GDP Gross Domestic Product ©2012, TESCCC Economics, Unit: 06 Lesson: 01

Learning Targets Define GDP Explain How Gross Domestic Product is calculated Explain the difference between nominal GDP and real GDP Explain difference between GNP & GDP ©2012, TESCCC

Gross Domestic Product Dollar value of all final goods and services produced within a nation’s borders in one year. ©2012, TESCCC

Economic growth is one of the major goals of U.S. Economic growth - increasing production of goods and services To do this, we must use our productive resources wisely and efficiently. ©2012, TESCCC

How to use Factors of Production Wisely Land or natural resources – don’t waste, but conserve Labor or human resources – make sure workforce has adequate training & education Capital goods/resources – save more and invest more in capital goods Entrepreneurship – new business vital, encourage entrepreneurs to start new business ©2012, TESCCC

GDP measures economic growth ©2012, TESCCC

-GDP combines spending of the 3 sectors within the national economy including households (consumer spending), business firms (investment), and the government (government spending) -GDP also calculates international trade (exports and imports) as a contributing factor ©2012, TESCCC How is GDP determined?

C + I + G + (X-M) = GDP ©2012, TESCCC

C + I + G + (X-M) = GDP C = consumer spending ©2012, TESCCC

C + I + G + (X-M) = GDP I = investment (business) spending on capital goods ©2012, TESCCC

C + I + G + (X-M) = GDP G = government spending ©2012, TESCCC

C + I + G + (X-M) = GDP (X-M) = net export X= exports M= imports (exports – imports) ©2012, TESCCC

C + I + G + (X-M) = GDP C = consumer spending I = investment (business) spending G = government spending (X-M) = net export (exports - imports) ©2012, TESCCC

GDP ©2012, TESCCC Foreign = Net Export If below zero, it means there are more imports than exports

Not included in GDP: Intermediate goods: Goods used in the production of another good (We wait and count the final product). ©2012, TESCCC

Cost of denim fabric not counted Instead, we count the value of the finished product, jeans. ©2012, TESCCC

New Goodyear Tires New Stereo NEW TRUCK or final product counted in GDP not counted ©2012, TESCCC

Used products - These products were counted the year they were made so we will not count them again this year or the year it was purchased. For example, if you buy a used car, just 1 year old with only 10,000 miles, it is not counted in this year. ©2012, TESCCC

Non market activities These are activities that a person does themselves such as painting your house instead of hiring a painter. You do not have a buyer and a seller so you do not have a market. ©2012, TESCCC

Illegal market This includes all of the underground economy or illegal transactions. Such as: gambling drugs stolen property ©2012, TESCCC

Financial Transactions This includes things like stocks and bonds. Nothing is produced; just paper showing a claim of some sort, not a good or service. ©2012, TESCCC

Gifts or Transfer You receive money for your birthday, or pay taxes or pay child support. Nothing is produced; simply transferring money from one group to another ©2012, TESCCC

Different Types of GDP Nominal GDP: no adjustment for inflation (current dollar value used) Real GDP: adjusted for inflation (converted to base year prices) Real per Capita GDP: Real GDP Population –shows overall standard of living ©2012, TESCCC

GDP & GNP GNP – Gross National Product: all goods & services produced by a nation’s citizens inside and outside of borders. GDP – Gross Domestic Product: all final goods & services produced within a nation’s border during a year ©2012, TESCCC

Limitations of GDP 1.Non-market activities 2.The underground economy 3.Negative externalities 4.Quality of life http:// ©2012, TESCCC