GDP Is the most important measure of economic activity. Is a measure of the income and expenditures of an economy. Gross Domestic Product What’s a Gross Domestic Product? Broccoli? I was gonna say “Preparation H.”

The Circular-Flow Diagram Firms Households Market for Factors of Production Market for Goods and ServicesSpending Revenue Wages, rent, and profitIncome Goods & Services sold Goods & Services bought Labor, land, and capital Inputs for production

GDP is used to compare economies world wide

The Measurement of GDP GDP is the dollar value of all final goods and services produced within a country in a given year.

The Measurement of GDP Production is measured as a $$$ dollar value $$$: the price that Consumers, Businesses, Government and International buyers pay or earn for goods and services.

+Government Spending 18% + +Foreign Spending -5% (Net Exports) Consumer Spending 70% (Consumption) +Business Spending 17 % ( Investment) EXPENDITURES APPROACH Net Exports = Exports – Imports [Imports represent production outside a country]

Wages + Rents (income from natural resources) + Interest (income from capital investments) + Owner’s Income (sole proprietorship and partnerships) + Corporate Profits - Corporate Income Taxes - Dividends - Undistributed Corporate Profits THE INCOME APPROACH

Intermediate Goods 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. GDP measures FINAL GOODS not intermediate goods

It includes both tangible GOODS (nondurable goods: food & clothing, durable goods: cars and refrigerators) and intangible SERVICES (haircuts, housecleaning, doctor visits).

Chevy Chevy Second Hand Salesno current production Second Hand Sales – no current production Chevy A. If a 1957 Chevy is bought in 2009 not been produced again [It has not been produced again so would not count.] Boots produced in 2000 B. Boots produced in 2000 are bought in a Resale Store in 09. not been produced again They also have not been produced again. commission would count Salesman’s commission would count. You are buying his services. It includes goods and services CURRENTLY PRODUCED, not transactions involving goods produced in the past.

The Measurement of GDP It measures the value of production WITHIN A COUNTRY’S BORDERS regardless of who owns the company. BMW in Waco in Chicago Provo,UT

It measures the value of production that takes place WITHIN A SPECIFIC TIME PERIOD, usually a year or a quarter (three months). The Measurement of GDP

Q2Q2 CHANGES IN GDP o P1P1 AS 1 AD 1 a Q1Q1 Price Level Real Gross Domestic Product b P2P2 AD 2 The level of output (income and expenditures) is changed if there is a change in AGGREGATE DEMAND.

Q2Q2 CHANGES IN GDP o P1P1 AS 1 AD 1 a Q1Q1 Price Level Real Gross Domestic Product bP2P2 AS 2 The level of output (income and expenditures) is changed if there is a change in AGGREGATE SUPPLY.