UNIT 3 - Gross Domestic Product

1. UNIT 3 - Gross Domestic Product • Gross Domestic Product Definition Gross Domestic Product, or GDP, is the value of all final goods and services produced during a period of time in a certain area or country.

2. UNIT 3 - Gross Domestic Product • United States GDP For United States GDP data, see Unit 3, Section 3 of our CD, or visit http://www.bea.gov/

3. UNIT 3 - Gross Domestic Product • Gross Domestic Product Definition Excluded in the calculation of GDP are • Intermediate goods (car tires, flour). • Any good sold this year, but produced in an other year (used car, existing houses). • Any transaction not directly representing production (welfare payments, purchases of stocks and bonds). • Goods and services that are difficult to measure (fixing your own car) or that we choose not to measure (illegal drugs, illegal prostitution).

4. UNIT 3 - Gross Domestic Product • Gross Domestic Product Definition Using the expenditure approach, GDP is:C + I + G + XConsumption + Investment + Government + neteXports Using the income approach, GDP is: W + I + R + P + IBT + CCAwages) + interest + rent + profit + Indirect Business Taxes+ Capital Consumption Allowance (depreciation)

5. UNIT 3 - Gross Domestic Product • Gross Domestic Product Definition Because all intermediate products are excluded, GDP does not accurately reflect ALL production in a country. In the GDP definition, two-thirds is consumption goods. In actuality, production of consumer goods is much less than two-thirds of all production.

6. UNIT 3 - Gross Domestic Product • Gross Domestic Product Calculation Example 1 Let’s say that we produce 5,000 cups of yogurt at $1 per cup. And let’s say that we produce 100 cell phones at $40 per phone. What is GDP?

7. UNIT 3 - Gross Domestic Product • GDP Calculation Example 1 answer: The value of the yogurt cups is: 5,000 times $1 = $5,000. The value of the cell phones is: 100 times $40 = $4,000. GDP = $5,000 + $4,000 = $9,000.

8. UNIT 3 - Gross Domestic Product • GDP Calculation Example 2 Let’s say that we produce 5,000 cups of yogurt at $2 per cup. And let’s say that we produce 100 cell phones at $80 per phone. What is GDP?

9. UNIT 3 - Gross Domestic Product • GDP Calculation Example 2 answer: The value of the yogurt is: 5,000 times $ 2 = $10,000. The value of the cell phones is: 100 times $80 = $8,000. GDP is $10,000 + $8,000 = $18,000. GDP has doubled compared to example 1. Has the economy improved?

10. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Year X nominal GDP uses year X prices times year X quantities. Year X real GDP uses a base year’s prices times year X quantities. When comparing real GDP between various years, only the quantity changes.

11. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Calculation Example 1 Let’s say that in year X, production is 20 cars and 10 computers. Prices are $100/car and $30/computer. Let’s say that in year Y, production is 22 cars and 9 computers. Prices are $120/car and $25/computer. What are nominal and real GDP for year X and year Y?

12. In the previous question, nominal GDP for year 1 is ___ and for year 2 is ___ • $2,250; $2,856 • $2,250; $2,478 • $2,856; $2,200 • $2,300; $2,865 • $2,300; $2,450 • $4,040; $5,359 :10 0 of 30

13. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Calculation Example 1 answer for nominal GDP Nominal GDP in year X is (20 x $100) + (10 x $30) = $2,000 + $300 = $2,300. Nominal GDP in year Y is (22 x 120) + (9 x $25) = $2,640 + $225 = $2,865. Nominal GDP has increased.

14. In the previous question, real GDP for year 1 is ___ and year 2 is ___ (using year 1 prices) • $2,250; $2,856 • $2,856; $2,250 • $2,250; $3,298 • $2,250; $2,490 • $2,300; $2,470 • $2,300; $2,610 • $2,300; $3,298 10 0 of 30

15. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Calculation Example 1 answer for real GDP Real GDP in year X (using year X prices) is (20 x $100) + (10 x $30) = $2,000 + $300 = $2,300. Real GDP this year (using year X prices): (22 x 100) + (9 x $30) = $2,200 + $270 = $2,470. Real GDP has also increased.

16. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Calculation Example 2 Let’s say that in year X, production is 30 cameras and 50 pizzas. Prices are $80/camera and $5/pizza. Let’s say that in year Y, production is 25 cameras and 60 pizzas. Prices are $100/camera and $8/pizza. What are nominal and real GDP for year X and year Y?

17. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Calculation Example 2 answer for nominal GDP Nominal GDP in year X is (30 x $80) + (50 x $5) = $2,400 + $250 = $2,650. Nominal GDP in year Y is (25 x 100) + (60 x $8) = $2,500 + $480 = $2,980. Nominal GDP has increased.

18. UNIT 3 - Gross Domestic Product • Nominal and Real GDP Calculation Example 2 answer for real GDP Real GDP in year X (using year X prices) is (30 x $80) + (50 x $5) = $2,400 + $250 = $2,650. Real GDP in year Y (using year X prices) is (25 x $80) + (60 x $5) = $2,000 + $300 = $2,300. Real GDP has decreased.

19. UNIT 3 - Gross Domestic Product • Per Capita GDP is GDP per person (GDP divided by population). For per capita GDP data, see unit 3, section 2 of the CD (Bouman), or visit http://www.bea.gov/.

20. UNIT 3 - Gross Domestic Product • Per Capita GDP For data on per capita GDP of the various states in the United States, see unit 3, section 4 of our CD, or visit http://www.bea.gov/

21. UNIT 3 - Gross Domestic Product • GDP and the Environment Is there a trade-off between increased production and pollution?

22. UNIT 3 - Gross Domestic Product • GDP and the Environment Some environmentalists support to stop economic growth in order to preserve the environment, natural resources, and wildlife.

23. UNIT 3 - Gross Domestic Product • GDP and the Environment Others believe that economic progress through technological advances will continue to find solutions to environmental and social problems, and actually improve the environment (electric cars; computers).

24. UNIT 3 - Gross Domestic Product • GDP and Leisure Time Does greater production mean a sacrifice of leisure time?

25. UNIT 3 - Gross Domestic Product • GDP and Leisure Time Some people sacrifice leisure time for greater production. Most people have experienced increases in GDP and leisure time. For these people, the income effect of a higher wage is greater than the substitution effect.