1. Gross Domestic Product
How do you measure economic growth?

2. Gross Domestic Product (GDP)
Dollar Value of all new FINAL goods & services produced domestically over one year.
Released quarterly by the Government (measured by % growth)
Recession = Negative GDP growth for 2 consecutive quarters
Historically, U.S. GDP grows between 1% - 5% annually
Growth above 5% is considered “too fast”
Growth below 2% is considered “too slow”

3. GDP = Total Expenditures GDP = Total Income
2 methods of calculating GDP
GDP = Total Expenditures
GDP = Total Income
PRODUCT MARKET
Total Expenditures
must equal
Total Income
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
FIRMS
HOUSEHOLDS
FACTOR Market
Factors of
production
Labor, land,
capital & entrepreneurship
Wages, rent,
Interest & profit
Income
= Flow of inputs
and outputs
= Flow of dollars

4. 2 Ways to measure GDP
Every economic transaction has both a buyer & a seller
You measure GDP by either adding all spending or all income:
Expenditure Method= total spending
Income Method= wages, rent, interest & profits
Resource Supplied Income Received
Labor Wages
Land Rent
Capital Interest
Entrepreneurial Talent Profit

5. NOT included in GDP: Intermediate Goods:
Only FINAL goods counts (must avoid “double counting”)
Example: steel used to make a car does not count
count only value of the entire car (not parts)
Non-market transactions:
If you call a plumber it counts
If you fix your sink
It does not count
Underground Economy
illegal sale of goods (drugs), payments made “under the table”, etc…
International goods:
Only goods produced in USA count
Second hand sales
only NEW sales count
Financial Transactions
only a transfer of assets
Gov’t Transfer Payments
Gov’t transfers to person/company (welfare)

6. GDP = C + I + G + (X-M) Equation for GDP: FACTOR New Capital Machinery
PRODUCT
Market
FACTOR
FIRMS
HOUSEHOLDS
GDP = C + I + G + (X-M)
New Capital Machinery
New Construction
Unsold Inventories

7. Worksheet: GDP Analysis
GDP = C + I + G + (NX)

8. The Recovery is very weak by historical standards!

9. GDP growth by quarter (3months)

10. Day2: GDP Equation
GDP = C + I + G + (NX)

11. Primary Use of GDP
Objective way to “keep score” on economic performance
Politicians monitor GDP figures to determine Gov’t Policy
Federal Reserve also base their policy decisions on GDP

12. U.S. GDP in Comparison U.S. 15.6 Trillion Entire World: 65.0 Trillion
24% of World GDP
U.S Trillion
Entire World: Trillion
China Trillion
Japan Trillion
Germany Trillion
India Trillion

13. Per Capita GDP GDP divided by a countries population
Illustrates the $ value of economic output per person
Current Statistics:
USA 310,000, Million people
GDP $15,600,000,000,000 Trillion dollars
Per Capital GDP = $50,000

14. Global Perspective: Per Capita GDP
World $8,600
Luxembourg $104,000
Denmark $56,000
U.S. $46,000
England $36,000
Japan $39,000
China $3,700
Bhutan $1,800

15. GDP Per Capita

16. What GDP does Not Measure
The mix of products:
all goods treated equally: Guns versus Food
How goods are distributed
Is wealth concentrated evenly?
The Quality of goods
New computers with more memory

17. GDP and Quality of Life Does not measure Leisure Time
Vacation Days in Europe vs. U.S.
Work 80 hours instead of 40 hrs/week, GDP increases
What about quality of life?

18. Want to move to Bhutan?
GDP Per Capita
$1,800
Benefits Costs

19. Denmark Video
Why?
USA Trade off