Gross Domestic Product Measure Up? Gross Domestic Product Economics LAP 1

Objectives Describe gross domestic product. Explain the economic role of gross domestic product.

Describe gross domestic product. Objective Describe gross domestic product.

$14 trillion U.S. gross domestic product (2009)—over $14 trillion Haiti GDP (2009)—$6.5 billion Ethiopia GDP (2009)—$32 billion $14 trillion

$14 trillion Every country has a GDP. GDP—an important indicator of economic health

Defining GDP GDP—the final market value of the total output of all goods and services produced within a country’s geographic boundaries during a year’s time China $4.9 trillion Final market value: Does not include intermediate products (parts of other finished items) Always expressed in dollars

Defining GDP Total output of all goods and services: Is comprehensive Includes exchanges made by consumers, businesses, and government Geographic boundaries—all output is included, regardless of ownership

Categories of Goods & Services That Make Up GDP Personal consumption expenditures: All products purchased for consumption by individuals Purchases made by the household sector Purchases made by U.S. citizens living abroad

Categories of Goods & Services That Make Up GDP Personal consumption expenditures: Three types: Durable goods (last one year or more) Nondurable goods (last less than one year) Services (non-tangible products, such as education)

Categories of Goods & Services That Make Up GDP Gross private domestic investment Investments in residential and nonresidential buildings and equipment Value of changes in business inventories Purchases made by the business sector

Categories of Goods & Services That Make Up GDP Government purchases of goods and services Everything purchased by local, state, and federal governments Does not include transfer payments—payments made when no good or service has been produced, such as: Social Security Disaster-relief funds

Categories of Goods & Services That Make Up GDP Net exports of goods and services Also called balance of trade The difference between what a country imports and what it exports Trade surplus—more exports than imports—raises GDP Trade deficit—more imports than exports—lowers GDP

Formula for Calculating GDP Symbols: C = Personal consumption expenditures I = Gross private domestic investment G = Government purchases of goods and services F = Net exports of goods and services

Formula for Calculating GDP C + I + G (+ or -) F = GDP

Problems With Calculating GDP Dynamic economy You can’t stop it to measure it. GDP represents trends, not static figures. Economy Uncounted production Goods and services that are not sold in the marketplace No money changes hands— value can only be estimated.

Problems With Calculating GDP Underground economy Transactions in which money changes hands but no receipts are kept Income is not reported to the government. Activities may be legal or illegal.

Problems With Calculating GDP Double counting—mistakenly counting a product more than once Vast amount of information

Problems With Calculating GDP Inflation A rapid rise in prices that may occur when demand exceeds supply or when productivity declines and costs of labor go up Can distort GDP by making it seem higher than it actually is

Explain the economic role of gross domestic product. Objective Explain the economic role of gross domestic product.

Why Countries Calculate GDP To check their economic performance To check the well-being of their citizens To compare findings with other countries

GDP Flaws Does not indicate types of products produced Does not indicate quality of products produced Does not indicate distribution of wealth

Importance of Economic Growth Supports a higher standard of living More products = more jobs More jobs = more people able to satisfy their needs and wants Improves government performance More jobs = more tax dollars

Importance of Economic Growth Helps to resolve domestic economic problems—stronger economy helps to fight poverty Helps to develop trading partnerships with other countries Having products to export Being a market for imports

Government & GDP Government is responsible for monitoring economic growth. When the economy is slow (recession), government can: Increase amount of money in circulation Spend more on goods and services Lower the prime interest rate

Government & GDP Government is responsible for monitoring economic growth. When the economy is slow (recession), government can: Decrease the discount rate for banks (interest rate at which banks borrow from the Federal Reserve) Lower taxes

Government & GDP When the economy grows too fast (inflation), government can: Restrict amount of money in circulation Spend less on goods and services Raise the prime interest rate Increase the discount rate for banks Raise taxes

Businesses & GDP GDP—helps businesses with planning Guides decisions such as: Whether or not to expand Whether to increase or decrease production Whether or not to borrow money

Businesses & GDP GDP—helps businesses with planning Guides decisions such as: Whether to increase or decrease investments Whether or not to hire new employees Whether to increase or decrease inventories Businesses and suppliers are interrelated—changes in one affect the other.

How are you contributing to your country’s gross domestic product? If you have a job, what goods or services are you producing and selling? As a consumer, what did you purchase in the past week that will be part of this year’s GDP?

Underground transactions weaken GDP. Example: A person who makes and sells hair bows out of her home She sells them to family and friends and doesn’t make a lot of money. She just keeps the cash and does not report the income.

Underground transactions weaken GDP. Example: Depending on how much she makes, this action may or may not become illegal. She believes her actions are acceptable, no matter what, since the law is really intended to catch “bigger fish” than she.

What do you think? Is she behaving unethically?

MBAResearch Acknowledgments Original Developers Christopher C. Burke, Sarah Bartlett Borich, MBAResearch Version 1.0 Copyright © 2011 MBA Research and Curriculum Center®

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