Economic Performance How do economists calculate GDP?How do economists calculate GDP? What are the limitations of GDP?What are the limitations of GDP? What other stats do economists use to measure the economy?What other stats do economists use to measure the economy?

Gross Domestic Product Nation Income AccountingNation Income Accounting –To track production, income, and consumption in a nation’s economy –Used to measure Nation income and product amounts

Measuring Economic Production Gross Domestic Product (GDP)Gross Domestic Product (GDP) –The total dollar value of all final goods and services produced within a country during one calendar year. 3 components of GDP –Final Output Value of only the final good and services –Woodcutter –Current Year Only goods that were produced within that year –Output Produced within National Borders

Output-Expenditure Model The actual formula used to compute GDPThe actual formula used to compute GDP Personal Consumption Expenditures (C)Personal Consumption Expenditures (C) –Consumer purchases Gross Investment (I) –Total value of all capital goods produced in a given nation during one year as well as change in the dollar value of business inventory Fixed investment- non/residential structures and capital goods Inventory Investment- I/D in stock of raw material

Output-Expenditure Model Government Purchases (G)Government Purchases (G) –Total dollar value that federal, state, and local governments spend on goods and services Highways, education, and defenseHighways, education, and defense Net Exports (X-M)Net Exports (X-M) –Includes exports and imports C+I+G+(X-M)=GDPC+I+G+(X-M)=GDP

Adjusting GDP for Price Increases As $ increases so does GDPAs $ increases so does GDP Nominal GDPNominal GDP –Current GDP expressed in the current prices of the period being measured Real GDPReal GDP –Adjusted for price changes –Price Index- a set of statistics that allows economists to compare prices over time.

Limitations of GDP Accuracy and Timeliness of DataAccuracy and Timeliness of Data –Use of estimates and sampling techniques Non market ActivitiesNon market Activities –chores Underground Economy “Goods” –Things that make society better are not reported “Bads” –Things that make society worse are reported

Other National Income and Product Accounts Gross National Product (GNP)Gross National Product (GNP) –Measures the total dollar value of all final output produced with factors of production owned by residents of a country during 1 year

Questions What are the main components of GDP, and how are they determined?What are the main components of GDP, and how are they determined? What are the limitations of GDP?What are the limitations of GDP? How does GDP differ from GNP? What are the main components of GDP, and how are they determined?How does GDP differ from GNP? What are the main components of GDP, and how are they determined? What are the limitations of GDP?What are the limitations of GDP? How does GDP differ from GNP?How does GDP differ from GNP?