Take Out Module 38 Notes Open-Note Quiz When you are finished, take out the worksheet that was handed out yesterday

Today’s Agenda Objective: To be able to explain GDP, what it includes, and what it does not include. To be able to calculate both real and nominal GDP. Essential Skill: To explicitly assess information and draw conclusions.

Gross Domestic Product The total market value of all final goods and services produced within a country in a given time period What are the essential parts of this definition? GDP vs. GNP (Gross National Product)

Final vs. Intermediate Final good or service A good or service that is produced for its final user and not as a component of another good or service Example: goods bought by households Intermediate good or service A good or service that is produced by one firm, bought by another firm, and used as a component of a final good or service or is used up during the production. Example: lumber or computer chips

What’s in GDP? Included  Final goods and services only! Not Included  Private transfer payments Cash gifts from one person to another  Stock Market Transactions  Public transfer payments Ex. Social Security, Welfare, Vet payments  Secondhand sales Ex. Used clothes, used cars  Underground economy

Calculating GDP Two Ways: 1) Expenditure Method- adds up all of the spending on goods and services from these four categories -Households- Consumption -Firms- Investment -Government- Government purchases -Rest of the World-Spending on US exports 2) Income method- wages + rent + interest + profit -less direct and not used as often as expenditure method

Income Method Wages: money paid to workers who supply their labor Rent: money paid to property owners who supply land, buildings, or equipment Interest: money paid to individuals who supply their personal savings for loans Profit: money earned by business owners who provide entrepreneurship

Personal Consumption- “C” Three categories of new goods and services 1. Durable Goods 2. Nondurable Goods 3. Services THIS IS THE LARGEST CATEGORY- Take a look at our consumption

Investment “I” Gross Private Domestic Investment  All final purchases of machinery, tools, and equipment, factories, etc.  Investment=purchasing physical capital goods, NOT financial investment  All construction Including residential  Changes in Inventories We include ALL items produced even if NOT sold The change in inventory is included in GDP.

Government Purchases “G” Expenditures for goods and services US Defense Dept buys weapons State Dep’t buys travel services Local gov’t buys cars for police Expenditures for social capital Roads, bridges, etc. Post office

Net Exports “Xn” Difference between Exports and Imports included in GDP(Exports minus imports)  Exports (X)- leaving the country  Imports (M)- entering the country Why don’t we include Imports?

Practice: For the following slides, decide whether the scenario would be counted in GDP

GDP? Shami earns $7.50/hr working a the local grocery store Yes, wage

GDP? The US armed forces invade a small island and in the process spend $5 billion on machines, arms, and ammunition Yes, Gov’t purchases

GDP? A rancher receives a monthly check for the oil pumped off of his property Yes, rent

GDP? Intel spends $300 million building a semiconductor factory in San Jose, Costa Rica No, Not included- outside US

GDP? Lindsey buys a new John Deere tractor for her organic farming business in New Hampshire Yes, investment

GDP? Jim and Frank decide to start a boy band and purchase a used Volkswagon Euro Wan in which to tour No, Not counted, used van

What goes into GDP? Complete the front side of this worksheet

Calculating GDP Nominal v. Real

Calculating GDP Formula = C +I +G +Xn (X- M) Which of these components accounts for the greatest portion of GDP? In 2005 for the US  C=$8,742  +I=$2,057  +G=$2,373  +Xn=-$717  =$ trillion ($12,456,000,000,00 0)

Real v. Nominal GDP x.php?iid=207&type=student x.php?iid=207&type=student

Nominal GDP A gross domestic product (GDP) figure that has not been adjusted for inflation. Also known as "current dollar GDP"

Real GDP An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices. Often referred to as "constant-price," "inflation-corrected" GDP or "constant dollar GDP".

GDP Year Production of X Price X $ $ $20 Nominal GDP (P x Q) Real GDP (current year Q x base yr P) 2000 $ $ $ $ $ $100

Economic Growth? What does it tell us when NGDP increases? Could be increase in production Could be increase in price Could be combination of production and price What does it tell us when RGDP increases? …b/c P is held constant to base year ….increase is due only to increase in Q ….= ECONOMIC GROWTH

Year Production of X Price X $ $ $20 Nominal GDP (P x Q) Real GDP (current year Q x base yr P) 2000 $ $ $ $ $ $100 Conclusions??? Economic growth? Price Levels? There was no economic growth. There was only an increase in price level

Complete the Back of the Worksheet -Start the second worksheet when you are finished