Lesson 1: Gross Domestic Product Unit 3: Macroeconomics Lesson 1: Gross Domestic Product

Measuring Economic Performance national income accounting: a system that collects statistics on production, income, investment, and savings National Income and Product Accounts: NIPA used by Department of Commerce to determine economic policies

Gross Domestic Product GDP: the total dollar value of all final goods and services produced within a country’s borders during a given year ● No intermediate products ● No overseas production ● No secondary sales items

Question #1: What is added to the GDP in the sale of a new home Question #1: What is added to the GDP in the sale of a new home? Explain.

Question #2: What is added to the GDP in the sale of a used home Question #2: What is added to the GDP in the sale of a used home? Explain.

Gross Domestic Product Expenditure vs. Income Approach ● Expenditure: a method to calculate GDP by using amounts spent on four categories of goods & services C + I + G + (X – M) C = consumer (durable vs. nondurable) I = business (capital goods) G = government (federal, state, local) (X-M) = total exports – total imports

Gross Domestic Product Expenditure vs. Income Approach ● Income: a method to calculate GDP by adding up all the incomes in the economy

Question #3: What is added to GDP in the sale of an automobile using income approach? Give examples in your response.

Gross Domestic Product Nominal vs. Real GDP ● nominal GDP: “current GDP” is measured in the current year’s prices ● real GDP: real GDP is measured in constant or unchanging prices to account for inflation

Real GDP = constant prices Nominal vs. Real GDP Nominal GDP = current prices Year Price Quantity GDP (PXQ) 2007 $100 1,000 $100,000 2008 $125 $125,000 Real GDP = constant prices Year Price Quantity GDP (PXQ) 2007 $100 1,000 $100,000 2008

Limitations of GDP non-market activities: no measure of goods and services made for no pay (child care) underground economy: no measure of unreported jobs (“black market” & “under the table” wages) negative externalities: no measure of value for economic side-effects (clean air) quality of life: additional goods and services do not always equate to happiness

Influences on GDP What factors can change level of GDP? aggregate supply: AS is the total amount of goods and services in the economy that are available at all prices aggregate demand: AD is the total amount of goods and services in the economy that are purchased at all prices

Influences on GDP AS/AD Equilibrium: the intersection of AS and AD portrays market equilibrium ● P = price level ● Q = GDP

Influences on GDP 5. A shift in either AS or AD will cause a change to GDP and the price level