1. Gross Domestic Product (GDP)

2. Gross Domestic Product (GDP)
“The dollar value of all goods and services produced within a countries’ border in a given year.”
It’s essentially how much stuff we make in our country in a given year (and we only count it once).

3. Why do we care?
It’s simple, the day will always be 24 hours long. Therefore, the countries who are able to be more productive with their resources are more likely to be economically secure.
It’s estimated that in 1870, it took 1800 hours of work to earn enough food for a year. Today, it only takes about 260 hours... a lot of that change is thanks to our productivity growth and improvements in human capital.

4. Measuring GDP over time also allows us to track our economy and it allows us to compare with others to see how we are doing.
Why do we care?

5. What gets calculated in GDP?
To explain this, first we need to clarify the difference between what we call intermediate goods and final goods.
A final good does count in GDP and is something that has reached their final buyer in the given year. That buyer must buy it with the intention of keeping the good for it to count in GDP

6. What gets calculated in GDP?
An intermediate good does NOT count into GDP. It is something that is a “complete” product, but that product has not met its final buyer in the given year.
When someone buys an intermediate good, they intend on using that good as part of another, usually larger good in order to sell the larger and more valuable good.

7. What gets calculated in GDP?
We don’t count intermediate goods because it would be like double counting the value and it would inflate GDP numbers. Think of it like a computer, each of it’s parts can be bought separately, but usually we buy it all as one good and the price of all the small goods is reflected in the price of the big good.
not counted
A lot of GDP calcualtion is related to context. Many products can be both intermediate and final, depending on who is buying and what their intentions are with that good.
counted

8. What gets calculated in GDP?
Another important distinction for GDP is where the good is actually produced.
If an American company has cars built in Brazil, the value of that work will count in Brazil’s GDP because the cars were produced in that country.
doesn’t count
If a foreign company has cars built in America, the value of that work will count in America’s GDP because the cars were produced here.
does count

9. How do we calculate GDP?
It all goes back to the circular flow model that we learned about when we talked about the free market.
There are two distinct “flows” that occur in our economy. Each of these flows is calculated differently, but each of them also represents our productivity, which means our GDP.
Why do we calculate it twice? Because it gives us a better average and perspective of our economy.

10. How do we calculate GDP? THE EXPENDITURE APPROACH
The first calculation method involves adding up all expenditures in our country in a single year. The idea is that when we produce something, someone buys it, and therefore adding up everything we buy is the same as adding up everything we produce.
We use this equation: C + I + G (X-M) = GDP
C: Consumer Goods and Services
I: Business Investment G: Government Spending X: Exports (helps production) M: Imports (hurts production)
Guess which of these five categories is, by far, the largest part of the GDP calculation?

11. THE EXPENDITURE APPROACH
How do we calculate GDP?
THE EXPENDITURE APPROACH
Let’s pretend our country had an economy that produced only Nike Dunks (shoes) and nothing else (remember, we’re simplifying). All we have to do is multiply the number of shoes purchased by their price (since price reflects production).
R2-D2 Dunks:
Banksy Dunks:
Peach Dunks:
Twitter Dunks:
$100 x 10,000 pairs
$120 x 10,000 pairs
$110 x 12,000 pairs
$100 x 12,000 pairs
= $1,000,000
= $1,200,000
= $1,320,000
GDP = $4,720,000

12. Those Dunks are so hot right now.
How do we calculate GDP?
THE INCOME APPROACH
Another way to calculate GDP is to add up all the incomes in our economy. Every product sold represents income for some type of worker and the price of products reflects the amount of work that went into making it.
Advertisers
Designers
Factory Workers
Factory Managers
Suppliers
20% per pair
25% per pair
15% per pair
= $944,000
= $1,180,000
= $708,000
GDP = $4,720,000
If our country still makes Dunks, we are going to need several types of jobs to produce the shoes.
If there’s ever a discrepancy between the two approaches, the government knows to study the situation.
Those Dunks are so hot right now.

13. What is Real GDP vs. Nominal GDP?
When it comes to GDP, economist like to use two numbers to represent our production; Real GDP and Nominal GDP.
If you rub the blister on my foot, I’ll pay you a whole quarter, Russ.
Nominal GDP is our production measured in current prices. This generally skews things since it means inflation is not taken into account (it’s like old people paying you $0.25 for work).
Real GDP is measured in constant prices. It does account for inflation and better represents how much better (or worse) off that we are
Wow, a whole quarter!

14. What is Real GDP vs. Nominal GDP?
Year 1 Nominal GDP
Apples:
PCs:
Let’s pretend we had an economy that sold only Apples and PCs.
100 Computers
x $1,500
x $2,000
= $150,000
= $200,000
GDP = $350,000
It looks like our GDP is increasing in Year 2, but that is actually false because we are not actually producing anything more.
Year 2 Nominal GDP
Apples:
PCs:
100 Computers
x $1,600
x $2,100
= $160,000
= $210,000
GDP = $370,000
Year 2 Real GDP
Apples:
PCs:
100 Computers
x $1,500
x $2,000
= $150,000
= $200,000
To measure Real GDP, simply multiply current year quantities to base year prices.
Real GDP = $350,000

15. Anything else?
If South Africa has a GDP of $524 Billion and Monaco has a GDP of $6.8 Billion, which is a more rich country?
Just give ‘em the “african face” and play the drums.
Monaco, by far. The reason is because for the average person, we are really concerned with GDP Per Capita. Essentially, it is the productivity of each person; it is calculated by taking GDP and dividing it by the population.
Monaco GDP Per Capita = $186,175
South Africa GDP Per Capita = $10,700
The most significant contributor to GDP Per Capita it human capital. When we have more skills, we are more productive and are ultimately better off.

16. Let’s Practice GDP Per Capita*
Take out a sheet of paper (turn it sideways) and divide it into five columns so it looks like the chart below.
$110,400 - $50,200
$47,600 - $40,600
$36,000 - $10,400
$9,200 - $3,600
$1,500 - $200
*Updated 2010

17. Let’s Practice GDP Per Capita
Germany
Iran
Ireland
UAE
United Kingdom
United States
Ethiopia
Liberia
Bahamas
Japan
Madagascar
China
Argentina
Luxembourg
Djibouti
Mexico
Norway
Switzerland
Sweden
Brazil
Eq. Guinea
Dem. Rep of Congo
South Korea
South Africa
Qatar
Canada
Fiji
Greece
Tanzania
Iceland

18. Let’s Practice GDP Per Capita
$110,400 - $50,200
$47,600 - $40,600
$36,000 - $10,400
$9,200 - $3,600
$1,500 - $200
Luxembourg
United States
United Kingdom
Mexico
Djibouti
Norway
Canada
Greece
Argentina
Tanzania
Qatar
Ireland
Bahamas
South Africa
Madagascar
Switzerland
Japan
Eq. Guinea
Iran
Ethiopia
UAE
Iceland
South Korea
China
Liberia
Sweden
Germany
Brazil
Fiji
Dem. Rep of Congo
How well did you do? Consider the fact that the richest country here makes literally 500X more than the poorest.