Gross Domestic Product How do you measure economic growth? PRODUCT Market FACTOR FIRMS HOUSEHOLDS

Gross Domestic Product (GDP) Dollar Value of all new FINAL goods & services produced domestically over one year. 2016 = $18.6 Trillion dollars Per capita GDP = $57,000 (per person) ($18.6 Trillion/321 million people) GDP growth rate released quarterly by the Government Recession = Negative GDP growth rate for 2 consecutive quarters Historically U.S. GDP grows between 1% - 5% annually Growth above 5% is considered “too fast” (causes inflation…) Growth below 2% is considered “too slow” (causes rising unemployment)

% GDP growth by quarter (3months) Slow Recovery Why? Great Recession Slow GDP growth recovery from great recession = +2.0% 2013 = +1.7% 2014 = +2.6% 2015 = +2.9% 2016 = 1.5% 2.5% 1.6%% 2.2%

Calculating GDP GDP = C + I + G + (X –M) Expenditure Method= add up all the spending on U.S. produced goods & services Most common method used in AP Economics GDP = C + I + G + (X –M) GDP = Total “size” of U.S. Economy => $18.7 Trillion Dollars

GDP = C + I + G + (X-M) Expenditure Equation for GDP: Consumption 70% of GDP! Government 24% of GDP! GDP = C + I + G + (X-M) Business Investment: New Capital Machinery New Construction Unsold Inventories Exports - Imports Gov’t Transfer Payments: => Do NOT count as Gov’t Spending ↓ Unemployment insurance, welfare, food stamps => end up in “C” as consumer spending

NOT included in GDP: Intermediate Goods: Only FINAL goods counts (must avoid “double counting”) Example: steel used to make a car does not count count only value of the entire car (not parts) Non-market transactions: If you call a plumber it counts. If you fix your sink It does not count Underground Economy illegal sale of goods (drugs), payments made “under the table”, etc… Financial Transactions only a transfer of assets Gov’t Transfer Payments Gov’t transfers to person or company Example: welfare, social security, food stamps etc… International goods: Only goods produced in USA count Second hand sales only NEW sales count

Worksheet: GDP Analysis GDP = C + I + G + (NX)

Primary Use of GDP Objective way to “keep score” on economic performance Politicians monitor GDP figures to determine Gov’t Policy Federal Reserve also base their policy decisions on GDP

What GDP does Not Measure The mix of products: all goods treated equally: Guns versus Food How goods are distributed Is wealth concentrated evenly? Does not measure Leisure Time Vacation Days in Europe vs. U.S. Work 80 hours instead of 40 hrs/week, GDP increases What about quality of life?

U.S. GDP in Comparison U.S. $18.6 Trillion 23% of World GDP U.S. $18.6 Trillion Entire World: $78.0 Trillion China $11.0 Trillion Japan $5.0 Trillion Germany $3.4 Trillion India $2.2 Trillion

2 Ways to calculate GDP Since every economic transaction has both a buyer & a seller => there are 2 ways to measure GDP. (Add up all Spending or all Income) 1) Expenditure Method= add up all spending (GDP = C + I + G + NX) method used most of the time in AP Economics OR 2) Income Method= add up all income (wages, rent, interest & profits) Resource Supplied Income Received Labor Wages Land Rent Financial Capital Interest Entrepreneurial Talent Profit

2 methods of calculating GDP continued GDP = Total Income GDP = Total Expenditures PRODUCT MARKET Total Expenditures must equal Total Income Revenue Spending Goods and services sold Goods and services bought FIRMS HOUSEHOLDS FACTOR Market Factors of production Labor, land, capital & entrepreneurship Wages, rent, Interest & profit Income = Flow of inputs and outputs = Flow of dollars