Chapter 12
Gross Domestic Product and Growth
Gross Domestic Product
Goods and servicesproduced within the borders of a country
Geography-not citizenship
Who cares about GDP?
It’s unreliable!!!
Non-market activities are NOT counted—cannot be measured as they are not
sold in a “market”
Illegal Business Activities are not counted because they are illegal—even though they are sold in a “market” and
are measurable
Unreported Sales
Things that don’t last long(non-durable goods)
Durable goods—things that last at least three years
Disasters and Wars increase GDP—but are not necessarily beneficial
Intermediate goods and services are not counted in GDP
Only FINAL goods and services arecounted!
GDP also does not include:
Second hand sales—though salesman’s commission does count
Public/Private transfer paymentsPurely financial transactions—but broker’s
fees count
Expenditures ApproachGDP=C+I+G+Xn
Consumption spending (consumers)65%
Investment spending (business) 15% Government spending (government) 15% Net exports (trade) 5%
Consumption
Investment
Government Spending
Exports-Imports=net exports
Since GDP is based on prices—we must adjust for inflation of current
prices
Nominal vs. real GDP
GDP is measure of economic health of a nation
Business Cycle—visual representation of the “ups” and
“downs” of an economy
Parts of a Business Cycle
Business Cycles reflect the increases/decreases of GDP
…was originally thought to be a
natural occurrence
The idea that government should not get involved in the economy changed during the Great
Depression
John Maynard Keynes
Encouraged government spending to offset the decrease in consumption and investment spending during the Great
Depression
Government spending serves as a “counter-weight”
IT KEEPS THE ECONOMY IN BALANCE
GDP is not a measure of the quality of life
High Stress = high GDP
Low stress = low GDP
GDP per capitaGDP divided by population
Nations by GDP per capita
Liechtenstein $118,000 Qatar $111,000 Luxembourg $ 81,200 Bermuda $ 69,900 Norway $ 59,900 Kuwait $ 57,500 Jersey $ 57,000 Singapore $ 51,600 Brunei $ 47,500
#10
United States$47,500
Lowest GDP per capital
Afghanistan $800Malawi 800Cent. Afr. Rep. 700Niger 700Eritrea 700Guinea-Bissau 600Somalia 600Liberia 500
Burundi $300Congo $300Zimbabwe $200
Other GDP’s per capita
37 Japan $34,10048 Israel 28,60070 Mexico 14,30073 Russia 16,100133 China 6,000162 Iraq 3,200167 India 2,900
Low GDP does not mean a nation is lazy
It means they have few factors of production!
Factors of Production
LandLaborCapitalEntrepreneurship