GDP—The Measure of National Output (cont.) Gross domestic product (GDP)— measures the dollar value of all final goods, services, and structures produced within a country’s borders during a one-year period. The most important measure of a nation’s economic performance and economic health. T-shirts produced by an American company in its Malaysian plant The purchase of a used book Software produced by a Japanese company located in California Tires sold to Ford to be put on new vehicles Medical supplies produced by an American company located in Ohio A new Honda made in Tennessee A haircut by a barber A realtor’s services Cutting your own grass Goods sold at a garage sale Drugs sold illeagally Machinery made in Ohio sold to a factory in Canada Repairing your own car Baking cookies with a friend A computer made in the U.S. with parts from Korea A computer made in Korea with parts from the U.S. The goods produced by an American company operating in Japan Estimating Total Annual Output Section 1

GDP—The Measure of National Output (cont.) Items excluded from GDP & Examples Intermediate products Secondhand sales Nonmarket transactions Underground economy Estimating Total Annual Output Section 1

GDP—The Measure of National Output (cont.) GDP has limitations. GDP tells us nothing about composition of output. GDP tells little about the impact of production on quality of life. Some GDP is produced to control activities with little utility. Section 1

Economic Sectors and Circular Flows (cont.) The largest sector in the economy is the household or consumer. Section 1

Economic Sectors and Circular Flows (cont.) Business or investment sector Proprietorships, partnerships, and corporations Section 1

Economic Sectors and Circular Flows (cont.) Government or public sector Foreign sector Section 1

The Output—Expenditure Model (cont.) The circular flow can be represented by the output-expenditure model. GDP = C + I + G + (X – M) Section 1

The Output—Expenditure Model (cont.) Consumers spend income on goods and services used by households. Income that is not spent appears as personal saving and borrowed by the business and government sectors. Section 1

The Output—Expenditure Model (cont.) Investment sector spends income on labor, factories, equipment, inventories, and other investment goods. Government sector spends income on national defense, income security, roads, etc. Foreign sector buys U.S. goods that make up our GDP. Foreign sector purchases are called net exports of goods and services. Section 1

Economic Sectors and Circular Flows (cont.) Income generated by production flows to businesses, government, and consumer sectors. Circular Flow of Economic Activity Section 1

GNP—The Measure of National Income (cont.) Gross national product (GNP) The dollar value of all final goods, services, and structures produced in a one-year period with labor and property owned by a country’s residents. =GDP + payments received from outside the country – payments made to all foreign owned businesses within the country Section 1