Ch. 12 Section 1 Gross Domestic Product

Guiding Questions  Why does it matter how the economy is doing to the individual?  How do we determine if the economy is healthy?

Gross Domestic Product  Gross Domestic Product – Main aspect of NIPA  The dollar value of all final goods and services produced within a country’s borders in a given year.  Terms Defined:  Dollar Value – average price of all goods.  Final Goods/Services – only final products are counted, not intermediate products.  Within the borders – no outsourced goods are counted.  In a Given Year – Only this year’s products/services are counted.

What does the GDP Show?  GDP measures the amount of money brought into a nation in a single year through the selling of that nation’s goods and services.  GDP is a measurement of how well a nation’s economy is doing for a particular year. A high GDP means the nation is doing well economically. A low GDP means the nation is doing poorly economically.

What does GDP show?  Basically, gross domestic product tracks exchanges of money.  To understand GDP, you need to understand which exchanges are included in the final calculations—and which ones are not.

What is GDP?  Dollar Value  YES – cash value of all goods and services  NO – costs of producing those things  Final Goods/Services  YES – Goods/Services offered to consumers  NO – Intermediate Goods  Within a Country’s Borders  YES – American or foreign countries producing in the US  NO – American companies producing overseas.

How to Calculate the GDP – Expenditure Approach  4 Components are included in the calculations of the GDP:  Consumption (C) – durable and nondurable goods  Investment (I) – Business goods and services  Government (G) – Government Employees, Gov’t purchases.  Net Exports – (NE) – Exports minus the cost of imports  GDP = C + I + G + NE

GDP = C + I + G + NE  CONSUMPTION = C  Largest Aspect of GDP  Durable Goods = Lasting products  Nondurable goods = Food, gasoline, shoes  INVESTMENT = I = Business Purchases  Business investment into equipment  Purchasing a new mine, upgrading software  NOT purchasing financial products (savings)

GDP = C + I + G + NE  GOVERNMENT SPENDING = G  Government expenditures on final goods.  Salaries of public servants, purchases of weaponry  NET EXPORTS = NE  Exports – Total production shipped elsewhere by businesses.  Imports – Total purchases from other countries.  Net = Exports minus Imports.

Income Approach  Another method calculates GDP by adding up all the incomes in the economy.  When a business sells a good/service, the selling price minus the dollar value of the Factors of Production equals income for the owners and employees.

Income v. Expenditure  The two are usually compared to get a more accurate representation of the GDP.

Nominal v. Real GDP  Nominal GDP is measured with current prices and does not correct values to account for inflation or aggregate price increases.  Real GDP corrects this by accounting for total output rather than only price.  If prices rise, nominal GDP will inflate, real GDP will show that output has remained the same.

Limitations of GDP  Nonmarket Activities—GDP does not measure goods and services that people make or do themselves.  The Underground Economy—GDP does not account for black market activities or people paid “under the table” without being taxed  Negative Externalities—unintended economic side effects, like pollution or poverty, are not subtracted from GDP  Quality of Life—a high GDP does not necessarily mean people are happier. Why is this?

GDP per capita  GDP per capita is gross domestic product divided by midyear population.  So this shows the GDP per person in the economy.  Higher value means higher GDP and economic success.  Using growth in GDP per head rather than crude GDP growth reveals a strikingly different picture of other countries’ economic health

GDP 2014 RankCountry/RegionGDP (Millions of US$) [trillions] World [9]World [9] 77,269,168 European Union [n 1][9]European Union [n 1][9] 18,527,116 1 United States 17,348,075 2 China 10,356,508 3 Japan 4,602,367 4 Germany 3,874,437 5 United Kingdom 2,950,039 6 France 2,833,687 7 Brazil 2,346,583 8 Italy 2,147,744 9 India 2,051, Russia [n 2]Russia [n 2] 1,860, Canada 1,785, Australia 1,442, South Korea 1,410, Spain 1,406, Mexico 1,291,062

GDP per capita 2014

GDP per Capita 2014 RankCountryUS$ 1 Luxembourg 103,187 2 Switzerland 82,178 3 Qatar 78,829 4 Norway 76,266 5 United States 55,904 6 Singapore 53,224 7 Australia 51,642 8 Denmark 51,424 9 Iceland 51, San Marino 49, Sweden 48, Ireland 48, Netherlands 44, United Kingdom 44, Canada 43,935 wiki/List_of_countries_by_ GDP_(nominal)_per_capit a

Overall  What does the GDP show about the nation’s economy?  How do the GDP and the GDP per capita change the conclusions about a country’s health economically?