1. Economics Journal: 10/09/14
SWBAT: Define GDP; explain three methods for calculating GDP; identify transactions that do and do not contribute to U.S. GDP.

2. In 2013 U.S. GDP was approximately $16800 Billion
27% of World Economic Production!

3. Gross Domestic Product
Also Known As Aggregate Output or National Income

4. Gross Domestic Product (GDP) (Y)
GDP: the total value of all final goods and services produced in the economy during a given period (usually a year)
Three ways to measure GDP
Measure value of production of final goods & services (value added)
Measure spending on final goods & services
Measure factor income
Government statisticians use all three methods
Total is the same because of circular flow

5. Method #1: Value Added Approach
includes only domestically produced final goods & services
Excludes intermediate goods & services
In essence we are only considering each producer’s value added (the value of a producer’s sales minus the value of its purchases of inputs)
Determined by surveying firms
If pizza is a final good – what are intermediate goods?
Why not count intermediate goods

6. Method #2: Expenditure Approach
Consumer Spending + Investment Spending + Government Spending + Net Exports = GDP
GDP = C + I + G + (X-M)
GDP = C + I + G + NX

7. Consumer Spending (C) Approximately 70% of GDP
Tangible goods – food, clothing, cars, etc.
Intangible services – haircuts, doctor visits, concerts, etc.

8. Investment Spending (I)
Approximately 12%
Investment: spending on capital equipment, inventories, and structures (including purchases of new housing)
Durable goods produced but not sold in the year count as investment spending
Does not include stocks, bonds, mutual funds

9. Government Purchases (G)
Approximately 21%
Local, state, & federal
Salaries of gov’t workers
Military, infrastructure, education
Does not include transfer payments
Transfers spent on goods and services – would be double counting

10. Net Exports (X-M) (NX) Value of exports minus the value of imports
Negative for the U.S. – large trade deficit
Approximately -3%

11. What’s In, What’s Out Included Not Included
Intermediate goods and services
Inputs
Used goods
Transfer payments
Financial assets
Foreign-produced goods & services
Purchases of illegal substances
Housework
Domestically produced final goods & services including
Capital goods
New construction
Changes to inventories

12. Method #3: Income Approach
Wages earned by labor
Interest earned by those who lend savings to firms and the government
Rent earned by those who lease land or structures to firms
Profit earned by shareholders (the owners of the firm’s physical capital) - dividends

13. Circular Flow Magic
All three methods (value added, expenditure, income) all come to (roughly) the same figure
Total output = total expenditure = total income

14. Stock Market Journal: 10/13/14 Source WSJ
ID market conditions Friday, October 10th: List 3 concerns re: international market conditions: Describe positive evidence supporting the claim that the Goldilocks Market will hold: Describe evidence supporting the claim that the bears are circling vulnerable S & P 500 companies: Who will be winners and losers when the Federal Reserve does raise interest rates?
Highlight and respond:

15. Quiz Time. Determine if each of the following would contribute to U. S
Quiz Time! Determine if each of the following would contribute to U.S. GDP.
Coca-Cola builds a new bottling plant in the U.S.
Delta sells one of its existing airplanes to Korean Air.
Ms. Moneybags buys an existing share of Disney stock.
A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada.
An American buys a bottle of French perfume in Tulsa.
A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.
A – yes – I increases
B – no – existing good – not new production
C – no – transfer of ownership, not new production
D – Yes – export
E – No – import
F – Yes – addition to inventories

16. What GDP Tells Us Size of the economy, aggregate output
But not a good measure of growth over time – unless we account for inflation
To measure aggregate output we need to know real GDP

17. A Simple Economy
Year
Q Apples
P Apples
Q Oranges
P Oranges
Nominal GDP
Real GDP (Year 1 Base) 1
2000
$0.25
1000
$0.50
$1000 2
2400
$0.30
1200
$0.70
$1560
$1200 3
2200
1100
$1.00
$2200
$1100
Nominal GDP: the total value of all final goods and services produced in the economy in a year, calculated with current prices
Real GDP: the total value of all final goods and services produced in the economy in a year, calculated using constant prices

18. Nominal v. Real GDP in the U.S.
Nominal GDP (trillions of current dollars)
Real GDP (trillions of 2005 dollars)
2001
$10.3
$11.3
2005
$12.7
$12.6
2009
$14.2
$13.0

19. Real GDP in the U.S. Since 1945

20. Changes in Real GDP

21. GDP Cautions
In order to make comparisons between countries we need to take population into account
GDP per capita: GDP divided by the size of the population
Only a very rough estimate of human welfare in a country
Doesn’t include important factors related to happiness – leisure, volunteerism, housework, natural beauty
GDP increases with spending on divorce, crime, natural disasters
GDP doesn’t measure how a society uses its output