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Gross Domestic Product (“GDP”)

Gross Domestic Product (“GDP”). Chapter 12 Read P. 301-305 (up to “Other Income and Output Measures”). To determine the health of the American economy, economists keep track of the amount of goods and services produced yearly by the nation and the amount of income people have to spend.

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Gross Domestic Product (“GDP”)

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  1. Gross Domestic Product (“GDP”) Chapter 12 Read P. 301-305 (up to “Other Income and Output Measures”)

  2. To determine the health of the American economy, economists keep track of the amount of goods and services produced yearly by the nation and the amount of income people have to spend.

  3. In the simplest of terms, if the nation produces more goods and services from one year to the next, it can generally be said that the economy is growing… • A growing economy creates jobs… • People who live in an ever-growing economy enjoy a rising standard of living

  4. Conclusion: • A healthy, growing economy is a MAJOR goal that we all share because we all want to live better, more comfortable lives.

  5. How do we measure the health of the national economy? • 5 statistics are used… we’ll focus on only 1:

  6. GDP • “Gross Domestic Product” Total spent on all final goods/services produced in the nation in a single year.

  7. Key points about GDP • Measures value of the stuff we produce…not the quantity OR quality • (GDP is currently somewhere around $14-15 trillion dollars): 14,750,000,000,000

  8. GDP: 4 Main Components

  9. Economists add up what is spent in 4 areas: • Consumer spending: What we spend on everything from gum to private jet airplanes • Investment by business: What business spends on new equipment, labor, buildings, software, etc. • G0vernment spending: What government spends on defense, bailouts, Medicare, etc. • X…net exports: The difference between what we sell overseas and what we buy from overseas

  10. Limitations of GDP Does NOT take into account: • Non-market activities (things we do for ourselves…mowing the lawn, etc) • Underground economy: black mkt., illegal drugs, weapons, stolen cars, etc. • Quality of life…growing GDP does not automatically mean higher std. of living for citizens

  11. Be Careful! Inflation skews (distorts)GDP • HOW? It does not represent higher output • Explanation: Imagine an ice cream cone cost $1.00 last year….and now it costs $2.00 GDP has doubled… but we haven’t produced twice as many ice cream cones, have we?

  12. So… to remove the misleading effects inflation has on output, we use…

  13. The GDP Price Deflator • A mathematical computation used to remove the effects of inflation (don’t panic…you don’t have to do the computation… just know that it IS used) • The resulting number is called “Real GDP”

  14. Summary • Just as we might monitor our blood pressure as a way of assessing our overall health, we monitor how the economy is performing to see if it is expanding (growth) or contracting (negative growth) • Remember: growth creates jobs and leads to a higher std. of living

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