Gross Domestic Product (GDP) Basics Guttmann – AP Macroeconomics from Kleinschmidt APSI Notes

What is GDP? Defined = The total value of all final goods and services produced in a country in a year, using resources from that country The measures were created in the 1930’s. Until the 1990’s, Gross National Product was the federal measure of the economy. Key terms to know: “Gross” = Totals before adjustments (inflation’s effect) “National” = Production owned by US companies “Domestic” = Production in the US, even if foreign owned

How does it work? GDP is officially measured in “quarters” of years: Quarter 1 = Jan/Feb/Mar Quarter 2 = Apr/May/June Quarter 3 = July/Aug/Sep Quarter 4 = Oct/Nov/Dec

GDP = C + Ig + G + Xn What’s it made of? The main form used is the “Expenditures” Approach: GDP = C + Ig + G + Xn The traditional Alternate approach to GDP accounting = Income Approach: was W+R+I+P+SA (as listed in older texts)

GDP Components C = Personal Consumption in the economy: (67% of the Economy !!!) The purchases of finished goods and services (but not houses)

GDP Components Ig = Gross Private Business Investment monies: Factory equipment maintenance, New factory equipment, Construction of housing, Unsold inventory of products built in a year, but not sold that year

GDP Components G = Government Spending: Government purchases of products and services

GDP Components Xn = Net Foreign Factor of Trade: Exports minus Imports Exports = Dollars in, Imports = Dollars out (Post WWII, Xn has usually been a negative number: Trade Deficit)

What’s not counted? Items that DO NOT Count in GDP: Used goods/Second-Hand goods Gifts or “Transfers” (Private or Public) (note COLAs) Stock/Equity/Securities purchases (places like the NYSE, NASDAQ) Unreported business activities conducted in “cash” (unreported tips...) Illegal activities (underground markets) Financial transactions between banks and businesses “Intermediate goods” (no double counting) “Non market” activities like volunteer and family work