1. Measuring the Economy: Gross Domestic Product

2. What is GDP?
National income accounting is a way of evaluating a country’s economy using statistical measures of its income, spending, and output
GDP is the most important of those measures
Gross domestic product is the market value of all final goods and services produced within a nation in a given time period

3. Components of GDP
To be included in GDP, a good or service has to fulfill 3 requirements:
1) has to be final rather than intermediate (Ex. The fabric used to make a shirt is an intermediate good; the shirt itself is a final good.)
2) the good or service must be produced during the time period, regardless of when it is sold (Ex. Cars made this year but sold next year would be counted in this year’s GDP)
3) The good or service must be produced within the nation’s borders. (Products made in foreign countries by U.S. companies are not included in the U.S. GDP)

4. Calculating GDP Economists use the expenditures approach
Group national spending on final goods and services according to 4 sectors of the economy:
1) Spending by households (consumption – C)
2) Spending by businesses (investment – I)
3) government spending (G)
4) total of exports minus total of imports or net exports (X)
To calculate GDP, economists use this equation: C+I+G+X=GDP

5. Consumption
Includes all spending by households on durable goods, nondurable goods and services
Movie Theater example:
You drive to the movies in a durable good (an item that does not wear out quickly.)
You purchase a service when you pay for the movie (since you are not buying to own something)
You obtain a nondurable good (a good that is used up relatively soon after purchase) when you buy popcorn

6. Investment Measures what businesses spend 2 categories:
1) fixed investment = new construction and purchases of capital goods like equipment, machinery, and tools
2) inventory investment (unconsumed output) = made up of unsold goods that businesses keep on hand

7. Government Spending
Includes all the expenditures of federal, state, and local governments on goods and services
Spending for defense, highways, public education
Spending on transfer payments, like social security and unemployment benefits, is not included

8. Net Exports Represents foreign trade
Takes into account the goods and services produced in the U.S. but sold in foreign countries (exports)
Since U.S. consumers and businesses also buy (import) goods made in foreign countries, the GDP only counts net exports
The value of U.S. exports minus the value of U.S. imports

10. Two types of GDP
GDP is used to gauge how well a country’s economy is doing
Economists use two forms of GDP to see exactly how “healthy” a country’s economy is
Nominal GDP = states GDP in terms of the current value (price levels) of goods and services in the year the GDP was measured
Real GDP = nominal GDP adjusted for changes in prices from year to year
An estimate of the GDP if prices were to remain constant from year to year
To find real GDP, economists compare nominal GDP to a base year
Real GDP provides a more accurate measure of economic performance

12. What GDP does not measure
Nonmarket activities = services that have potential economic value but are performed without charge
doing volunteer work or performing one’s own home repairs
Underground economy = market activities that go unreported because they are illegal or because those involved want to avoid taxation
Drug dealing, smuggling, gambling, selling stolen goods, illegal trading (black market)

13. Other Economic Performance Measures of national income accounting
Gross National Product (GNP) = the market value of all final goods and services produced by a country
Net national product (NNP) = the value of final goods and services minus the value of capital goods that have become worn out
National income (NI) = the total income earned in a nation from the production of goods and services
Personal income (PI) = the income received by a country’s people from all sources
Disposable personal income (DPI) = personal income minus taxes
(how much money actually available for consumer spending)

15. Calculate the GDP
Atoll K is small island nation. Its population total is 400, and it has 100 wage earners who earn an average of $50 per year. Each wage earner spends a total of $40 per year buying goods and services of which $3.00 goes to buying imported goods. The island exports a total of $800 worth of goods. The Government tax rate is 10% and all government money is spent on building infrastructure and supporting schools. There is only one industry (uranium mining) on the island and it employs every wage earner. The industry spends $600 each year on new mining equipment. What is the GDP?

16. GDP = C+I+G+X GDP = C + I + G + X, where X = E - M
C = 100 x $40 = $4000 Total Consumer Spending
I = 600 Total spent on Investment
E = 800 Total received from Exports
M = 100 x $3.0 = -300 Total spent on Imports
G = .1 x (100 x $50) = % of total income for workers
$5600 Total = GDP

17. The top 10 countries by GDP
United States
China
Japan
Germany
France
Brazil
United Kingdom
Italy
India
Russia
What do you think of the GDP as a measure of the standard of living?
For instance , China has a huge GDP, but the standard of living is quite poor. Any thoughts?