GROSS DOMESTIC PRODUCT Mr. Park Econ ERHS

What is GDP? Gross Domestic Product

What is GDP? Gross Domestic Product GDP is considered to be the best indicator of determining the health of the economy of a country Serves as the primary measure of the size and strength of an economy Gross Domestic Product measures the market value of all final goods and services produced in the United States during a given time period, usually one year.

What counts towards GPD? Only the value of final goods and services.

Calculating GDP GDP = C + G + I + NX

Calculating GDP Consumption (Haircuts, airline tickets, soup, furniture) – 67%(C) Investment (New physical capital) (I) Government Purchases (spending by all levels of government for goods and services) (G) Net exports minus net imports (NX)

GDPP GDP Per Capita Take the GDP of a country and divide it by the number of people living in the country Accurate? Potentially Misleading?

Continuing to Understand GDP Nonmarket Activities: GDP does not measure goods or services that people make or do themselves. This includes caring for children, mowing the lawn, or washing the car. GDP does rise slightly when people pay someone else to do these things for them.

Limitations of GDP GDP counts only the selling price of the finished product. What does that mean?

Limitations of GDP GDP counts only the selling price of the finished product. What does that mean? Farmer A sells his wheat to a miller for $10 The miller grinds the wheat, produces flour, and sells it to the baker for $15 The baker uses the flour and makes frozen dough which is sold to the supermarket for $25 The supermarket sells this frozen dough to you for $35

Limitations of GDP HOW MUCH WAS ADDED TO THE GDP FROM THIS TRANSACTION?

Limitations of GDP HOW MUCH WAS ADDED TO THE GDP FROM THIS TRANSACTION? $35

Limitations of GDP $35 Why is it only $35, and not $85, or $50?

Limitations of GDP The Underground Economy: A large amount of production and income is never recorded or reported to the government. This includes the market for illegal goods such as drug, stolen cars and illegal weapons. Underground transactions add nothing to GDP as well. Includes paying someone to baby sit, mow your lawn, or shovel your driveway

Limitations of GDP Negative Externalities: Unintended economic side effects, or externalities, have a monetary value that often isn’t immediately reflected in GDP. One example is a power plant that buys equipment so that it is more efficient and pollutes less. What might occur when there is less pollution?

Limitations of GDP Quality of Life: Remember that additional goods and services do not guarantee happiness for a society. GDP cannot measure environmental cleanliness, leisure time, or personal safety. When calculated consistently over time though, GDP helps to reveal economic growth rates. Thus it is closely watched by economists and policy makers.

GDP and the Current Economy If GDP falls for two consecutive quarters (or at least six straight months), the economy is considered to be in a recession. A recession is a prolonged economic contraction, usually lasting 6 to 18 months. Generally unemployment rises to a rate of between 6-10 percent.

Wrap Up Hand in your answer to the following question before exiting class: Is GDP a good measurement of economic health? Why or why not?