adapted from “Econ, Econ” by

Gross Domestic Product What’s a Gross Domestic Product? Broccoli? I was gonna say “Preparation H.”

GDP - Location All goods/services produced legally for pay in a country’s borders. [ Geography matters, not citizenship] GNP – Ownership All goods/services produced legally for pay by citizens of a country. [ Citizenship mattered, not geography] The difference between GDP & GNP is about 2/10 of 1%. Nike in Indonesia Plano, TX ChinaEurope BMW in Waco P rovo, UT Honda in Ohio Honda in Ohio in Chicago

measures production in U.S. in one year – measures production in U.S. in one year. GDP is a $$ measure of all final goods/services produced by workers and capital located the U.S.A., regardless of ownership within a one year period.

measures production in U.S. in one year – measures production in U.S. in one year. GDP measures all final goods/services produced by workers and capital located in the U.S., regardless of ownership. [Domestically located resources] W hat E ight T hings Do Not Count In GDP ? Intermediate Goods 1. Intermediate Goods – components of the final good. batteriestires A. Ford buys batteries or tires for its cars. chickens B. KFC buys chickens to eventually sell to customers.

Chevy Chevy - what is not counted [#2] Second Hand Salesno current production 2. Second Hand Sales – no current production Chevy A. If a 1957 Chevy is bought in 2005 not been produced again [It has not been produced again so would not count.] commission would count The salesman is doing productive work. His commission would count. Boots produced in 1980 B. Boots produced in 1980 are bought in a Thrift Store in 05. not been produced again They also have not been produced again. commission would count Salesman’s commission would count. You are buying his services.

what is not counted [#3] – what is not counted [#3] Purely Financial Transactions 3. Purely Financial Transactions – stocks, bonds, CDs. no current production There is no current production. 100 shares of Dell stock A. If 100 shares of Dell stock is bought I’m going to buy 100 shares of Dell Stock. Exchanging one financial asset for another

–what is not counted [#4] – what is not counted [#4]. 4. Transfer Payment s –welfare, unemployment, social security 4. Transfer Payment s –welfare, unemployment, social security. [There is no contribution to final production] “Now that I’ve gotten my welfare check, I can get a mini iPod.”

Unreported “Legal” business Activity 5. Unreported “Legal” business Activity “legal” Unreported “legal” business activity does not count. two-thirds“underground economy.” This is two-thirds of the “underground economy.” What if an eye surgeon doesn’t report $500 doesn’t report $500 of his his $3,400 IntraLASIK bill? And what if this doesn’t waitress doesn’t report all tips report all tips? And what if the doesn’t dentist doesn’t report $400 for teeth whitening teeth whitening?

6. Illegal business activity is also not counted. Illegal business activity, because it goes unreported, 1/3 “underground also does not count. Making up 1/3 of the “underground economy,” economy,” it includes murder for hire, gambling, drugs, and prostitution. “I’m getting $1,000 to kill you, Ziggy, but at least it will not count in GDP.”

7. Non-market Transactions Are Not Counted own householdvolunteer work Work in your own household or volunteer work in the community does not count because there was no payment. don’t marry your maid, gardener, or So, don’t marry your maid, gardener, or fitness instructor fitness instructor, or you will hurt GDP.

8. U.S. Corporations Producing Goods Overseas U.S. corporationsproduce goods overseas If U.S. corporations produce goods overseas, it does not count in GDP, but would count in GNP. Remember, we are measuring production inside the U.S. Imports represent production outside of the U.S. Chevy in France Nike in Djibouti

Eight Things Not Counted in GDP NON-PRODUCTION Second Hand Sales Public/Private Transfer Payments Purely Financial Transactions Intermediate Goods NON-INCOME 5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity

Do These Count in GDP? Do These Count in GDP? - W hen Outback buys potatoes for baked potatoes -When a tattoo business buys ink for tattoos -When Tom Thumb buys spam to sell it to you -When the popsicle maker buys the sticks -Dell buys a computer monitor frame -Ice cream that Braums buys for sundaes -Tippins buys an apple to put in its pies -W hen F ord buys a windshield wiper for a car

The Circular-Flow Diagram Households Product Market $ $ Resource Market A.Goods/services? B.Consumer expenditures? C.Land, labor, capital and entrepreneurial ability? entrepreneurial ability? D.Rent, wages, interest, and profits? and profits? $ $ Businesses

Personal Consumption Expenditure ( C ) EXPENDITURES APPROACH GDP = C(66%) + Ig(18%) + G(17%) + Xn Durable Consumer Goods[12%] N ondurable s[29 %][soup & soap] Consumer Expenditures for Services[59%]

Personal Consumption Expenditure ( C ) Gross Private Domestic Investment (I G ) EXPENDITURES APPROACH 3 S ubcategories 3 S ubcategories [spending on Y not consumed] A. Business fixed investment-tools, machinery, & plants B. Residential fixed investment–construction of new houses [can rent for financial return] & apartments. C. Inventory investment – change in inventories [A net increase in inventories is investment; a net decrease in inventories is negative investment or disinvestment (disinvestment represents sale of output produced in a previous year) Let’s say this Porsche is produced by a foreign co. in Plano, Texas.

G overnment P urchases (G) [state, local & federal] Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH [“G” purchases of goods/svcs produced (not transfer payments) 3 Subcategories A. Federal government40% B. 50 State governments C. 84,000 local governments 60% for state and local

Government Purchases ( G ) Net Exports( X n ) Personal Consumption Expenditure (C) Gross Private Domestic Investment (I g ) EXPENDITURES APPROACH Net Exports (X n ) = Exports (X) – Imports (M) [M represents production outside a country]

Compensation of Employees Rents Interest Proprietors’ Income Corporate Profits Corporate Income Taxes Dividends Undistributed Corporate Profits THE INCOME APPROACH

Allocations: Income Approach______ Receipts: Expenditures Approach____ Allocations: Income Approach______ C$7304 Compensation of employees $5977 Ig 1593 Rents 142 G 1973 Interest 684 Xn -424 Proprietor’s income 757 Corporate income taxes 213 Dividends 434 Undistributed corporate profits 141 National Income $7560 National Income $7560 Indirect business taxes 695 Consumption of fixed capital 1393 NFFIEUS 10 GDP $10,446GDP $10,446 Expenditure and Income Approach to GDP