Gross Domestic Product In this lesson, students will be able to identify characteristics of the Gross Domestic Product. Students will be able to identify and/or define the following terms: Gross Domestic Product (GDP) Real GDP Inflation Durable Goods

Do you remember the Invisible Hand? It was the idea that the economy would always fix itself.

The Great Depression (1929-1939) But when the Great Depression happened, the economy didn’t seem to fix itself. What event started the Great Depression? How did the Government respond?

… and did not end until the U.S. entered WWII What was the primary reason the U.S. entered the war?

The Effects of the Great Depression on Economists: The Great Depression taught economists that they needed some way of tracking the nation’s economy. By tracking the nation’s economy, economists could determine if the economy was in danger of a recession or a depression and could try to apply economic policies to prevent such hardships from occurring.

The Gross Domestic Product (GDP) is a tool for tracking macroeconomic progress.

Gross Domestic Product (GDP) The Gross Domestic Product is the dollar value of all final goods and services produced within a country’s borders in a given year. In order for a good to be included in a nation’s GDP, it must be made in that country. It doesn’t matter if the factory is owned by a foreign company as long as the factory is located in the country where GDP will be calculated.

By tracking GDP, economists can tell whether an economy is growing (expanding) or shrinking (contracting).

What is Gross Domestic Product?

GDP counts only FINAL GOODS Intermediate Goods - Goods and services used as inputs for the production of final goods Final goods - Finished goods and services produced for “end consumer” • To avoid double counting intermediate goods must be excluded

Real GDP Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not. While nominal GDP is expressed in current prices, real GDP is adjusted for inflation. Inflation means rising prices. The problem with GDP is it could appear to rise when in reality only prices rose. In other words, one million in1970 dollars is not the same as one million in 2006 dollars. The 2006 dollars must be adjusted to 1970 dollars in order to effectively compare the two amounts.

Durable and Nondurable Goods The goods included in GDP are durable and nondurable goods. Durable goods are goods that last for a relatively long time, such as refrigerators and cars. Nondurable goods last for a short period of time like food and paperback books.

A refrigerator is a durable good. It lasts a long time.

Food is a nondurable good. It does not last a long time.

REMEMBER: Just like going for your yearly physical allows you to track your health and prevent more serious problems from occurring, GDP tracks the economy’s health.

STOP!!! Lets Assess Suppose a wholesale distributor sells glass to an automaker. Is this transaction included in the GDP? Why / Why Not

Which of the following are final goods or services? a new automobile an oil filter purchased in the new auto a haircut from a barber crude oil Explain you answer

Components of GDP Consumption Investment Government Foreign (X - M) There are four components of GDP Consumption Investment Government Foreign (X - M)

Consumption (C) is total spending by households on goods & services.

Investment (I) is total spending on goods that will be used in the future to produce more goods. includes spending on:  capital equipment (e.g., machines, tools)  structures (factories, office buildings, houses)  inventories (goods produced but not yet sold) Note: “Investment” does not mean the purchase of financial assets like stocks and bonds.

Government Purchases (G) is all spending on the goods & services purchased by government at the federal, state, and local levels.  G excludes transfer payments, such as Social Security or unemployment insurance benefits. They are not purchases of goods & services.

Net Exports (NX) NX = exports – imports  Exports represent foreign spending on the economy’s goods & services.  Imports are the portions of C, I, and G that are spent on goods & services produced abroad.

Calculating of GDP Y = C + I + G + NX GDP is total spending, therefore GDP (denoted Y): is calculated by adding the four components Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX

GDP and Economic Well-Being  Real GDP per capita is the main indicator of the average person’s standard of living.  But GDP is not a great measure of well-being. GDP Does Not Value:  the quality of the environment  leisure time  non-market activity, such as the child care a parent provides his or her child at home  an equitable distribution of income E. Napp

Questions for Reflection: What did economists believe about the economy before the Great Depression? What is Gross Domestic Product or GDP and why is it important? Why do economists adjust GDP for inflation and what is this adjusted GDP called? What is the primary difference between durable and nondurable goods? E. Napp

Let’s Assess WS