAINED SUPPOSE YOUR FAMILY BUYS A HONDA for 30k(A FOREIGN CAR MADE IN JAPAN) What happens to GDP CONSUMPTION +30K NET EXPORTS -30K SO NO EFFECT ON GDP MAKE SENSE?

Definition of Net Exports: spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).

QUICK QUIZ WHAT IS THE EQUATION

QUICK QUIZ WHAT DO EACH LETTER STAND FOR? WHAT ARE THEY

Consumption 70% Government Purchases 19% Net Exports -5 % Investment 16%

Paparazzi clear $4 million a year off her pictures. 1. Paparazzi clear $4 million a year off her pictures. 2. Record companies, promoters & licensers make $30-$40 million. $30-$40 million. 3. Kevin Federline earns a cool $1 million off her name. [Nightclubs pay him just to show up] 4. Newspapers, magazines, other media rake in $75 million. 5. Tabloids sell up to 33% more with her on the cover. Britney contributes $110-$120 million each year to the economy, and much more than that when she is on tour.

U.S. Japan China Germany France U.K Italy Russia Brazil Canada Spain India Mexico Australia South Korea 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Comparative GDPs in Trillions, 2008 14.3 4.5 4.2 1.5 1.5 2.9 3.0 3.8 1.8 1.7 1.2 1.1 1.0 953 1.6 http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

Real versus Nominal GDP Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices.

Gross Domestic Product – market value of all final legal output produced in a country in one year. Gross Domestic Product – market value of all final legal output produced in a country in one year. Year one $2.00 $2.00$2.00 N ominal (money) GDP =$ 6.00 Year Two $3.05 $3.05 N ominal (money) GDP =$6.10 [R ecession - decrease in real output] Real GDP – measures only output. [measures current output at base-year prices ($ 4), not current prices ($6.10) ]. [“Real” or “constant-dollar” GDP] Nominal GDP measures “current” output valued at current prices. The base year is the benchmark year to which other years are compared.

Importance of Real GDP in Determining a Recession Apple GDP Example A country produces 10 apples in base year x $1; Nominal [current] & Real [constant] GDP both=$10 Year 2: A country produces 10 apples x $1.25; Nominal GDP=$12.50 (no recession but worse off) [Real GDP would = $10 (10 apples x $1)] Or Year 2: A country produces 9 apples x $ 1.25; Nominal GDP=$ 11.25 but real is $9 (9 apples x $1) (recession although nominal GDP is up) Real GDP measures current output at base-year prices.

Nominal [money] GDP v. Real GDP increase in pricesoutput An increase in prices and/or output will increase nominal GDP. increase in output will increase real GDP Only an increase in output will increase real GDP. Nominal GDP could increase even if output falls. Real GDP = Nominal Y/GDP deflator x 100 nominal GDP measures output & prices So, nominal GDP measures output & prices. Real measures only output [actual production] Constant (real) GDP current (money) GDP Constant (real) GDP v. current (money) GDP

GDP Deflator The GDP deflator measures the current level of prices relative to the level of prices in the base year. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

GDP Deflator The GDP deflator is calculated as follows:

Calculating Inflation Rate GDP Deflator = Nominal GDP / Real GDP X 100 Inflation Rate = (Current Year’s GDP Deflator – Previous Year’s GDP Deflator) / Previous Year’s GDP Deflator X 100 Inflation Rate Current Year GDP Deflator – Previous Year GDP Deflator *100 Previous Years GDP Deflator

Converting Nominal GDP to Real GDP Nominal GDP is converted to real GDP as follows:

Real and Nominal GDP

Finding inflation with Deflator Current Year Deflator – Previous Year Deflator divided by previous years deflator Or Current – Previous * 100 = inflation rate Previous

Calculating Inflation Rate GDP Deflator = Nominal GDP / Real GDP X 100 Inflation Rate = (Current Year’s GDP Deflator – Previous Year’s GDP Deflator) / Previous Year’s GDP Deflator X 100 Inflation Rate Current Year GDP Deflator – Previous Year GDP Deflator *100 Previous Years GDP Deflator

Real and Nominal GDP Use the equation for Inflation rate to solve for inflation Remember it is current-previous divided by previous

Nominal GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600 Nominal GDP in Year 2 = ($12 × 200) + ($15 × 300) = $6,900 Nominal GDP in Year 3 = ($14 × 180) + ($18 × 275) = $7,470 YearPrice of FootballsQuantity of FootballsPrice of BasketballsQuantity of Basketballs Year 1$10 120$12 200 Year 21220015 300 Year 31418018275 Nominal Gdp year 1? Nominal Gdp Year 2? Nominal Gdp year 3?

