What’s GDP?

What is gross domestic product (GDP)?

Gross domestic product (GDP) is defined as the sum of all final goods and services that are produced within a national border over a specific time interval, typically one calendar year.

What does (GDP) Measures? Total income of a nation A Nation’s economic well-being Measure of a nation’s economic growth from one period to the next. Measures the dollar value of all final goods and services produced within a country’s border in a given year.

How Is GDP Measured?

What is gathered to measure the (GDP)? The total value of expenditures (funds spent) on: ConsumptionInvestments Government Purchases of Goods and Services Exports of Goods and Services Imports of Goods and Services

Consumption (C) $ amount of goods and services purchased by household within the allotted year. Examples: Food, rent, jewelry, vacations, computers, clothing, haircuts, movies, gasoline etc. cart

Consumption (C) is normally the largest GDP component in the economy. Not including the purchase of new housing Also gifts not sold such as hand-knit sweaters are not counted as part of GDP

Investment (I) $ amount spent by business on productive resources Purchases of new homes by consumers! New machines, new factories, research

Investment (I) Don’t Include Purchase of financial products, such as “saving” as opposed to investments. To avoid double-counting: if one buy’s shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things.

Government Spending (G) $ amount spent on federal, state, and local government provided goods and services. Includes salaries of public servants, purchase of weapons for the military, and any investment by the government. Example: Roads, education, military, parks, public libraries, etc.

Government Spending not included Payments, such as social security or unemployment benefits.

Net Exports (X-M) Exports (X) = Goods we ship to other countries  Imports (M) = Goods we bring in from other countries Exports – Imports = Net Exports

GDP = C + I + G + (X-M) If any one letter increases, ceteris paribus, GDP increases C + I + G + (X-M) C + I + G + (X-M)

Ceteris Paribus in Economics Latin phrase that means “other things being equal. Saturation of Cause and effect for an example: if the price of beef increases, ceteris paribus people will purchase less beef. In this situation, ceteris paribus means that the possibility of other changes affecting the sales of beef will not be considered. Other things could happen that would keep the sales of beef the same or even increase the sales of beef – for example, the price of other meats could increase even more than the price of beef increased, leaving beef as the cheapest meat available.

Ceteris Paribus in Economics contain Or the Centers for Disease control could announce that eating beef prevents cancer, which would most likely increase the sales of beef – but in this situation, we only want to consider what happens if the price of beef rises while keeping all other factors the same.

What’s not included in GDP? Intermediate goods Used goods Underground production (black market) Financial transactions Household production Transfer payments

What GDP does not tell us Does not measure income distribution Does not measure non-monetary output or transactions (e.g., barter, getting paid under the table) Does not take into account desirable externalities such as, leisure or environment. Does not measure social well-being

( ) 15,517,926,000,000 ( ) 16,163,158,000,000 ( ) 16,768,053,000,000 ( ) 17,419,000,000,000

Other Vocabulary Terms Economic Indicators: Inflation Rate Unemployment Rate Gross Domestic Product

Inflation Rate This indicator measures how rapidly the overall price level is changing in the U.S. economy.

Unemployment Rate This indicator measures the percentage of the U.S. labor force that wishes to work, but are currently without jobs.

Gross Domestic Product (GDP) This indicator measures the dollar value of all final goods and services produced within a country’s border in a given year.