Gross Domestic Product Chapter 12, section 1 Objectives – Explain how gross domestic product (GDP) is calculated Explain the difference between nominal and real GDP List the main limitations of GDP Describe the Income and Expenditure approaches of GDP Identify factors that influence GDP

What is Gross Domestic Product? Gross Domestic Product is the dollar value of all goods and services produced within a country’s borders in a given year. Que?! Let’s take a look at this definition part by part to understand it better.

Dollar Value is the total of the selling prices of all goods and services produced in one calendar year. Everything you buy in a year shows up on GDP!! As long as it is a… FINAL GOOD OR SERVICE!!!

is used in the production of final goods. Sometimes… Intermediate Goods can also be Final Goods… A final good or service is what is sold to consumers. Final Goods An Intermediate Good is used in the production of final goods. Intermediate Goods

Produced within a country’s borders… Even materials and goods & services made by an Italian company in a U.S. factory counts for the U.S. GDP.

GDP So now, do we understand the phrase: “The dollar value of all final goods and services produced within a country’s borders within a given year”? If so, then we understand… GDP

Now that we understand GDP, how is it measured? There are two systems. Expenditure Approach Income Approach

The Expenditure Approach is… Economists estimate the amount spent in four categories: All consumer goods and services All business goods and services Government goods and services Net exports or imports of goods and services (this can be a negative value) Durable Goods, or goods that last for a long time (DVD players, cars) AND Non-Durable Goods, or goods that last a short time (food, light bulbs, shoes) ARE BOTH COUNTED!

= The Income Approach is… A more accurate way to measure GDP based on the combined incomes of all individuals who earn money within that country. Expenditure Approach: Car sells for $100,000 dollars and it is added directly to the GDP. The income approach however… Takes the individual incomes of all workers involved in production to make up GDP Corporate Manager $40,000 = Salesman $30,000 Factory Worker $30,000 $100,000

Nominal vs. Real GDP Nominal GDP is GDP that is measured in current prices. Real GDP is GDP measured in constant, unchanging, prices. But what does this look like? Did productivity actually increase from year one to year two? What is the problem then in using Nominal GDP? What actually increased if it wasn’t the productivity? Year 2 Real GDP Economists pick one year to use to establish base prices, and all following years use those base prices. So what would be the Real GDP of Year Two using Year One as the base year? Year 1 Nominal GDP 10 Cars at $15,000 each + 10 Trucks at $20,000 each Total = $350,000 Year 2 Nominal GDP 10 Cars at $16,000 each + 10 Trucks at $21,000 each Total = $370,000

Limitations of GDP Nothing is perfect, even GDP has some economic activities that aren’t included such as: * Non-market activities GDP does not measure goods and services that people make or do themselves like mowing the lawn or cooking dinner. But if you pay someone to do it, that counts as GDP. * The underground economy A large amount of production is never recorded or reported to the government. Illegal goods, drugs, stolen cars are included in this. So are babysitters! * Negative externalities Unintended side effects can have a monetary value. Cleaning up an oil spill costs money and would show up on GDP but the damage done to the environment is not. * Quality of life Many view rising GDP as rising quality of life, but more goods and services does not always mean a better lifestyle. GDP only measures output and income in an economy, nothing more! Gross National Product (GNP) is all goods and services produced by AMERICANS around the world. Depreciation, the loss of value in a product, is not calculated in GDP.

Need help? Further reading? Pg 300-308 The Questions!? What is the difference between intermediate and final goods? How does GDP differ from GNP? How does Nominal GDP differ from Real GDP? What economic activities are not included in GDP? Why is GDP calculated by both the expenditure and the income approach? Intemediate goods are goods used in the production of final goods, final goods are sold to consumers GDP is the dollar value of all goods produced in a country’s borders, GNP is goods of all citizens Nominal GDP is current prices, Real GDP uses a base year price Non-market, underground economy, negative externialities, quality of life Expenditure is practical, income approach is more accurate, this allows to compare mistakes Need help? Further reading? Pg 300-308