Using Year 1 as the Base Year: Real GDP in Year 1 = ? Real GDP in Year 2 = ? Real GDP in Year 3 = ? YearPrice of FootballsQuantity of FootballsPrice of BasketballsQuantity of Basketballs Year 1$10 120$12 200 Year 21220015 300 Year 31418018275

Using Year 1 as the Base Year: Real GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600 Real GDP in Year 2 = ($10 × 200) + ($12 × 300) = $5,600 Real GDP in Year 3 = ($10 × 180) + ($12 × 275) = $5,100 (Note that nominal GDP rises from Year 2 to Year 3, but real GDP falls.) YearPrice of FootballsQuantity of FootballsPrice of BasketballsQuantity of Basketballs Year 1$10 120$12 200 Year 21220015 300 Year 31418018275

GDP deflator for Year 1 = ? GDP deflator for Year 2 = ? GDP deflator for Year 3 =? YearPrice of FootballsQuantity of FootballsPrice of BasketballsQuantity of Basketballs Year 1$10 120$12 200 Year 21220015 300 Year 31418018275

GDP deflator for Year 1 = ($3,600/$3,600) × 100 = 1 × 100 = 100 GDP deflator for Year 2 = ($6,900/$5,600) × 100 = 1.2321 × 100 = 123.21 GDP deflator for Year 3 = ($7,470/$5,100) × 100 = 1.4647 × 100 = 146.47 YearPrice of FootballsQuantity of FootballsPrice of BasketballsQuantity of Basketballs Year 1$10 120$12 200 Year 21220015 300 Year 31418018275

YearPrice of FootballsQuantity of FootballsPrice of BasketballsQuantity of Basketballs Year 1$10 120$12 200 Year 21220015 300 Year 31418018275 Nominal GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600 Nominal GDP in Year 2 = ($12 × 200) + ($15 × 300) = $6,900 Nominal GDP in Year 3 = ($14 × 180) + ($18 × 275) = $7,470 Using Year 1 as the Base Year: Real GDP in Year 1 = ($10 × 120) + ($12 × 200) = $3,600 Real GDP in Year 2 = ($10 × 200) + ($12 × 300) = $5,600 Real GDP in Year 3 = ($10 × 180) + ($12 × 275) = $5,100 (Note that nominal GDP rises from Year 2 to Year 3, but real GDP falls.) GDP deflator for Year 1 = ($3,600/$3,600) × 100 = 1 × 100 = 100 GDP deflator for Year 2 = ($6,900/$5,600) × 100 = 1.2321 × 100 = 123.21 GDP deflator for Year 3 = ($7,470/$5,100) × 100 = 1.4647 × 100 = 146.47 Calculate the inflation rate for years 1, 2, 3.

Calculate Nominal GDP, Real GDP and Inflation Rate for all three years.

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.

Non-market Transactions don’t count Earthquakes, divorces, etc. increase GDP Leisure isn’t factored in Improved Product Quality The Underground Economy GDP’s impact on the Environment Per Capita Output low GDP per capitamore infants with low birth weighthigher rates of infant mortalityhigher rates of maternal mortalityhigher rates of child malnutrition safe drinking waterfewer go to schoolfewer teachersfewer TVstelephonesfewer paved roadsfewer Olympic medals Countries with low GDP per capita have more infants with low birth weight, higher rates of infant mortality, higher rates of maternal mortality, higher rates of child malnutrition, and less common access to safe drinking water. Also, fewer go to school and they have fewer teachers. They have fewer TVs and telephones, fewer paved roads. They also win fewer Olympic medals. SHORTCOMINGS OF GDP

GDP 1. GDP is the monetary value of all final domestic goods/services produced (by/within) a nation in one year. N.F.F.I. is positiveU.S. profits are greater in the 2. If N.F.F.I. is positive, which means U.S. profits are greater in the ROW ROW than foreign profits in the U.S., then (GDP/GNP) is larger. Double or multiple counting 3. Double or multiple counting can be avoided by counting only (intermediate/final) goods. 4. (Final/Intermediate) goods and services refer to products purchased by the ultimate users purchased by the ultimate users. Transfer payments 5. Transfer payments [when you take tax money from those who are working & give it to those who are not working] (do/do not) count in GDP because they (do/do not) reflect current production. 6. (The purchase of 100 shares of DELL stock/ not consideredreal investment The purchase of a drill press) is not considered real investment. depreciation exceeds gross private domestic investment 7. If depreciation exceeds gross private domestic investment, it can be concluded that In is (positive/negative) & we have declining productive capacity declining productive capacity. Depreciation 8. Depreciation can be determined by (adding/subtracting) In from Ig. largest component of GDP (spending) 9. The largest component of GDP (spending) is (C/Ig/G/Xn) and the smallest is (C/Ig/G/Xn). NDP 10. NDP is (GDP-indirect business taxes/GDP-Depreciation). NIA NS 1-10

If this is Pat then this is “The End”. If this is Pat then this is “The End”.

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.

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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.

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Presentation on theme: "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."— Presentation transcript:

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