adapted from “Econ, Econ”

by

Gross Domestic ProductGross Domestic Product

What’s a Gross What’s a Gross Domestic Product?Domestic Product? Broccoli?Broccoli? I was gonna say I was gonna say

“Preparation H.”“Preparation H.”

GDP - LocationGDP - LocationAll goods/services produced All goods/services produced legally for pay legally for pay inin a country’s borders. a country’s borders.[[GeographyGeography matters, matters, not citizenshipnot citizenship]]

GNP – OwnershipGNP – OwnershipAll goods/services produced All goods/services produced legally for pay legally for pay byby citizens of a country. citizens of a country.[[CitizenshipCitizenship mattered, mattered, not geography]not geography]

The difference between GDP & GNP is about 2/10 of 1%.

Nike inNike inIndonesiaIndonesia

Plano, TXPlano, TX

ChinaChina EuropeEurope

BMW in WacoBMW in Waco

PProvo,rovo,UTUT

Honda in OhioHonda in Ohio

in Chicagoin Chicago

– measures production in U.S. in one yearmeasures production in U.S. in one year.

GDP is a GDP is a $$ measure$$ measure of all of all finalfinal goods/services goods/services producedproduced by by workers and capitalworkers and capital locatedlocated the U.S.A.the U.S.A., regardless of , regardless of ownership within a one year ownership within a one year period.period.

– measures productionmeasures production in in U.S. U.S. in onein one year year.

GDP measures all final goods/services produced by GDP measures all final goods/services produced by workersworkersand capital located in the U.S.and capital located in the U.S., regardless of ownership., regardless of ownership.[[Domestically located resourcesDomestically located resources] ]

WWhat hat EEight ight TThings hings Do Not CountDo Not Count In In GDPGDP??1. Intermediate GoodsIntermediate Goods – components of the final good. A. Ford buys batteriesbatteries or tirestires for its cars.

B. KFC buys chickenschickens to eventually sell to customers.

ChevyChevy

- what is not counted [#2]- what is not counted [#2]

2. Second Hand SalesSecond Hand Sales – no current productionno current production. A. If a 1957 Chevy1957 Chevy is bought in 2005

[It has not been produced againnot been produced again so would not count.]

The salesman is doing productive work. His commission would countcommission would count.

B. Boots producedBoots produced in in 19801980 are bought in a Thrift Store in 05.

They also have not been produced againnot been produced again.Salesman’s commission would countcommission would count.You are buying his services.

– what is not counted what is not counted [#3][#3]

3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. A. If 100 shares of Dell stock100 shares of Dell stock is bought

I’m going to buy 100 I’m going to buy 100 shares of Dell Stock.shares of Dell Stock.

Exchanging one financial asset for anotherExchanging one financial asset for another

–– what is not counted what is not counted [#4][#4].

4. 4. Transfer PaymentTransfer Paymentss – –welfare, unemployment, social securitywelfare, unemployment, social security. [There is no contribution to final production]

“Now that I’ve gotten my welfare check, I can get a mini iPod.”

5. Unreported “Legal” business ActivityUnreported “Legal” business Activity

Unreported “legal”“legal” business activity does not count.This is two-thirdstwo-thirds of the “underground economy.”“underground economy.”

What if an eye surgeon doesn’t reportdoesn’t report $500 $500 of his his $3,400 IntraLASIK bill?

And what if thiswaitress doesn’tdoesn’treport all tipsreport all tips?

And what if the dentist doesn’t doesn’t report $400 forreport $400 forteeth whiteningteeth whitening?

6. Illegal business activity is also not counted.6. Illegal business activity is also not counted.

Illegal business activity, because it goes unreported,also does not count. Making up 1/31/3 of the “underground“undergroundeconomy,”economy,” it includes murder for hire, gambling, drugs, and prostitution.

“I’m getting $1,000 to killyou, Ziggy, but at least itwill not count in GDP.”

7. 7. Non-market Transactions Are Not Non-market Transactions Are Not CountedCounted

Work in your own householdown household or volunteer workvolunteer workin the community does not count because there wasno payment.

So, don’t marry your maid, gardener, or don’t marry your maid, gardener, or fitness instructorfitness instructor, or you will hurt GDP.

8. 8. U.S. Corporations Producing Goods U.S. Corporations Producing Goods OverseasOverseas

If U.S. corporationsU.S. corporations produce goods overseasproduce goods overseas, it does not count in GDP, but would count in GNP.Remember, we are measuring production insidethe U.S. Imports represent production outside ofthe U.S.

