Macro Chapter 6

Presentation 1

Gross Domestic Product (GDP)

• The total market value of all final goods and services produced in a given year

• Includes domestically supplied and foreign supplied resources employed within the country

• Ex- Market value of Fords produced in Michigan or the Hondas produced by a Japanese-owned factory in OH

GDP as a Monetary Measure

• Compares the value of goods/services produced in a given country in diff. years

• Ex- Year 1: 3 sofas @ $500 + 2 computers @ $2000 = $5500

• Year 2: 3 sofas @ $500 + 3 computers @ $2000 = $7500

US GDP

• Current GDP is approximately $14.4 trillion

• China = $5.8 trillion• Japan = $5.5 trillion• Germany = $3.3 trillion• France = $2.6 trillion• UK= $2.3 trillion

Intermediate Goods

• Goods and services that are purchased for resale or for further processing or manufacturing

• ***They become part of the final good***

• Ex- Sugar, steel, car engines

Final Goods

• Goods and services that are purchased for final use by the consumer, not for resale or for further processing or manufacturing

• Ex- cars, televisions

Final Goods/Services Counted in GDP… Intermediate Goods are not?

• The value of intermediate goods are already counted into the value of the final product

• To count the intermediate goods would lead to Multiple Counting, which would distort the GDP calculation

Avoid Multiple Counting

• Avoid multiple counting by measuring and adding only the value added - market value of a firm's output excluding the value of the inputs the firm has bought from others.

• Adding the value added at each production stage will equal the final price of that good

Example of Value Added• EX- A suit is sold for $350 to a consumer• Firm A sells $120 worth of wool to Firm B, a wool processor

(VA = 120-0= $120)• Firm B processes the wool and sells it to Firm C, a suit

manufacturer for $180 (VA = 180-120= $60)• Firm C sells the suit to Firm D, a wholesaler for $220 (VA=

$220-180=$40)• Firm D sells the suit to a retailer, Firm E for $270 (VA=270-

220=$50)• Firm E sells the suit to consumer for $350 (VA=350-

270=$80)• ***Add all of the VA and you get $350, which equals the

final sale, and should be added to GDP***

Value Added Example 2

– Ex: If a chocolate chip cookie manufacturer paid a chocolate manufacturer $50 for chocolate, and the total price for a shipment of chocolate chip cookies is $100, the value added ($100 - $50) is $50.

• As an example: The finished chocolate chip cookie is the good counted in GDP. The chocolate chips used to make the cookies, which are intermediate goods, have already been valued into the final product.

GDP Excludes Nonproduction Transactions

Financial transactions: Public Transfer Payments: Social security payments, welfare payments, and veterans' payments. Recipients contribute nothing to current production. Private Transfer Payments: Money that parents give children, cash gifts etc. They produce no output, but simply transfer funds from one private individual to another.

GDP Excludes Financial Transactions Contd.

• Stock Market Transactions: The buying and selling of stocks/bonds does not add to current production

– BUT, payments for the services of a security broker are included in GDP, as these services contribute to current output.

– Reason : Stocks and bonds are just exchange or transfer on assets from one individual to another

Secondhand Sales Excluded from GDP

• Contribute nothing to current production• The G/S was already added to GDP at

another time• Ex- You sell a 1965 Mustang to your

neighbor- already counted in 1965’s GDP

Black market sales- EXCLUDED from GDP

– Excluded because they also do not contribute to the current production. A "black market" includes any sale made by a business who does not pay taxes to the government. Examples include fake DVDs in China, gambling, drugs etc.

– also known as "underground" sales, the money involved in the transaction isn't reported to the government