Gross Domestic Product

How do you measure economic growth?

Gross Domestic Product (GDP)

• Dollar Value of all new FINAL goods & services produced domestically over one year.– Currently = $16.6 Trillion dollars

• 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”

• causes inflation…

– Growth below 2% is considered “too slow” • causes rising unemployment

GDP growth by quarter (3months)

Slow GDP growth recoveryfrom great recession = +2.0%

2 Ways to measure GDP

• Since every economic transaction has both a buyer & a seller => there are 2 ways to measure GDP– GDP is the sum of all spending or all income

– 1) Expenditure Method= add up all spending– method used most of the time in AP Economics

– 2) Income Method= add up all income (wages, rent, interest & profits)

Resource Supplied Income ReceivedLabor WagesLand RentFinancial Capital InterestEntrepreneurial Talent Profit

Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,capital & entrepreneurship

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,Interest & profit

FIRMS

HOUSEHOLDS

FACTOR Market

PRODUCT MARKET

GDP = Total Expenditures GDP = Total Income

Total Expendituresmust equal

Total Income

2 methods of calculating GDP continued

NOT included in GDP:

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…

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)

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 or company Example: welfare, social security, etc…

GDP = C + I + G + (X-M)

Expenditure Equation for GDP: PRODUCT Market

FACTOR Market

FIRMS HOUSEHOLDS

New Capital MachineryNew Construction Unsold Inventories

Worksheet: GDP Analysis

GDP = C + I + G + (NX)

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

U.S. GDP in Comparison

• U.S. $16.0 Trillion

• Entire World: $70.0 Trillion• China 7.0 Trillion• Japan 6.0 Trillion• Germany 3.3 Trillion• India 1.8 Trillion

23% of World GDP

Per Capita GDP

• GDP divided by a countries population

• Illustrates the $ value of economic output per person

• Current Statistics:– USA 310,000,000 Million people

– GDP $15,600,000,000,000 Trillion dollars

– Per Capital GDP = $50,000

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

GDP Per Capita

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

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?