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Measuring the Wealth of the Nation

Measuring the Wealth of the Nation. Chapter 12. What is GDP?. Gross Domestic Product The total dollar value of all final goods and services a nation’s industries produce within its borders in one year. Quantity of goods produced in a year X price of each item = GDP. Nominal GDP.

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Measuring the Wealth of the Nation

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  1. Measuring the Wealth of the Nation Chapter 12

  2. What is GDP? • Gross Domestic Product • The total dollar value of all final goods and services a nation’s industries produce within its borders in one year.

  3. Quantity of goods produced in a year X price of each item = GDP

  4. Nominal GDP • Dollar values (reported as is) – the way the government reports GDP

  5. Real GDP • GDP adjusted for inflation from a base year.

  6. Final Goods measure GDP • Final goods and services – sold to ultimate users • Intermediate goods – those used in the production of other goods. • Tire example: may be either final or intermediate depending on who sells it.

  7. Unsold inventories are counted in GDP- dealer is considered the final purchaser.

  8. GDP includes only goods produced in the specified calendar year.

  9. GDP measures only domestic production, things produced in the U.S. • Toyota Tundra made in Texas?

  10. Recap: 4 concepts used to determine GDP • 1. Quantity of Goods X Price • 2. Only final goods & services • 3. Only goods produced during the calendar year. • 4. Only includes domestic production.

  11. How to Measure GDP

  12. GDP has to be estimated. • Add all purchases in the four basic economic groups: • Households • Businesses • Government • foreign buyers

  13. Household Consumption • Households account for the greatest portion of the nation’s total purchases: $9,224.5 billion in 2006. • Consumer Services – haircuts, education • Consumer Durable Goods: life expectancy more than one year • Consumer Non-durable Goods: wears out or used up in less than one year.

  14. Trash bags • Car stereo • Suntan lotion • Flip flops • Prom dress • Laundry detergent • Home theater

  15. Business Investment • Gross Private Domestic Investment (GPDI)- business investment • Sum of all business spending on captial investment and unplanned inventories.

  16. Government Spending • In 2006, Government spending accounted for about one-fifth of the GDP.

  17. Net Exports • Consider the amount of goods a nation sells to other countries. • Then subtract the amount that nation buys from other countries. • That gives you the Net Exports. • The U.S. has had a negative trade balance every year since the 1970s. (We buy more from other countries than we sell.)

  18. GDP = C + I + G + NX

  19. Problems with GDP Measurement

  20. Purpose of GDP – tell government officials and economists how productive the economy has been at any given time. • GDP is an estimate and is NOT precise.

  21. Unrecorded Transactions – barter transactions, do-it-yourself activities, black market activities • Counterproductive Items – pollution, environmental damage • Inflation- GDP doesn’t recognize the true dollar value of production. Economists adjust for inflation to a base year = REAL GDP • Changes in population – per capita GDP, wealth per person

  22. Real GDP/total population = per capita real GDP

  23. Foreign Trade

  24. Trade Deficit • Negative balance of trade – buy more from foreign countries than you sell.

  25. Trade Surplus • Positive balance of trade – Sell more to foreign countries than you buy.

  26. Since 1976 the U.S. has run trade deficits. • Trade deficits mean jobs leave the U.S. and go overseas where countries are producing more. • Trade deficits indicate a decline in U.S. manufacturing. • Trade deficits show that other countries are able to produce better or less costly products.

  27. Reasons for Trade Deficits

  28. Reasons for Trade Deficits • 1. Domestic inability to produce some goods. • 2. Better quality of some foreign goods. • 3. Cheaper foreign materials. • 4. Lower foreign wages. • 5. Lower foreign capital costs. • 6. Foreign subsidies – Gov’t pays producers to help with manufacturing costs.

  29. Trade Policy: Protectionism vs. Free Trade

  30. Protectionists • Try to protect domestic manufacturing and jobs.

  31. Protectionists • Support trade quotas which limit the quantity of goods that can be imported. • Support tariffs which make imports more expensive and domestic products more competitive. • Unintended Consequence: Costs rise for the American consumer causing a reduced demand for products.

  32. Free Trade Advocates • Believes free markets will offer the best opportunities. • Consumers are important to productivity. • Say protectionism is similar to mercantilism (how?) • Quotas and tariffs cause shippers and boatmen to lose jobs due to fewer imports.

  33. Free Trade Advocates • If foreigners prosper from trade, they are able to purchase American products. • Protectionist laws favors some businesses and industry and hurts others. (redistribution of unemployment)

  34. Winners & Losers Protectionism • Non-competitive firms win • Limits buyers choices • Raises prices Free Trade • Solid businesses may suffer • Gives buyers more choices • Lowers prices

  35. GDP Review • What is it? • Why is it important? • What must be taken into consideration?

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