GDP

Gross Domestic Product

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

©2012, TESCCC Economics, Unit: 06 Lesson: 01

Gross Domestic ProductDollar value of all final goods and

services produced within a nation’s borders in one year.

©2012, TESCCC

* GDP measures Aggregate “total” Spending, Income and Output

Economic growth is one of the major goals of U.S.

• Economic growth - increasing production of goods and services

• To do this, we must use our productive resources wisely and efficiently.

©2012, TESCCC

-GDP combines spending of the 3 sectors within the national economy including households (consumer spending), business firms (investment), and the government (government spending)-GDP also calculates international trade (exports and imports) as a contributing factor©2012, TESCCC

How is GDP determined?

GDP=GDP=CC + I + G + (X-M)+ I + G + (X-M)C = Consumer Spending on

- durable goods (cars, appliances…)

-non-durable goods (food, clothing,…)

-services (plumbing, college…)

©2012, TESCCC

GDP=CGDP=C + + I I + G+ G + (X-M) + (X-M)I = Investment (business) spending on

capital goods

-Spending in order to increase future output or productivity

(new construction, new inventories, etc.)

©2012, TESCCC

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

G = government spending*government transfers DO NOT count toward GDP

- All levels of government spending on final goods and services and infrastructure count toward GDP.

©2012, TESCCC

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

•Exports – Imports

•X-M

•Exports create a flow of money to the United States in exchange for domestic production.

•Imports create a flow of money away from the United States in exchange for foreign production.

©2012, TESCCC

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

• C = consumer spending• I = investment (business)

spending• G = government spending• (X-M) = net export (exports -

imports)©2012, TESCCC

GDP

-10%

0%

10%

20%

30%

40%

50%

60%

70%

ConsumersBusiness-IGovernmentForeign

©2012, TESCCC

Foreign = Net Export

If below zero, it means there are

more imports than exports

Not included in GDP:

- GDP counts all final, domestic production for which there is a market transaction in that year.

Used and intermediate goods* are not counted in order to avoid double-counting.

*Goods used in the production of another good (We wait and count the final product).

©2012, TESCCC

Cost of denim fabric not counted

Instead, we count the value of the finished product, jeans.

©2012, TESCCC

New Goodyear Tires

New Stereo

NEW TRUCK or final product

counted in GDP

not counted not counted

©2012, TESCCC

Used products -These products were counted the year they were made so we will not count them again this year or the year it was purchased. For example, if you buy a used car, just 1 year old with only 10,000 miles, it is not counted in this year.

©2012, TESCCC

Non-market activities

• These are activities that a person does themselves such as painting your house instead of hiring a painter.

(i.e. babysitting for the neighbor)

©2012, TESCCC

Illegal market

• This includes all of the underground “black market economy or illegal transactions.

Such as:

• gambling

• drugs

• stolen property

©2012, TESCCC

Financial Transactions

• This includes things like stocks and bonds. Nothing is produced; just paper showing a claim of some sort, not a good or service.

©2012, TESCCC

Gifts or Transfer

• You receive money for your birthday, or pay taxes or pay child support. Nothing is produced; simply transferring money from one group to another

©2012, TESCCC

Different Types of GDP

• Nominal GDP: no adjustment for inflation (“current” dollar value used).

• Is “current” GDP measured at current market prices. May overstate the value of production because of inflation.

• Real GDP: adjusted for inflation (converted to base year prices). Measured with a “fixed dollar” that is held constant & is useful for making year to year comparisons. THIS IS THE IMPORTANT ONE!!!!

©2012, TESCCC

GDP & GNP

• GNP – Gross National Product: all goods & services produced by a nation’s citizens inside and outside of borders.

• GDP – Gross Domestic Product: all final goods & services produced within a nation’s border during a year

©2012, TESCCC

Limitations of GDP

1. Non-market activities2. The underground economy3. Negative externalities4. Quality of life• http://www.learner.org/vod/vod_window.html?pid

=2467

©2012, TESCCC