Chevy in FranceChevy in France Nike in DjiboutiNike in Djibouti

Eight Things Not Counted in GDPEight Things Not Counted in GDP

NON-PRODUCTION• Second Hand Sales • Public/Private Transfer Payments• Purely Financial Transactions• Intermediate GoodsNON-INCOME5. U.S. Corporations producing overseas6. Non-market transactions [household or volunteer work]Underground EconomyUnderground Economy7. Illegal business activity8. Unreported legal business activity

Do These Count in GDP?Do These Count in GDP?- When Outback buys potatoes for baked potatoes

- When a tattoo business buys ink for tattoos- When Tom Thumb buys spam to sell it to you - When the popsicle maker buys the sticks- Dell buys a computer monitor frame - Ice cream that Braums buys for sundaes

- Tippins buys an apple to put in its pies- When Ford buys a windshield wiper for a car

The Circular-Flow The Circular-Flow DiagramDiagram

HouseholdsHouseholds

Product MarketProduct Market

$$

Resource MarketResource Market

1

2

3

4

A.A. Goods/services?Goods/services?B.B. Consumer expenditures?Consumer expenditures?C.C. Land, labor, capital andLand, labor, capital and entrepreneurial ability?entrepreneurial ability?D.D. Rent, wages, interest, Rent, wages, interest, and profits?and profits?

$$

BusinessesBusinesses

PersonalPersonal Consumption Consumption ExpenditureExpenditure ( C )( C )PersonalPersonal Consumption Consumption ExpenditureExpenditure ( C )( C )

EXPENDITURES APPROACHEXPENDITURES APPROACHGDP = C(66%) + Ig(18%) + G(17%) + Xn

•Durable Consumer Goods[12%]•Nondurables[29%][soup & soap]

•Consumer Expenditures for Services[59%]

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C C ))

Gross Private Domestic Investment (IGross Private Domestic Investment (IGG))Gross Private Domestic Investment (IGross Private Domestic Investment (IGG))

EXPENDITURES APPROACHEXPENDITURES APPROACH

3 S3 Subcategoriesubcategories [spending on Y not consumed]

A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment–construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories [A net increase in inventories is investment; a net decrease in inventories is negative investment or disinvestment (disinvestment represents

sale of output produced in a previous year)

Let’s say this Porsche isLet’s say this Porsche is produced by a foreign co. produced by a foreign co. in Plano, Texas.in Plano, Texas.

GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]GGovernmentovernment P Purchasesurchases (G) (G) [state, local & federal][state, local & federal]

Personal Consumption Expenditure ( Personal Consumption Expenditure ( C C ))Personal Consumption Expenditure ( Personal Consumption Expenditure ( C C ))

Gross Private Gross Private DomesticDomestic Investment ( Investment ( IIgg ))Gross Private Gross Private DomesticDomestic Investment ( Investment ( IIgg ))

EXPENDITURES APPROACHEXPENDITURES APPROACH

[“G” purchases of goods/svcs produced (not transfer payments)

3 Subcategories A. Federal government 40% B. 50 State governments C. 84,000 local governments 60% for state and local

Government Purchases (Government Purchases ( GG ))Government Purchases (Government Purchases ( GG ))

Net Exports( XNet Exports( Xnn)) Net Exports( XNet Exports( Xnn))

Personal Consumption Expenditure Personal Consumption Expenditure ((CC))Personal Consumption Expenditure Personal Consumption Expenditure ((CC))

Gross Private Domestic Gross Private Domestic Investment (Investment (IIgg))Gross Private Domestic Gross Private Domestic Investment (Investment (IIgg))

EXPENDITURES APPROACHEXPENDITURES APPROACH

Net Exports (Xn) = Exports (X) – Imports (M) [M represents production outside a country]

• Compensation of Employees• Rents• Interest• Proprietors’ Income• Corporate Profits•Corporate Income Taxes•Dividends•Undistributed Corporate Profits

THE INCOME APPROACHTHE INCOME APPROACH

Receipts: Expenditures Approach____ Allocations: Income Approach______Allocations: Income Approach______

CC $7304$7304 Compensation of employees Compensation of employees $5977$5977IgIg 1593 1593 RentsRents 142 142GG 1973 1973 InterestInterest 684 684XnXn -424 -424Proprietor’sProprietor’s incomeincome 757 757

Corporate income taxesCorporate income taxes 213213DividendsDividends 434434Undistributed corporate profitsUndistributed corporate profits 141141 National IncomeNational Income $7560$7560Indirect business taxesIndirect business taxes 695695Consumption of fixed capitalConsumption of fixed capital 13931393NFFIEUSNFFIEUS 1010

GDPGDP $10,446 $10,446 GDPGDP $10,446 $10,446

ExpenditureExpenditure and and IncomeIncome Approach to GDP Approach to GDP