Gross Domestic Product

Definitions GDP – final value of all goods and services produced within a country in a year. Nominal GDP – GDP reported in current prices. Real GDP – GDP adjusted for inflation. Inflation – An overall rise in prices. Real per capita GDP - Real GDP divided by the countries population. GDP deflator – price index that reduces current prices into prices of a base year.

Shortcomings of GDP Not a perfect indicator of the well-being of the people. Does not measure goods and services that people produce but do not sell. Does not measure goods that a household produces and consumes its self. Does not measure the value of leisure time. Does not measure the value of illegal activities.

Productivity Output of goods and services measured per unit of input. Labor, capital, land When productivity goes up more goods are produced by the same amount of resources. Per capita GDP only increases when production grows faster than population. Labor productivity – amount work force can produce during a given period of time.

Keys to Productivity Quality of human resources – education, training, attitude. Quality of management – Example: Henry Ford – installed assembly line as new method of producing cars.

Raising Productivity Customer satisfaction – give customers what they want and expect. Conduct research or a survey to assess this. High-quality work – set clear quality standards. Provide training and equipment to guarantee standards are met. Employee involvement – LISTEN to employees. “Empower” employees. Involve them in decision making.

Shared vision – nurture employees commitment to company and its goals. Mission statements, company slogans, internal reward systems to recognize employee contributions.

Production and Cost Changes Fixed costs – remain the same –real estate, taxes, managers salaries. Variable costs – wages, utilities, raw materials. Fixed plus variable equals total costs. Average costs – costs divided by units produced. Marginal cost – additional cost of increasing a unit of production.

Law of Diminishing returns As more and more variable resources are added to fixed resources production eventually decreases. Decreasing amount produced leads to increasing costs. Beyond a certain point production won’t be profitable. Marginal revenue – sales from additional products.

Marginal Analysis Compares marginal benefits and marginal costs. When marginal costs exceeds marginal revenue companies will stop production. Marginal revenue = marginal costs – profits are maximized.

Economies of Scale When a company reaches the point where it can employ large-scale production methods it has economy of scale. cost per unit produced gores down. Benefits – 1.divide labor into specialized tasks. 2. discounts on purchase of supplies. 3. use of specialized machinery and equipment. 4. invest in research and development.