Ch. 12Section 1
Gross DomesticProduct
Guiding Questions
Why does it matter how the economy isdoing to the individual?
How do we determine if the economy ishealthy?
Gross Domestic Product
Gross Domestic Product – Main aspect of NIPA
The dollar value of all final goods and services producedwithin a country’s borders in a given year.
Terms Defined:
Dollar Value – average price of all goods.
Final Goods/Services – only final products are counted,not intermediate products.
Within the borders – no outsourced goods are counted.
In a Given Year – Only this year’s products/services arecounted.
What does the GDP Show?
GDP measures the amount of money brought intoa nation in a single year through the selling of thatnation’s goods and services.
GDP is a measurement of how well a nation’seconomy is doing for a particular year. A high GDPmeans the nation is doing well economically. A lowGDP means the nation is doing poorlyeconomically.
What does GDP show?
Basically, gross domestic product tracksexchanges of money.
To understand GDP, you need tounderstand which exchanges areincluded in the final calculations—andwhich ones are not.
What is GDP?
Dollar Value
YES – cash value of allgoods and services
NO – costs of producingthose things
Final Goods/Services
YES – Goods/Servicesoffered to consumers
NO – IntermediateGoods
Within a Country’s Borders
YES – American orforeign countriesproducing in the US
NO – Americancompanies producingoverseas.
How to Calculate the GDP –Expenditure Approach
4 Components are included in the calculationsof the GDP:
Consumption (C) – durable and nondurablegoods
Investment (I) – Business goods and services
Government (G) – Government Employees, Gov’tpurchases.
Net Exports – (NE) – Exports minus the cost ofimports
GDP = C + I + G + NE
GDP = C + I + G + NE
CONSUMPTION = C
Largest Aspect of GDP
Durable Goods = Lasting products
Nondurable goods = Food, gasoline, shoes
INVESTMENT = I = Business Purchases
Business investment into equipment
Purchasing a new mine, upgrading software
NOT purchasing financial products (savings)
GDP = C + I + G + NE
GOVERNMENT SPENDING = G
Government expenditures on final goods.
Salaries of public servants, purchases of weaponry
NET EXPORTS = NE
Exports – Total production shipped elsewhere bybusinesses.
Imports – Total purchases from other countries.
Net = Exports minus Imports.
IncomeApproach
Another method calculates GDP by adding up allthe incomes in the economy.
When a business sells a good/service, the sellingprice minus the dollar value of the Factors ofProduction equals income for the owners andemployees.
Income v. Expenditure
The two are usually compared to get a moreaccurate representation of the GDP.
Nominal v. Real GDP
Nominal GDP is measured with current pricesand does not correct values to account forinflation or aggregate price increases.
Real GDP corrects this by accounting for totaloutput rather than only price.
If prices rise, nominal GDP will inflate, real GDPwill show that output has remained the same.
Limitations of GDP
Nonmarket Activities—GDP does not measuregoods and services that people make or dothemselves.
The Underground Economy—GDP does notaccount for black market activities or people paid“under the table” without being taxed
Negative Externalities—unintended economic sideeffects, like pollution or poverty, are not subtractedfrom GDP
Quality of Life—a high GDP does not necessarilymean people are happier. Why is this?
GDP per capita
GDP per capita is gross domestic product dividedby midyear population.
So this shows the GDP per person in the economy.
Higher value means higher GDP and economicsuccess.
Using growth in GDP per head rather than crudeGDP growth reveals a strikingly different picture ofother countries’ economic health
GDP 2014
Rank
Country/Region
GDP (Millions of US$) [trillions]
77,269,168
18,527,116
1
17,348,075
2
10,356,508
3
4,602,367
4
3,874,437
5
2,950,039
6
2,833,687
7
2,346,583
8
2,147,744
9
2,051,228
10
1,860,598
11
1,785,387
12
1,442,722
13
1,410,383
14
1,406,538
15
1,291,062
GDP per capita 2014
GDP per Capita 2014
Rank
Country
1
103,187
2
82,178
3
78,829
4
76,266
5
55,904
6
53,224
7
51,642
8
51,424
9
51,068
10
49,139
11
48,966
12
48,940
13
44,333
14
44,118
15
43,935
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
Overall
What does the GDP show aboutthe nation’s economy?
How do the GDP and the GDPper capita change theconclusions about a country’shealth economically?