Gross Domestic Product

Gross Domestic Product Gross domestic product , or GDP, measures

the value of all final goods and services produced in the economy. It does not include the value of intermediate goods.

• GDP is used as a measure of the size of an economy and can also be used to compare the economic performance in other countries.– In 2004, the GDP of the U.S. was $11,734 billion

(Erbi)

Gross Domestic ProductAggregate spending, the sum of consumer spending, investment spending, government purchases, and exports minus imports, is the total spending on domestically produced final goods and services in the economy.Aggregate Spending

GDP = C + IG + G + XN

C = Consumption

IG = Gross Private Investment

G = Government Spending

XN= Net Exports

= Exports (X) – Imports (IM or M) (Erbi)

GDP: WHAT’S IN AND WHAT’S OUT

Included• Domestically produced final goods and services (including

capital goods)• New construction of structures• Changes to inventories

Not Included• Intermediate goods and services• Inputs• Used goods• Financial assets like stocks and bonds• Foreign-produced goods and services• Underground or ‘black market’ activity is not counted.

(Erbi)

Real GDP and Aggregate Output

Real GDP is the market value of all final goods and services produced inside a country’s border during a period of time.

In layman’s term it measures the total output of an economy. An increase in Real GDP indicates an increase in jobs, and an increase in goods and services available for consumption. A decrease in Real GDP indicates a recession or depression.

(Erbi)

• “To figure a country’s Real GDP, a country can add up all of the components that make up the Product Market on the right side of the Circular Flow.” (Brunelle)

Product

Market

Firms

Resource

Market

Govern-ment

Households

Product

Market

Firms

Govern-ment

Households

• “When you add up all of the components of the Product Market to get Real GDP, this called the “Flow of Expenditures.” (Brunelle)

Flow of Expenditures

• “Add up all of the Consumption by households in the Product Market.” (Brunelle)

Consumption

• “Add up all of the Investment by households in the Product Market.” (Brunelle)

+ Investment

• “Add up all of the Government expenditures in the Product Market.” (Brunelle)

+ Government

• “Add up the value of Net Exports in the Product Market.” (Brunelle)

+ Net ExportsMX

• “When these are all added together—Consumption (households) + Investment (firms) + Government + Net Exports = Real GDP” (Brunelle)

= Real GDP

Product

Market

Firms

Govern-ment

Households

Flow of Expenditures

“The 2005 figures for the United States’ Flow of Expenditures shown in billions of dollars (Consumption, Investment, Government, and Net Exports) are as follows:”

Consumption$ 8,742

+ Investment$ 2,057

+ Government$ 2,373

+ Net Exports

-$ 717

= Real GDP

$ 12,456

“The Real GDP for the United States in 2005 was….

$12,456,000,000,000 ($12,456 Trillion dollars.”

(Brunelle)

Firms

Resource

Market

Govern-ment

Households

Let’s look at the left side of the circular flow.

(Brunelle)

MX

“The left side of the circular flow (Resource Market) is the Flow of Earnings/Income in the National Accounting.”

Flow of Earnings/Income

“When you add and subtract all of the components of Real GDP on this side of the circular flow, you get the same Real GDP for 2005, $12,456,000,000,000.”

2005 United States ($ billions)

Real Gross Domestic Product 12,456

Plus Foreign Income Adjustment 32

Equals Real Gross National Product 12,456

Less Depreciation 1,605

Equals Net National Product 10,883

Less statistical discrepancy 71

Equals Net National Income 10,812

Less corporate profits 1,331

Less indirect taxes 865

Less social insurance contributions 881

Less net interest 483

Less business current transfer payments 74

Less surplus of government enterprises -15

Plus personal income receipts on assets 1,519

Plus personal current transfer receipts 1,527

Equals Personal Income 10,239

Less personal taxes 1,203

Equals Disposable Income 9,036

Flow of Earnings/Income

• Real GDP = C + I + G + (X – M)

• Foreign Income Adjustment = the income payments to households, firms, & governments outside of the United States are subtracted from income that U.S. entities earn from outside the U.S.

• Personal Income = is the flow back into Households• Deducting personal income taxes from Personal

Income gives us the Disposable Income of households. (Used for either consumption or savings.)

(Erbi)

Works Cited• Brunelle, Dick and Steven Reff. National Accounting also

known as Flow of expenditures/Flow or Earnings/Income. Reffonomics. 2006. 10 Feb. 2008. http://www.reffonomics.com/TRB/NationalAccounting/nationalaccounting3.swf

• Erbil, Can “MacroEconomics. ” Worth Publishers.. 2005.