1. Taking the Nation’s Economic Pulse
Chapter 7

2. Chapter 7 Objectives Define gross domestic product.
Calculate gross domestic product.
Differentiate between GDP and GNP
Differentiate between real GDP and nominal GDP.

3. GDP
Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period.
Performance measure
Announced quarterly, at annual rate

4. GDP Do include final goods and services
Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.
Do include final goods and services
Don’t include intermediate goods
Intermediate goods – goods purchased for resale or for use in producing another good or service
Final goods and services – items purchased by their ultimate end-user

5. GDP Do include services rendered and sales commissions
Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.
Do include services rendered and sales commissions
Don’t include income transfers, financial transactions, welfare, Social Security

6. GDP
Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.
Do include production by individuals of any citizenship within U.S.
Don’t include count production by U.S. citizens working outside the U.S.
Citizenship doesn’t matter
Location does!

7. GDP
Gross Domestic Product – The market value of final goods and services produced within a country during a specific time period, usually a year.
Do include value of services provided by realtor, car dealer, clothing reseller, etc
Don’t include value of the used goods

8. Dollars are the Common Denominator for GDP+ + +
Each good/service counted increases GDP by its market price
22oz of Bud Light at pro baseball game: $7
22oz of Bud Light from the gas station: $2

9. GDP Measures Output and Income
1) Add up all expenditures on goods and services produced during the year OR
2) Add up all the income payments to the resource suppliers of the things used to produce the goods and services
Dollar flow of expenditures on final goods =
Dollar flow of income (and indirect cost) from final goods

10. Two Ways of Measuring GDP
Expenditure Approach
Personal consumption expenditures +
Gross private domestic investment +
Government consumption
and gross investment +
Net exports of goods and services
= GDP

11. GDP Expenditure Approach
Personal consumption expenditures –
Household spending on consumer goods and services
71% of GDP
Private investment
Production of capital goods that provide a flow of future services
14% of GDP

12. GDP Expenditure Approach
Government consumption and gross investment
Expenditures on goods, services consumed
Purchases of capital goods
20% of GDP
Net Exports – exports minus imports
Exports – goods and services produced domestically and sold to foreigners
Imports – goods and services produced abroad but purchased by domestic consumers, businesses, and governments
-4% of GDP

13. Expenditure Approach, 2013 data
(billions)
Personal Consumption
$11,484
Durable Goods
$1,249
Non Durable Goods
$2,601
Services
$7,633
Gross Private Investment
$2,648
Fixed Investment
$2,574
Inventories
$74
Government Consumption and Gross Investment
$3,144
Federal
$1,232
State and Local
$1,912
Net Exports
-$508
Gross Domestic Product
$16,768

14. Two Ways of Measuring GDP
Resource Cost-Income Approach
Aggregate income:
Employee Compensation
Income of self-employed
Rents
Profits
Interest +
Non-income cost items:
Indirect business taxes
depreciation
Net income of foreigners +
= GDP

15. GDP Resource Cost-Income Approach
Indirect business taxes
Taxes that increase a business firm’s cost of production
Examples: sales, excise, property taxes
Depreciation
Estimated based on expected life of the asset
Capital consumption

16. Resource Cost-Income Approach, 2013 data
(billions)
Employee Compensation
$8,606
Proprietors’ Income
$1,260
Rents
$533
Corporate Profits
$2,023
Interest Income
$492
Indirect Business Taxes
$1,074
Depreciation (Capital Consumption)
$2,627
Net Income of Foreigners
-$224
Gross Domestic Product
$16,768

17. GNP Gross National Product –
Total market value of all final goods and services produced by the citizens of a country
Equal to GDP minus the net income of foreigners

18. Adjusting for Price Changes
Nominal GDP may rise because
(1) More goods/services
(2) Higher prices
Nominal values (money values)
Expressed in current (Now) dollars
Not adjusted for inflation
Real values
Expressed in constant dollars (base year)
Adjusted for inflation

19. Adjusting for Price Changes
Imagine a country that only produces kibbles and Frisbees. In 2013
10 bags of kibble, $5 each
3 Frisbees, $4 each
Nominal GDP = $62
Scenario 1: in 2014
10 bags of kibble cost $6 each,
3 Frisbees, $5 each
Nominal GDP = $75
Real GDP (base year 2013) = $62

20. Adjusting for Price Changes
Imagine a country that only produces kibbles and Frisbees. In 2013
10 bags of kibble, $5 each
3 Frisbees, $4 each
Nominal GDP = $62
Scenario 2: in 2014
11 bags of kibble cost $6 each,
5 Frisbees, $5 each
Nominal GDP = $91
Real GDP (base year 2013) = $75

21. Real GDP If real GDP increases If real GDP decreases
output is increasing
Incomes are rising
Economy is growing 
If real GDP decreases
output is decreasing
Incomes are falling
Two quarters falling real GDP  recession 

22. Adjusting for Price Changes
Inflation – increase in the general level of prices over time
Purchasing power of money is falling
If unexpected, borrowers win, savers lose
Deflation – decrease in the general level of prices over time
Purchasing power of money is rising
If unexpected, savers win, borrowers lose

23. Adjusting for Price Changes
Consumer price index (CPI) – measures the impact of price changes on the cost of the typical bundle of goods purchased by households, =100
GDP deflator – measures the change in the average price of the market basket of goods included in GDP, 2009 = 100
Both help us measure inflation!

24. Adjusting for Price Changes
Example: The CPI in 2012 was The CPI in 2013 was Calculate the inflation rate.
Answer: 1.5%

25. Adjusting for Price Changes
Example: I earned $5.15 per hour in The CPI in 1997 was The CPI in was Find the wage rate in dollars
Answer: $7.48

26. Adjusting for Price Changes
Percent change in real GDP equals the percent change in nominal GDP minus the inflation rate %∆Real GDP = %∆Nominal GDP – inflation

27. Nobody’s Perfect, Not Even GDP
GDP does not include or take into account
Nonmarket or household production
Underground or black market economy
Leisure and human costs
Quality variation, introduction of new goods
Harmful side effects, economic “bads”

28. Chapter 7 Objectives Define gross domestic product.
Calculate gross domestic product.
Differentiate between GDP and GNP
Differentiate between real GDP and nominal GDP.