Gross Domestic Product

1. Gross Domestic Product Also known as GDP

2. Before We Begin • aggregate demand (AD)- the total demand for final goods and services in an economy at a given time. • aggregate supply (AS)  the total supply of goods and services available to a particular market

3. Gross Domestic Product (GDP) • The Market Value of all final goods and services produced in a country in a year • If someone buys a brand new car in 2004 and then sells it in 2008 which year does that car count towards GDP? • If a good is produced in Russia and bought in the U.S. does it count towards GDP?

4. Gross Domestic Product (GDP) • Final Goods and serviceshave been purchased for final use. They are not for resale or further manufacture? • Lumber used to build a house? • Steel used to build a car? • New School building?

5. Gross Domestic Product (GDP) • Economist often measure GDP by totaling the money spent on four major categories of goods and services • C-Consumption(Consumer Spending) • I-Investment (Spending by Businesses) • G-Government (Spending by government) • (X-M)-Net Exports (exports-imports)

6. Gross Domestic Product (GDP) • C-Consumer spending -Spending by households on goods and services. Includes spending on things such as cars, food, and visits to the dentist. Makes up 2/3 of GDP (largest)

7. Gross Domestic Produce GDPs • I- Investment, business, industrial spending. Spending by businesses on machinery, factories, Equipment, tools, and construction of new buildings

8. Gross Domestic Product (GDP) • G- Government spending • Spending by all levels of government on goods and services. Includes spending on the military, schools and highways

9. Gross Domestic Product (GDP) • (X-M) Net exports • Exports minus imports • Spending by people abroad on U.S. goods and services (exports) minus spending by people in U.S. on foreign goods and services (Imports or M)

10. Gross Domestic Product (GDP) • In other words: exports is when other countries buy our stuff imports when we buy their stuff • Net Exports is always negative for U.S. • Imports decrease GDP, Exports increase it • To find GDP, use this formula: • GDP=C+I+G+(X-M)

11. Try it out • Due to tax cuts, consumers buy more new cars • Worried about an increasing budget deficit, the government decides to buy fewer military planes • Increasing prices in the U.S. encourage Americans to buy more foreign goods • Due to tax increase, consumers spend less on vacation travel

12. Try it out • Due to increased incomes, Europeans buy more U.S. goods and services • A foreign government imposes a tariff that discourages its citizens from buying goods from the U.S. • Businesses are optimistic about the future and increase construction of new factories

13. Try it out • Decreases in interest rates encourage businesses to take out loans to construct • To fight unemployment, the government decides to hire more people to work in national parks • Tax cuts to businesses give businesses incentives to buy more computers • To stimulate the economy and provide jobs, the government builds more bridges in California

14. Gross Domestic Product GDP • The formula for GDP is known as “The Output Expenditure Model.” • Think of if like you would the like a formula in math or science • Output Expenditure model is GDP=C+I+G+(X-M)

15. GDP Per Capita • GDP Per Capita-Per capita GDP is sometimes used as an indicator of standard of living as well, with higher per capita GDP being interpreted as having a higher standard of living • GDP Per Capita=GDP/Population

16. GDP Per Capita • High GDP’s per capita usually represent a high standard of living. • It has been shown that countries with high GDP’s per capita usually have High life expectancy, high literacy rates, and low infant mortality rates

17. GDP PER CAPITA • Discussion question- Does high literacy rates lead to higher GDP Per capita or does high GDP per capita lead to High literacy rates?

18. GDP Practice • All values are billions • Reminder GDP=C+I+G+(X-M) • 1. C= 125 I=15 G=40 X=10 M=15 • 2. C= 500 I=5 G=25 X=30 M=15 • 3. C= 50 I=10 G=15 X=20 M=30 • 4. C= 150 I=20 G=30 X=40 M=10 • 5. C= 750 I=40 G=30 X=15 M=35

19. Takeaways • What is the Output expenditure model? • What are the categories of GDP? • Be able to identify what category an expenditure would fit in. • Be able to identify GDP Per capita • What are the biggest categories of GDP • How is it calculated • What does GDP Per capita say about a country?