Gross Domestic Product

total of all selling prices of all goods and services produced in a country in 1 calendar year products in the form sold to consumers dollar value of all final goods and services produced w/in a country’s borders in a given year Ex. house built in 1995 sold in 2011 would not be counted in this year’s GDP, it was counted in 1995. However, the realtor’s fee is counted for this year because it is a service performed this year Ex. house built in 2011, would nails, lumber, and windows count in GDP? No, they are intermediate goods… the house is the final good

What is the difference between a final good and an intermediate good? Intermediate good- one of many goods used to produce a final good. Example: tires for a car, steering wheel, apples for apple pie, crust for apple pie Final good- finished good. Ready to be sold. Example: Car, Apple Pie

Why do we use final goods and not intermediate goods? To avoid double counting Easier (think of how many components make up a car!)

What Eight Things Do Not Count In GDP? 1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers. 5

GDP - what is not counted [#2] 2. 2nd Hand Sales – no current production. A. 1957 Chevy bought in 2007 Salesman 57 Chevy [It has not been produced again in 1963 & would not count.] The salesman is doing productive work. His commission would count. B. Boots produced in 1980 are bought in a Thrift Store in 07. They also have not been produced again. Salesman’s commission would count. You are buying his services. Shoe salesman 6

GDP - what is not counted [#3] 3. Purely Financial Transactions – stocks, bonds, CDs. There is no current production. Ex: If 100 shares of Dell stock is bought Buying stock is not buying a product but buying ownership of the firm. I’m not buying a Dell computer but part ownership of Dell. Exchanging one financial asset for another 7

GDP – what is not counted [#4]. 4. Transfer Payments –welfare, unemployment, social security. [There is no contribution to final production] 8

5. Unreported “Legal” Business Activity Unreported “legal” business activity does not count. This is two-thirds of the “underground economy.” Before LASIK Surgery Then he has LASIK but the surgeon doesn’t report $500 of his $3,400 bill? And what if the dentist doesn’t report $400 for teeth whitening? And what if this waitress doesn’t report all tips? 9

6. Illegal business activity is also not counted. Making up 1/3 of the “underground economy,” includes murder for hire, gambling, drugs, and prostitution. And, what about “Jane Ho”? 10

7. Non-market Transactions Are Not Counted Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework. 11

fitness instructor, or you will hurt GDP. 7. Non-market Transactions Are Not Counted So, don’t marry your maid, gardener, or fitness instructor, or you will hurt GDP. 12

8. U.S. Corporations Producing Goods Overseas GM in France Nike in Indonesia If U. S. corporations produce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. 13

Would each of the following be counted in the U.S. 2018 GDP? 1. I paint my personal house and I am a painter 2. Apple iPhone produced in China, sold in U.S. 3. Honda Accord produced in Ohio in 2018 4. chicken used by Kentucky Fried Chicken 5. Coach Arnold’s teacher salary

2 WAYS TO CALCULATE… EXPENDITURE APPROACH INCOME APPROACH Estimate amount spent on goods and services Ex. Economy’s entire output is cars and trucks $15,000/car, 10 cars sold $20,000/truck, 10 trucks sold (15,000*10)+(20,000*10)= $350,000 Calculate by adding up all the incomes in the economy Planners, Designers, Managers, Suppliers, Engineers, Factory workers income = $350,000

Gross National Product Nominal GDP Measured in current prices Gross National Product annual income earned by US-owned firms and citizens GDP+ income earned by American firms and citizens outside the US – income earned by foreign citizens and companies Real GDP Adjusted for inflation

Limitations of GDP Nonmarket activities- things people make themselves (ex. washing your car, mowing your lawn, etc.) Underground economy- black market, illegal gambling, etc Negative externalities- unintended economic side effects, power plant spending money to reduce pollution Quality of life- pleasant surroundings, personal safety

ECONOMIC GROWTH GDP growing= economic growth Standard of living is better Real GDP per capita= GDP/ total population Population growth doesn’t necessarily mean economic growth Technological process- increase in efficiency gained by producing more output w/o using more input (using robots in assembly lines making cars)

BUSINESS CYCLE Peak- height of expansion Trough- lowest point when real GDP stops falling Contraction- economic decline marked by falling real GDP Recession- prolonged economic contraction Depression- recession that’s especially long and severe Expansion- economic growth caused by a rise in GDP