Gross Domestic Product

1. Gross Domestic Product

2. Gross Domestic Product(GDP) Definition: The market value of all final goods and services produced in a country in a year • Current/nominal GDP (measured for the given year, reflects inflation ) • Real GDP (set on a constant base year)

3. Gross Domestic Product(GDP) GDP is measured by totaling money spent on four categories: • Consumption (C) • Investment (I) • Government Spending (G) • Net Exports • Exports (X) - imports (M) • GDP= C+I+G+ (X-M)

4. Consumer and GovernmentSpending • Consumer: The spending by households on goods and services. • A new car, food, clothes, college tuition, sporting event, health insurance. • Makes up 66% of GDP • Government: Spending by all levels of government on goods and services • Military, education, roads, healthcare • 25-35% GDP www.irle.berkeley.edu/events/spring08/feller/

5. Spending GDP(Consumer and Government) • How Divided? • Housing 24% • Health 14% • Food 12% • Transport 10%

6. Investment • Definition: Spending by businesses on capital • machinery, factories, equipment, tools, computers, new buildings, inventory • 12-14% of total GDP

7. Net Exports • Definition:Spending by people outside the United States on US produced goods and services(exports, or X)minus spending by people in the United States on foreign goods and service(imports, or M) • (X-M) = Net Exports • (X) Jonas Brothers sell CDs in Japan • (M) You buy a camera made in China

8. Gross Domestic ProductHow to Calculate • GDP is calculated by multiplying the quantity of each final good and service produced (Q) in a year by their estimated price (P) to get the dollar value (DV), and then adding all dollar values of each to get the total GDP. • GDP = C + G +I + (X-M) Consumer Spending Q x P = DV + Investment Q x P = DV + Govt. Spend Q x P = DV + Net Exports (X- M)

9. Gross Domestic ProductHow to Calculate Calculation Example # in the millions Cons. Goods6m cars x $20,000= $120,000m Cons. Service 150m haircuts x $15= $2,250m Bus. Invest. 2m buildings x $300,000= $600,000m Govt. Spend. 1m roads x $5,000= $5,000m Net Exports 40m apples (export) x $1= $40m(X) 50m apples (import) x $1= $50m (M) GDP= $120,000m cars $ 2,250m haircuts $600,000m buildings $ 5,000m roads $727,350m - 10m net loss in apple exports $727,250m

10. Gross Domestic ProductWhat’s Not Included • The GDP includes only final goods and services that have been purchased for final use. • Not Included • Intermediate goods • (battery comes with computer, wood to make paper) • Resale goods • (used car, selling your home) • Financial assets • (stocks and bonds) • Public or Private Transfer payments • (unemployment and social security, $ from parents) • Non-market service • (babysitting, painting your own house) • Underground economy • (illegal transactions)

11. An Alternative to GDP: GPI -Genuine Progress Indicator • Developed in 1995 • Attempts to measure factors not measured by GDP • Adjusts for income distribution • Focuses on economic well-being not monetary transactions • Adds for • Increase in leisure and vacation time • volunteer and non-market work

12. Genuine Progress Indicator (GPI) Subtracts for • Crime = $40 billion/yr • Pollution and loss of natural resources • Counts $1.2 billion in toxic clean-up costs decrease • Health care expenditures for preventable illness • Heart attacks • High blood pressure • Loss in infrastructure • From natural disasters or war • Foreign debt counts as negative • GDP can count as positive government spending