1. Gross Domestic Product
Measure Up?
Gross Domestic Product
Economics LAP 1

2. Objectives Describe gross domestic product.
Explain the economic role of gross domestic product.

3. Describe gross domestic product.
Objective
Describe gross domestic product.

4. $14 trillion U.S. gross domestic product (2009)—over $14 trillion
Haiti GDP (2009)—$6.5 billion
Ethiopia GDP (2009)—$32 billion
$14 trillion

5. $14 trillion Every country has a GDP.
GDP—an important indicator of economic health

6. Defining GDP
GDP—the final market value of the total output of all goods and services produced within a country’s geographic boundaries during a year’s time
China
$4.9 trillion
Final market value:
Does not include intermediate products (parts of other finished items)
Always expressed in dollars

7. Defining GDP Total output of all goods and services: Is comprehensive
Includes exchanges made by consumers, businesses, and government
Geographic boundaries—all output is included, regardless of ownership

8. Categories of Goods & Services That Make Up GDP
Personal consumption expenditures:
All products purchased for consumption by individuals
Purchases made by the household sector
Purchases made by U.S. citizens living abroad

9. Categories of Goods & Services That Make Up GDP
Personal consumption expenditures:
Three types:
Durable goods (last one year or more)
Nondurable goods (last less than one year)
Services (non-tangible products, such as education)

10. Categories of Goods & Services That Make Up GDP
Gross private domestic investment
Investments in residential and nonresidential buildings and equipment
Value of changes in business inventories
Purchases made by the business sector

11. Categories of Goods & Services That Make Up GDP
Government purchases of goods and services
Everything purchased by local, state, and federal governments
Does not include transfer payments—payments made when no good or service has been produced, such as:
Social Security
Disaster-relief funds

12. Categories of Goods & Services That Make Up GDP
Net exports of goods and services
Also called balance of trade
The difference between what a country imports and what it exports
Trade surplus—more exports than imports—raises GDP
Trade deficit—more imports than exports—lowers GDP

13. Formula for Calculating GDP
Symbols:
C = Personal consumption expenditures
I = Gross private domestic investment
G = Government purchases of goods and services
F = Net exports of goods and services

14. Formula for Calculating GDP
C + I + G (+ or -) F = GDP

15. Problems With Calculating GDP
Dynamic economy
You can’t stop it to measure it.
GDP represents trends, not static figures.
Economy
Uncounted production
Goods and services that are not sold in the marketplace
No money changes hands— value can only be estimated.

16. Problems With Calculating GDP
Underground economy
Transactions in which money changes hands but no receipts are kept
Income is not reported to the government.
Activities may be legal or illegal.

17. Problems With Calculating GDP
Double counting—mistakenly counting a product more than once
Vast amount of information

18. Problems With Calculating GDP
Inflation
A rapid rise in prices that may occur when demand exceeds supply or when productivity declines and costs of labor go up
Can distort GDP by making it seem higher than it actually is

19. Explain the economic role of gross domestic product.
Objective
Explain the economic role of gross domestic product.

20. Why Countries Calculate GDP
To check their economic performance
To check the well-being of their citizens
To compare findings with other countries

21. GDP Flaws Does not indicate types of products produced
Does not indicate quality of products produced
Does not indicate distribution of wealth

22. Importance of Economic Growth
Supports a higher standard of living
More products = more jobs
More jobs = more people able to satisfy their needs and wants
Improves government performance
More jobs = more tax dollars

23. Importance of Economic Growth
Helps to resolve domestic economic problems—stronger economy helps to fight poverty
Helps to develop trading partnerships with other countries
Having products to export
Being a market for imports

24. Government & GDP
Government is responsible for monitoring economic growth.
When the economy is slow (recession), government can:
Increase amount of money in circulation
Spend more on goods and services
Lower the prime interest rate

25. Government & GDP
Government is responsible for monitoring economic growth.
When the economy is slow (recession), government can:
Decrease the discount rate for banks (interest rate at which banks borrow from the Federal Reserve)
Lower taxes

26. Government & GDP
When the economy grows too fast (inflation), government can:
Restrict amount of money in circulation
Spend less on goods and services
Raise the prime interest rate
Increase the discount rate for banks
Raise taxes

27. Businesses & GDP GDP—helps businesses with planning
Guides decisions such as:
Whether or not to expand
Whether to increase or decrease production
Whether or not to borrow money

28. Businesses & GDP GDP—helps businesses with planning
Guides decisions such as:
Whether to increase or decrease investments
Whether or not to hire new employees
Whether to increase or decrease inventories
Businesses and suppliers are interrelated—changes in one affect the other.

29. How are you contributing to your country’s gross domestic product?
If you have a job, what goods or services are you producing and selling?
As a consumer, what did you purchase in the past week that will be part of this year’s GDP?

30. Underground transactions weaken GDP. Example:
A person who makes and sells hair bows out of her home
She sells them to family and friends and doesn’t make a lot of money.
She just keeps the cash and does not report the income.

31. Underground transactions weaken GDP. Example:
Depending on how much she makes, this action may or may not become illegal.
She believes her actions are acceptable, no matter what, since the law is really intended to catch “bigger fish” than she.

32. What do you think?
Is she behaving unethically?

33. MBAResearch Acknowledgments Original Developers
Christopher C. Burke, Sarah Bartlett Borich, MBAResearch
Version 1.0
Copyright © 2011
MBA Research and Curriculum Center®

34. Digital-based photography sources:
DIGITAL VISION LTD.
Teenager Today
Obj. B: #130271
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