Measuring Economic Growth-GDP

Unit 3, Lesson 3

Gross Domestic Product(GDP)

Definition: The market value of all final goods and services produced in a country in a year

– Current/nominal GDP(measured for the given year,

reflects inflation )

– Real GDP (set on a constant base year)

Gross Domestic Product(GDP)

GDP is measured by totaling money spent on four categories:– Consumption (C)– Investment (I)– Government Spending

(G)– Net Exports

• Exports (X) - imports (M)

– GDP= C+I+G+ (X-M)

Consumer and GovernmentSpending

• Consumer: The spending by households on goods and services.– A new car, food, clothes,

college tuition, sporting event, health insurance.

– Makes up 66% of GDP

• Government: Spending by all levels of government on goods and services– Military, education,

roads, healthcare– 25-35% GDP

www.irle.berkeley.edu/events/spring08/feller/

Spending GDP(Consumer and Government)

• How Divided?– Housing 24% – Health

14%– Food 12%– Transport 10%

Investment

• Definition: Spending by businesses on capital – machinery, factories,

equipment, tools, computers, new buildings, inventory

– 12-14% of total GDP

Net Exports

• Definition: Spending by people outside the United States on US produced goods and services (exports, or X) minus spending by people in the United States on foreign goods and service (imports, or M)– (X-M) = Net Exports– (X) Jonas Brothers sell

CDs in Japan– (M) You buy a camera

made in China

Gross Domestic ProductHow to Calculate

• GDP is calculated by multiplying the quantity of each final good and service produced (Q) in a year by their estimated price (P) to get the dollar value (DV), and then adding all dollar values of each to get the total GDP.

• GDP = C + G +I + (X-M)Consumer Spending Q x P = DV

+Investment Q x P = DV

+Govt. Spend Q x P = DV

+Net Exports (X- M)

Gross Domestic ProductHow to Calculate

Calculation Example# in the millions

Cons. Goods 6m cars x $20,000= $120,000mCons. Service 150m haircuts x $15= $2,250mBus. Invest. 2m buildings x $300,000= $600,000mGovt. Spend. 1m roads x $5,000= $5,000m Net Exports 40m apples (export) x $1= $40m(X)

50m apples (import) x $1= $50m (M)

GDP= $120,000m cars$ 2,250m haircuts$600,000m buildings$ 5,000m roads$727,350m- 10m net loss in apple exports$727,250m

Gross Domestic ProductWhat’s Not Included

• The GDP includes only final goods and services that have been purchased for final use.

• Not Included– Intermediate goods

• (battery comes with computer, wood to make paper)

– Resale goods • (used car, selling your home)

– Financial assets • (stocks and bonds)

– Public or Private Transfer payments

• (unemployment and social security, $ from parents)

– Non-market service• (babysitting, painting your

own house) – Underground economy

• (illegal transactions)

An Alternative to GDP:

GPI - Genuine Progress Indicator

• Developed in 1995 • Attempts to measure factors

not measured by GDP • Adjusts for income

distribution• Focuses on economic well-

being not monetary transactions

• Adds for – Increase in leisure and

vacation time– volunteer and non-market

work

Genuine Progress Indicator (GPI)

Subtracts for • Crime = $40 billion/yr• Pollution and loss of natural

resources– Counts $1.2 billion in toxic

clean-up costs decrease• Health care expenditures

for preventable illness– Heart attacks– High blood pressure

• Loss in infrastructure – From natural disasters or

war • Foreign debt counts as

negative– GDP can count as positive

government spending