1. [ 7.1 ] Gross Domestic Product

2. [ 7.1 ] Gross Domestic Product
Learning Objectives
Explain how gross domestic product (GDP) is calculated.
Interpret GDP data.
Identify factors that influence GDP.
Describe other output and income measures.

3. [ 7.1 ] Gross Domestic Product
Key Terms
national income accounting
gross domestic product
intermediate goods,
durable goods
nondurable goods
nominal GDP
real GDP,
gross national product
depreciation,
price level,
aggregate supply,
Aggregate demand

4. Economic Measures
How much attention do you pay to the economic news? If you’re like most people your age—or most Americans in general—your answer is probably, “Not much.” After all, you’d have to be some kind of genius to keep track of the GDP, the GNP, the NNP, the NI, the DPI, and the rest of the economic alphabet soup. Who has the time? And who cares anyway?

5. Economic Measures What is GDP? The Expenditure Approach
The Income Approach

6. What Is Gross Domestic Product?
Economists monitor the macro-economy using national income accounting, a system that collects statistics on production, income, investment, and savings.
Gross domestic product (GDP) is the dollar value of all final goods and services produced within a country’s borders in a given year.
GDP does not include the value of intermediate goods. Intermediate goods are goods used in the production of final goods and services.

7. Calculating GDP
The Expenditure Approach
The expenditure approach totals annual expenditures on four categories of final goods or services.
1. Consumer goods and services
2. Business goods and services
3. Government goods and services
4. Net exports or imports of goods or services.
The Income Approach
The income approach calculates GDP by adding up all the incomes in the economy.
Consumer goods include durable goods, goods that last for a relatively long time like refrigerators, and nondurable goods, or goods that last a short period of time, like food and light bulbs.

8. Economic Measures
Analyze Charts Would GDP include a computer chip made by a U.S. company in China? Why or why not?

9. Economic Measures
Analyze Graphs Based on this chart, which shows the average spending by household in different categories as a portion of GDP, about what portion of GDP do Americans spend on housing?

10. Economic Measures
Electronic devices such as smartphones include many intermediate goods, or parts. Only the value of the final product is included in GDP.

11. Two Measures of GDP
Government officials use gross domestic product to find out how well the economy is performing. To help them understand what is really going on in the economy, economists distinguish between two measures of GDP, nominal and real.

12. Two Measures of GDP
Calculating Nominal GDP
Calculating Real GDP

13. Real and Nominal GDP
Nominal GDP is GDP measured in current prices. It does not account for price level increases from year to year.
Real GDP is GDP expressed in constant, or unchanging, dollars.
Nominal and Real GDP
Year 1 Nominal GDP
Suppose an economy‘s entire output is cars and trucks.
This year the economy produces:
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
Since we have used the current year’s prices to express the current year’s output, the result is a nominal GDP of $350,000.
In the second year, the economy’s output does not increase, but the prices of the cars and trucks do:
This new GDP figure of $370,000 is misleading. GDP rises because of an increase in prices. Economists prefer to have a measure of GDP that is not affected by changes in prices. So they calculate real GDP.
10 cars at $16,000 each = $160,000
+ 10 trucks at $21,000 each = $210,000
Total = $370,000
Year 2 Nominal GDP
10 cars at $15,000 each = $150,000
+ 10 trucks at $20,000 each = $200,000
Total = $350,000
To correct for an increase in prices, economists establish a set of constant prices by choosing one year as a base year. When they calculate real GDP for other years, they use the prices
from the base year. So we calculate the real GDP for Year 2 using the prices from Year 1:
Year 3 Real GDP
Real GDP for Year 2, therefore, is $350,000

14. Two Measures of GDP
Although nominal GDP offers useful information, real GDP corrects for increases in prices. Analyze Charts What is the difference between nominal and real GDP for Year 2?

15. What GDP Doesn’t Measure
Even though GDP is a valuable tool, it is not a perfect yardstick. For instance, GDP does not take into account certain economic activities or aspects of life. These include nonmarket activities, the underground economy, negative externalities, and quality of life.

