What is the Gross Domestic Product?

Gross Domestic Product (GDP) The retail value of everything produced in the country in a year

GDP Prior to 1991, the US used the Gross National Product (GNP)

GDP Prior to 1991, the US used the Gross National Product (GNP) The GNP took into account goods made overseas, by owners who lived in the US

GDP Prior to 1991, the US used the Gross National Product (GNP) The GNP took into account goods made overseas, by owners who lived in the US The switch happened because the GDP is a truer representation of production within the US

How to Calculate the GDP Expenditure Approach – add together all of the spending for new goods and services produced in a year

How to Calculate the GDP Expenditure Approach – add together all of the spending for new goods and services produced in a year There are 4 types of spending: consumer, business, government, foreign Consumer Spending 68% 18% 5% Business InvestmentGov’t Spending Foreign Spending

How to Calculate the GDP Income Approach – add all the income earned

How to Calculate the GDP Income Approach – add all the income earned Businesses will calculate salary based upon production

Problems with Counting the GDP Double Counting Items

Problems with Counting the GDP Double Counting Items Ex. A firm produces a tire rim and sells it to another company for $10, then company B polishes it and adds some detail and sells it for $15, the $ to the GDP should only be $15 ($10 + $5) but instead it is $25

Problems with Counting the GDP Do-it-Yourself

Problems with Counting the GDP Do-it-Yourself Ex. You paint your house, this is not part of the GDP. Paint your neighbors house for $100 and it is. Either way, a house was painted and value was added

Problems with Counting the GDP Used Purchases Ex. Buy a used car for $5000, not in GDP b/c it is not a part of that year’s production

Problems with Counting the GDP The Underground Economy

Problems with Counting the GDP The Underground Economy People earn income and do not report it

Problems with Counting the GDP The Underground Economy People earn income and do not report it Maybe b/c it is illegal (drugs)

Problems with Counting the GDP The Underground Economy People earn income and do not report it Maybe b/c it is illegal (drugs) Some estimate that the underground economy is 2x that of the GDP

Why Measure the GDP?

In general, it tells us the health of our economy, and proper step may be taken to encourage growth