GROSS DOMESTIC PRODUCT (GDP)

WHAT IS GDP? Just as economists study the amount of goods and services that single producers bring to the market, they also study the total amount of G & S the economy as a whole produces. They use national income accounting, a system of statistics and accounts that keeps track of production, consumption, saving, and investment in the entire economy The statistics and accounts are used to measure how the economy is doing and trace long-term trends

DEFINITION The dollar amount of all final goods and services produced within a country’s national borders in a year The single most important measure of overall economic performance The most comprehensive statistics kept concerning the economy’s performance

Importance of GDP Analysis Although there are components that are not included the measure is still reliable When interpreted properly GDP becomes a useful tool in economic understanding It is generally regarded as a measurement of both he economy’s performance and its general health

Importance of GDP Analysis It allows us to: Determine how we are doing and where we are going Make political decisions Helps government decide what should be done Increase taxes? Lower interest rates?

HOW DO WE MEASURE? All final goods and service produced in one year multiplied by their prices gives you the dollar value of production (Figure 13.1 on page 342)

HOW DO WE MEASURE? Since measuring every single product would be difficult, sampling is used for both quantity and prices of goods sold Similar to Standard and Poor 500 or Dow Jones Figures become less accurate but they are reliable

With a Partner Describe the 4 factors that are not taken into consideration when measuring GDP What limitations or weaknesses exist when examining the GDP? Answer question # 1 on the back of the initial hand-out

WHAT IS NOT INCLUDED? Intermediate products – products used in making other products already counted in GDP only if something is purchased for final use by the consumer would it be counted replacement tires would be included but tires that come with a new car would not be counted, they’re already in the price of the car

WHAT IS NOT INCLUDED? Secondhand sales – sales of used goods the original sale of the good was included, the second time its not If I buy a new Nintendo 64 on opening day it counts toward GDP, but not when I resell it on E-Bay

WHAT IS NOT INCLUDED? Products produced by American companies abroad If a foreign-owned company produces products in the US, they are counted in GDP (BMW) Only products produced within the borders of the US are counted (McDonalds)

WHAT IS NOT INCLUDED? Non-market activities- Activities that do not take place in the market The services performed by a homemaker are not counted Mowing Lawn or general home maintenance Illegal activities (underground economy) Gambling, smuggling, prostitution, drugs, etc. is a billion dollar industry but this is not reported so it is not included in GDP

LIMITATIONS Delays in reporting statistics, and then adjustments that occur after Do not take into account other factors influencing individual happiness Environment, free time, health, job satisfaction, etc.

LIMITATIONS GDP went up $10 billion due to purchases of nerve gas Is this a good thing? Quality of life issues not factored in GDP increased because 10,000 new homes were built, but what if they were built after previous homes were destroyed by a hurricane