Gross Domestic Product Predicting Economic Performance

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Gross Domestic Product The total dollar value of all final goods and services produced within a country during one calendar year. Based on 3 things…

1. Final Output To avoid counting products more than once, economists include only the value of final goods and services when calculating GDP.  Woodcutter cuts down a tree and sells it to a sawmill operator. Sawmill processes the tree into lumber, which is sold to a furniture manufacturer. The manufacturer turns it into a dining table. ◦ ONLY the dining table is the final output.

2. Current Year GDP does not include used cars and secondhand clothing. GDP is a gauge of PRODUCTION. We only want to know what was PRODUCED in the current year. (Not what was sold.)

3. Output Produced Within National Borders GDP ONLY measures output produced within a nation’s borders. Coca~Cola Co. located in Russia DOES NOT COUNT.

OUTPUT EXPENDITURE MODEL 4 sectors of the product market combine to make up GDP  1. Personal Consumption Expenditures (C)  2. Gross Investment (I)  3. Government Purchases of Goods and Services (G)  4. Net exports of goods and services, or exports minus imports (X-M)

Output Expenditure Model C + I + G + (X-M)

Personal Consumption Expenditures Consumer Purchases Durable, non durable goods, & services DURABLE: Lifetime of more than 1 year (Automobiles & Computers) Non-Durable: food and cosmetics. Services: medical care, entertainment and public education are the fastest growing area of consumer expenditures

GROSS INVESTMENT Real investment is the money used to produce new capital goods Fixed Investments: spending on residential structures, office space, factories, etc. Capital Goods: office equipment and new machinery **Does Not include stocks, bonds and land because they do not result in the production of any new goods or services.

GOVERNMENT PURCHASES Total Dollar value that the government spends on goods and services such as highways, public education,and national defense.

NET EXPORTS Total US Exports minus total US Imports Includes the value of goods and services produced domestically but sold in other countries (exports) and does not include goods and services produced in other countries but purchased locally (Imports).