1. Gross Domestic Product

2. total of all selling prices of all goods and services produced in a country in 1 calendar year
products in the form sold to consumers
dollar value of all final goods and services produced w/in a country’s borders in a given year
Ex. house built in 1995 sold in 2011 would not be counted in this year’s GDP, it was counted in However, the realtor’s fee is counted for this year because it is a service performed this year
Ex. house built in 2011, would nails, lumber, and windows count in GDP? No, they are intermediate goods… the house is the final good

3. What is the difference between a final good and an intermediate good?
Intermediate good- one of many goods used to produce a final good.
Example: tires for a car, steering wheel, apples for apple pie, crust for apple pie
Final good- finished good. Ready to be sold.
Example: Car, Apple Pie

4. Why do we use final goods and not intermediate goods?
To avoid double counting
Easier (think of how many components make up a car!)

5. What Eight Things Do Not Count In GDP?
1. Intermediate Goods – components of the final good.
A. Ford buys batteries or tires for its cars.
B. KFC buys chickens to eventually sell to customers. 5

6. GDP - what is not counted [#2]
2. 2nd Hand Sales
– no current production.
A Chevy bought in 2007
Salesman
57 Chevy
[It has not been produced again in 1963 & would not count.]
The salesman is doing productive work. His commission would count.
B. Boots produced in 1980 are bought in a Thrift Store in 07.
They also have not been produced again.
Salesman’s commission would count.
You are buying his services.
Shoe salesman 6

7. GDP - what is not counted [#3]
3. Purely Financial Transactions – stocks, bonds, CDs.
There is no current production.
Ex: If 100 shares of Dell stock is bought
Buying stock is not buying a product but buying
ownership of the firm.
I’m not buying a Dell computer
but part ownership of Dell.
Exchanging one financial asset for another 7

8. GDP – what is not counted [#4].
4. Transfer Payments –welfare, unemployment, social security.
[There is no contribution to final production] 8

9. 5. Unreported “Legal” Business Activity
Unreported “legal” business activity does not count.
This is two-thirds of the “underground economy.”
Before LASIK Surgery
Then he has LASIK but the
surgeon doesn’t report
$500 of his $3,400 bill?
And what if the
dentist doesn’t
report $400 for
teeth whitening?
And what if this
waitress doesn’t
report all tips? 9

10. 6. Illegal business activity is also not counted.
Making up 1/3 of the “underground economy,” includes murder for hire, gambling, drugs, and prostitution.
And, what about
“Jane Ho”? 10

11. 7. Non-market Transactions Are Not Counted
Work in your own household or volunteer work in
the community does not count because there was no
payment.
You need to do some of
this housework. 11

12. fitness instructor, or you will hurt GDP.
7. Non-market Transactions Are Not Counted
So, don’t marry your maid, gardener, or
fitness instructor, or you will hurt GDP. 12

13. 8. U.S. Corporations Producing Goods Overseas
GM in
France
Nike in
Indonesia
If U. S. corporations produce goods overseas,
it does not count in GDP, but would count in GNP.
Remember, we are measuring production inside
the U.S. Imports represent production outside of
the U.S. 13

14. Would each of the following be counted in the U.S. 2018 GDP?
1. I paint my personal house and I am a painter
2. Apple iPhone produced in China, sold in U.S.
3. Honda Accord produced in Ohio in 2018
4. chicken used by Kentucky Fried Chicken
5. Coach Arnold’s teacher salary

15. 2 WAYS TO CALCULATE… EXPENDITURE APPROACH INCOME APPROACH
Estimate amount spent on goods and services
Ex. Economy’s entire output is cars and trucks
$15,000/car, 10 cars sold
$20,000/truck, 10 trucks sold
(15,000*10)+(20,000*10)= $350,000
Calculate by adding up all the incomes in the economy
Planners, Designers, Managers, Suppliers, Engineers, Factory workers income = $350,000

16. Gross National Product
Nominal GDP
Measured in current prices
Gross National Product
annual income earned by US-owned firms and citizens
GDP+ income earned by American firms and citizens outside the US – income earned by foreign citizens and companies
Real GDP
Adjusted for inflation

17. Limitations of GDP
Nonmarket activities- things people make themselves (ex. washing your car, mowing your lawn, etc.)
Underground economy- black market, illegal gambling, etc
Negative externalities- unintended economic side effects, power plant spending money to reduce pollution
Quality of life- pleasant surroundings, personal safety

18. ECONOMIC GROWTH GDP growing= economic growth
Standard of living is better
Real GDP per capita= GDP/ total population
Population growth doesn’t necessarily mean economic growth
Technological process- increase in efficiency gained by producing more output w/o using more input (using robots in assembly lines making cars)

19. BUSINESS CYCLE Peak- height of expansion
Trough- lowest point when real GDP stops falling
Contraction- economic decline marked by falling real GDP
Recession- prolonged economic contraction
Depression- recession that’s especially long and severe
Expansion- economic growth caused by a rise in GDP