1. Gross Domestic Product
How do you measure economic growth?
PRODUCT
Market
FACTOR
FIRMS
HOUSEHOLDS

2. Gross Domestic Product (GDP)
Dollar Value of all new FINAL goods & services produced domestically over one year.
2016 = $18.6 Trillion dollars
Per capita GDP = $57,000 (per person) ($18.6 Trillion/321 million people)
GDP growth rate released quarterly by the Government
Recession = Negative GDP growth rate for 2 consecutive quarters
Historically U.S. GDP grows between 1% - 5% annually
Growth above 5% is considered “too fast” (causes inflation…)
Growth below 2% is considered “too slow” (causes rising unemployment)

3. % GDP growth by quarter (3months)
Slow Recovery
Why?
Great
Recession
Slow GDP growth recovery
from great recession = +2.0%
2013 = +1.7%
2014 = +2.6%
2015 = +2.9%
2016 = 1.5%
2.5% %% %

4. Calculating GDP GDP = C + I + G + (X –M)
Expenditure Method= add up all the spending on U.S. produced goods & services
Most common method used in AP Economics
GDP = C + I + G + (X –M)
GDP = Total “size” of U.S. Economy => $18.7 Trillion Dollars

5. GDP = C + I + G + (X-M) Expenditure Equation for GDP:
Consumption
70% of GDP!
Government
24% of GDP!
GDP = C + I + G + (X-M)
Business Investment:
New Capital Machinery
New Construction
Unsold Inventories
Exports - Imports
Gov’t Transfer Payments: => Do NOT count as Gov’t Spending ↓
Unemployment insurance, welfare, food stamps => end up in “C” as consumer spending

6. NOT included in GDP: Intermediate Goods:
Only FINAL goods counts (must avoid “double counting”)
Example: steel used to make a car does not count
count only value of the entire car (not parts)
Non-market transactions:
If you call a plumber it counts. If you fix your sink
It does not count
Underground Economy
illegal sale of goods (drugs), payments made “under the table”, etc…
Financial Transactions
only a transfer of assets
Gov’t Transfer Payments
Gov’t transfers to person or company
Example: welfare, social security, food stamps
etc…
International goods:
Only goods produced in USA count
Second hand sales
only NEW sales count

7. Worksheet: GDP Analysis
GDP = C + I + G + (NX)

8. Primary Use of GDP
Objective way to “keep score” on economic performance
Politicians monitor GDP figures to determine Gov’t Policy
Federal Reserve also base their policy decisions on GDP

9. What GDP does Not Measure
The mix of products:
all goods treated equally: Guns versus Food
How goods are distributed
Is wealth concentrated evenly?
Does not measure Leisure Time
Vacation Days in Europe vs. U.S.
Work 80 hours instead of 40 hrs/week, GDP increases
What about quality of life?

10. U.S. GDP in Comparison U.S. $18.6 Trillion
23% of World GDP
U.S $18.6 Trillion
Entire World: $ Trillion
China $ Trillion
Japan $ Trillion
Germany $ Trillion
India $ Trillion

11. 2 Ways to calculate GDP
Since every economic transaction has both a buyer & a seller => there are 2 ways to measure GDP. (Add up all Spending or all Income)
1) Expenditure Method= add up all spending (GDP = C + I + G + NX)
method used most of the time in AP Economics OR
2) Income Method= add up all income (wages, rent, interest & profits)
Resource Supplied Income Received
Labor Wages
Land Rent
Financial Capital Interest
Entrepreneurial Talent Profit

12. 2 methods of calculating GDP continued
GDP = Total Income
GDP = Total Expenditures
PRODUCT MARKET
Total Expenditures
must equal
Total Income
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
FIRMS
HOUSEHOLDS
FACTOR Market
Factors of
production
Labor, land,
capital & entrepreneurship
Wages, rent,
Interest & profit
Income
= Flow of inputs
and outputs
= Flow of dollars