16. What GDP Doesn’t Measure
Nonmarket Activities
The Underground Economy
Negative Externalities
Quality of Life

17. Limitations of GDP
GDP does not take into account certain economic activities, such as:
Nonmarket Activities
GDP does not measure goods and services that people make or do themselves, such as caring for children, mowing lawns, or cooking dinner.
Negative Externalities
Unintended economic side effects, such as pollution, have a monetary value that is often not reflected in GDP.
The Underground Economy
There is much economic activity which, although income is generated, never reported to the government. Examples include black market transactions and "under the table" wages.
Quality of Life
Although GDP is often used as a quality of life measurement, there are factors not covered by it. These include leisure time, pleasant surroundings, and personal safety.

18. Other Income and Output Measures
Gross National Product (GNP)
GNP is a measure of the market value of all goods and services produced by Americans in one year.
Net National Product (NNP)
NNP is a measure of the output made by Americans in one year minus adjustments for depreciation. Depreciation is the loss of value of capital equipment that results from normal wear and tear.
National Income (NI)
NI is equal to NNP minus sales and excise taxes.
Personal Income (PI)
PI is the total pre-tax income paid to U.S. households.
Disposable Personal Income (DPI)
DPI is equal to personal income minus individual income taxes.

19. What GDP Doesn’t Measure
Professional day-care services are included in the calculation of GDP. However, unpaid child care and informal baby-sitting are not.

20. Other Economic Measures
As you have read, our system of National Income and Product Accounts provides numerous measurements of the performance of the nation’s economy. While gross domestic product is the primary measure of income and output, economists also look at other measures to focus on specific parts of the economy. Many of these other yardsticks are derived from GDP. Figure 7.4 shows how GDP is used to determine five other economic measures.

21. Other Economic Measures
These equations summarize formulas for calculating some of these key indicators.Analyze Charts Which measure includes depreciation in its calculation?

22. Other Economic Measures
Depreciation accounts for the cost of replacing capital equipment such as these washing machines in a laundromat.

23. Factors That Affect GDP
So far, we have defined GDP, calculated it, and learned about its limitations. One important issue remains, however: What influences GDP? That is, in a real economy, what factors can make GDP go up or down? These questions go to the heart of macroeconomics.

24. Factors That Affect GDP
Aggregate Supply
Aggregate Demand
Aggregate Supply/Aggregate Demand Equilibrium

25. Key Macroeconomic Measurements
Measurements of the Macroeconomy + =
Gross Domestic Product
Gross National Product
income earned outside U.S. by U.S. firms and citizens –
income earned by foreign firms and foreign citizens located in the U.S.
Gross National Product –
depreciation of capital equipment =
Net National Product
Net National Product
National Income –
sales and excise taxes = –
• firms‘ reinvested profits
• firms‘ income taxes
• social security +
other household income =
National Income
Personal Income –
individual income taxes =
Personal Income
Disposable Personal Income

26. Factors Influencing GDP
Aggregate Supply
Aggregate supply is the total amount of goods and services in the economy available at all possible price levels.
As price levels rise, aggregate supply rises and real GDP increases.
Aggregate Demand
Aggregate demand is the amount of goods and services that will be purchased at all possible price levels.
Lower price levels will increase aggregate demand as consumers’ purchasing power increases.
Aggregate Supply/Aggregate Demand Equilibrium
By combining aggregate supply curves and aggregate demand curves, equilibrium for the macroeconomy can be determined.

27. Factors That Affect GDP
Aggregate supply is the total amount of goods and services available at all price levels in the economy.

28. Factors That Affect GDP
Analyze Graphs What does the positive slope of the graph mean?

29. Quiz: Economic Measures
Why are imports not included in gross domestic product?
A. They are heavily taxed.
B. They are durable goods.
C. They are not final goods and services.
D. They are produced outside the country.

30. Quiz: Two Measures of GDP
What problem is solved by using real GDP?
A. misrepresentations of output
B. distortions caused by changes in prices over time
C. the difficulty in determining current average prices
D. differences between the expenditure and income approach

31. Quiz: What GDP Doesn’t Measure
Which is an example of a nonmarket activity?
A. buying a car
B. cleaning your house
C. baby-sitting for less than minimum wage
D. going to a movie with someone who buys your ticket

32. Quiz: Other Economic Measures
What is disposable personal income?
A. how much people earn in a year
B. how much people pay in income taxes
C. how much people spend on durable goods
D. how much people have to spend after paying their taxes

33. Quiz: Factors That Affect GDP
Which of the following is not included in aggregate demand?
A. an increase in supply
B. government spending
C. foreigners’ demand for export goods
D. business spending on capital investment