1

Gross Domestic Product

2

WHY?• Suppose one candidate for President of the

United States proclaims that the economy’s performance is the best in a generation, and an opposing candidate argues that the economy could perform much better.

What statistics would you seek to tell how well the economy is doing?

Is measuring the performance of the economy an important part of life?

3

What isgross domestic product? The market value of all final

goods and services produced in a nation during a period of time, usually a year

4

GDP…

• Measures our nation’s (and others around the world) total economic performance (INDICATOR)

• Excludes production abroad by US business

• 1991govt. switched from GNP to GDP

5

What is gross national product (GNP)?

the market value of all final goods and services produced by a nation’s residents, no matter where they are located

6

What’s the difference?Politicians want to know what’s going on in OUR country

7

GDP counts only NEW domestic production

Secondhand transactions-the sale of USED products

*commission on the sale of USED products counts-b/c salesman performed a SERVICE in the present day

8

GDP counts only NEW domestic production

• Nonproductive financial transactions-the giving of gifts or buying/selling stocks or making transfer payments

• *transfer payments - govt. payment to individuals NOT in exchange for goods or services currently produced

9

GDP counts only final goods

• Final goods - Finished goods and services produced for the “ultimate user” (end consumer)

• To avoid double counting intermediate goods must be excluded

10

Intermediate goodsGoods and services used as inputs for the production of final goods

11

Suppose a wholesale distributor sells glass

to an automaker.

Is this transaction included in the GDP?

12

Which of the following are final goods or services?

• a haircut from a barber• a new automobile• an oil filter purchased in the new auto• crude oilExplain you answer

13

There are four components of GDP

• Consumption• Investment• Government• Foreign (X - M)

14

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

15

How much does Mario add to GDP?

Mario works part-time at Pizza Hut and earns an annual wage plus tips of $15,000. He sold 4,000 pizzas at $10 per pizza during the year. He was unemployed part of the year, so he received unemployment compensation of $3,000. During the past year, Mario bought a used car for $1,000. Determine how much has Mario contributed to GDP?

16

GDP downfallsNon-market transactions

• GDP excludes unpaid activities• difficult to collect data & assign dollar

value to services people provide themselves or others without compensation

• which non-market activities to include and to exclude?

17

GDP downfallsDistribution, Kind, & Quality of products

• GDP is blind to whether consumption is evenly divided or not.

• Country A GDP consists of military goods only; Country B GDP is made up of houses, tractors, wheat, milk, etc.

• only a small group of people consume the goods in A, but B has more even consumption

• GDP is a quantitative, rather than qualitative, measure of the output of goods & services

18

GDP downfallsNeglect of Leisure Time

• The wealthier a nation becomes, in general, the more leisure time its citizens can afford.

• GDP understates national well-being because no allowance is made for people working fewer hours than they once did.

19

GDP downfallsThe Underground Economy

• illegal gambling, prostitution, loan-sharking, illegal guns, and illegal drugs meet the requirements for GDP

• all are final products, but GDP does not include unreported criminal activities

• If the underground economy is sizeable, GDP will understate an economy’s performance

20

GDP downfallsEconomic “Bads”

• Air, noise and water pollution impose costs on society

• GDP does not account for the diminished quality of life from the “bads” of production of goods and services