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Understanding Gross Domestic Product and its Measurement

Learn about the concept of Gross Domestic Product (GDP) and its measurement, including the expenditure and income approach, nominal versus real GDP, limitations of GDP, and factors influencing GDP.

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Understanding Gross Domestic Product and its Measurement

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  1. Unit 3: Macroeconomics Lesson 1: Gross Domestic Product

  2. Measuring Economic Performance • national income accounting: a system that collects statistics on production, income, investment, and savings • National Income and Product Accounts: NIPA used by Department of Commerce to determine economic policies

  3. Gross Domestic Product • GDP: the total dollar value of all final goods and services produced within a country’s borders during a given year ● No intermediate products ● No overseas production ● No secondary sales items

  4. Question #1: What is added to the GDP in the sale of a new home? Explain.

  5. Question #2: What is added to the GDP in the sale of a used home? Explain.

  6. Gross Domestic Product • Expenditure vs. Income Approach ● Expenditure: a method to calculate GDP by using amounts spent on four categories of goods & services C + I + G + (X – M) C = consumer (durable vs. nondurable) I = business (capital goods) G = government (federal, state, local) (X-M) = total exports – total imports

  7. Gross Domestic Product • Expenditure vs. Income Approach ● Income: a method to calculate GDP by adding up all the incomes in the economy

  8. Question #3: What is added to GDP in the sale of an automobile using income approach? Give examples in your response.

  9. Gross Domestic Product • Nominal vs. Real GDP ● nominal GDP: “current GDP” is measured in the current year’s prices ● real GDP: real GDP is measured in constant or unchanging prices to account for inflation

  10. Nominal vs. Real GDP Nominal GDP = current prices Real GDP = constant prices

  11. Limitations of GDP • non-market activities: no measure of goods and services made for no pay (child care) • underground economy: no measure of unreported jobs (“black market” & “under the table” wages) • negative externalities: no measure of value for economic side-effects (clean air) • quality of life: additional goods and services do not always equate to happiness

  12. Influences on GDP • What factors can change level of GDP? • aggregate supply: AS is the total amount of goods and services in the economy that are available at all prices • aggregate demand: AD is the total amount of goods and services in the economy that are purchased at all prices

  13. Influences on GDP • AS/AD Equilibrium: the intersection of AS and AD portrays market equilibrium ● P = price level ● Q = GDP

  14. Influences on GDP 5. A shift in either AS or AD will cause a change to GDP and the price level

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