Gross Domestic Product GDP

GDP – total market value of all final goods and services produced in a country in a given year.

Other GDP’s U.S. GDP $16.2 trillion China – $8.2 trillion Japan – $5.9 trillion European Union –$16.5 trillion Russia -$ 1.7 trillion India - $4.04 trillion

Two main problems with calculating GDP are Inflation Double counting. Price is the only common unit of measurement for all of those goods and services. Two main problems with calculating GDP are Inflation Double counting.

Products not counted in GDP include: Intermediate goods Second hand goods Stocks and Bonds Transfer payments

Two Methods of Calculating GDP Expenditures Approach – add up all money spent in a year. Income Approach – add up all money earned in a year.

Expenditures Approach GDP = C + Ig + G + Xn

C C = consumption or consumer spending. Includes Durable Goods, Non Durable Goods and Services

Ig Ig = Gross Investment or business spending. This includes all construction spending and purchasing of capital goods by business. Includes changes in inventory

G G = government spending. All purchases and activities of the government. Does not include transfer payments such as Social Security and Unemployment checks.

Xn Xn = net exports or exports – imports (X-M) In the case of the U.S. this is a negative number.

Shortcomings of GDP Does not account for non-market transactions. Does not take into account improved product quality. An economy is penalized for leisure time.

Shortcomings (cont) GDP does not tell us if economy is producing the correct mix of goods. High GDP, hard on environment. Underground economy not accounted for. Non-economic sources of well being not counted.