Measuring the Wealth of the Nation

Chapter 12

What is GDP? Gross Domestic Product The total dollar value of all final goods

and services a nation’s industries produce within its borders in one year.

Quantity of goods produced in a year X price of each item = GDP

Nominal GDP Dollar values (reported as is) – the way

the government reports GDP

Real GDP GDP adjusted for inflation from a base

year.

Final Goods measure GDP Final goods and services – sold to

ultimate users Intermediate goods – those used in the

production of other goods.

Tire example: may be either final or intermediate depending on who sells it.

Unsold inventories are counted in GDP- dealer is considered the final purchaser.

GDP includes only goods produced in the specified calendar year.

GDP measures only domestic production, things produced in the U.S.

Toyota Tundra made in Texas?

Recap: 4 concepts used to determine GDP

1. Quantity of Goods X Price 2. Only final goods & services 3. Only goods produced during the

calendar year. 4. Only includes domestic production.

How to Measure GDP

GDP has to be estimated. Add all purchases in the four basic

economic groups: › Households› Businesses› Government› foreign buyers

Household Consumption Households account for the greatest

portion of the nation’s total purchases: $9,224.5 billion in 2006.

Consumer Services – haircuts, education

Consumer Durable Goods: life expectancy more than one year

Consumer Non-durable Goods: wears out or used up in less than one year.

Trash bags Car stereo Suntan lotion Flip flops Prom dress Laundry detergent Home theater

Business Investment Gross Private Domestic Investment

(GPDI)- business investment Sum of all business spending on captial

investment and unplanned inventories.

Government Spending In 2006, Government spending

accounted for about one-fifth of the GDP.

Net Exports Consider the amount of goods a nation

sells to other countries. Then subtract the amount that nation

buys from other countries. That gives you the Net Exports. The U.S. has had a negative trade

balance every year since the 1970s. (We buy more from other countries than we sell.)

GDP = C + I + G + NX

Problems with GDP Measurement

Purpose of GDP – tell government officials and economists how productive the economy has been at any given time.

GDP is an estimate and is NOT precise.

Unrecorded Transactions – barter transactions, do-it-yourself activities, black market activities

Counterproductive Items – pollution, environmental damage

Inflation- GDP doesn’t recognize the true dollar value of production. Economists adjust for inflation to a base year = REAL GDP

Changes in population – per capita GDP, wealth per person

Real GDP/total population = per capita real GDP

Foreign Trade

Trade Deficit Negative balance of trade – buy more

from foreign countries than you sell.

Trade Surplus Positive balance of trade – Sell more to

foreign countries than you buy.

Since 1976 the U.S. has run trade deficits.

Trade deficits mean jobs leave the U.S. and go overseas where countries are producing more.

Trade deficits indicate a decline in U.S. manufacturing.

Trade deficits show that other countries are able to produce better or less costly products.

Reasons for Trade Deficits

Reasons for Trade Deficits

1. Domestic inability to produce some goods.

2. Better quality of some foreign goods. 3. Cheaper foreign materials. 4. Lower foreign wages. 5. Lower foreign capital costs. 6. Foreign subsidies – Gov’t pays

producers to help with manufacturing costs.

Trade Policy: Protectionism vs. Free Trade

Protectionists Try to protect domestic manufacturing

and jobs.

Protectionists Support trade quotas which limit the

quantity of goods that can be imported.

Support tariffs which make imports more expensive and domestic products more competitive.

Unintended Consequence: Costs rise for the American consumer causing a reduced demand for products.

Free Trade Advocates Believes free markets will offer the best

opportunities. Consumers are important to

productivity. Say protectionism is similar to

mercantilism (how?) Quotas and tariffs cause shippers and

boatmen to lose jobs due to fewer imports.

Free Trade Advocates If foreigners prosper from trade, they

are able to purchase American products.

Protectionist laws favors some businesses and industry and hurts others. (redistribution of unemployment)

Winners & LosersProtectionism Non-competitive

firms win Limits buyers

choices Raises prices

Free Trade Solid businesses

may suffer Gives buyers more

choices Lowers prices

GDP Review What is it? Why is it important? What must be taken into

consideration?