Understanding GDP: Measuring the Nation's Output and Income

1. Tuesday, 6/7/16, Day 1 Essential Skill: Demonstrate understanding of concepts Do you know where your assigned textbooks are? *United States Government: Democracy in Action $89.00 *Economics: Principles and Practices $118.00 ============================================= 1-“Measuring the Nation’s Output and Income” 2-“Business Cycles and Unemployment”

2. Gross Domestic Product

3. 1-What is “macroeconomics”? • The branch of economics that deals with the economy as a whole, using aggregate measures of output; income; prices and employment.

4. 2-What is gross domestic product? • The most comprehensive measure of national output. • Multiply all of the final goods and services produced in a 12 month period by their prices and then add them to get the total dollar value. • All final goods and services that are sold in a year

5. Understanding GDP • http://www.npr.org/sections/money/2011/10/26/141741360/video-what-is-gdp

6. https://www.stlouisfed.org/education/economic-lowdown-video-series/episode-7-gross-domestic-producthttps://www.stlouisfed.org/education/economic-lowdown-video-series/episode-7-gross-domestic-product

7. Created in 1932 during the Great Depression. United States government set up a “national income accounting system” to measure the country’s production and income. GDP is not a measure of what the country is worth, rather it is a measure of what the country is capable of producing and selling in a given year.

8. Gross Domestic Product The total dollar value of all finalgoods and services produced within a country’s borders in a given year.

9. Final Goods and Services Final goods or services,but not intermediate products are included in GDP Final goods or services • A good or service that is sold to its final user and NOT as a component of another good or service, or to a firm that will use it for something else. • Examples: cars, cell phones, airplanes, baked goods….

10. 3-What things may be excluded from GDP? In each case, give a brief explanation why. • a-Intermediate products, or goods that are used to make other products that are counted in GDP: tires on a new car; paper used to make a newspaper [replacement tires are counted in GDP. • Flour and sugar used at home to bake are counted; those used in a bakery to make a baked good for sale are not.

11. Intermediate Products • Computer chips in a cell phone • Tires or radio in a new car [if you buy replacement tires, they are part of the GDP] • Coal burned up in production of electricity • Flour you buy to bake is a final good, whereas, the flour used to make hamburger buns for McDonald’s is an immediate product. Intermediate products are not included in GDP because they are already included in the dollar value of the final good. DOUBLE COUNTING!

12. b-Second hand sales • [used goods…only original sale is counted in GDP. c-Nonmarket transactions: • When you mow your lawn or do household repairs: only count when done for pay outside the home. d-Underground economy: • drugs, gambling; flea markets; garage sales [difficult to trace]; babysitting; caddying on a golf course

13. WHAT’S NOT INCLUDED IN GDP? • Unpaid work • Sale of used goods • Intermediate products • Black Market/ illegal goods • Informal Economy • Tips, babysitting, golf caddying • Private transfer payments • Cash gifts from one person to another • Stock Market Transactions • Public transfer payments • Ex. Social Security, Welfare, Payments to veterans

14. 4-What are the limitations of GDP? 1-tells us nothing about the composition of the output, or what is being produced 2-Impact of production on quality of life: environment, health 3-Some GDP is produced to control activities that give us little utility or satisfaction: money spent to fight crime

15. 6-What are the four sectors of the economy? Explain each one briefly. a. Consumer sector: Households b. Investment sector: Businesses c. Government sector: Local. state and federal d. Foreign sector: All consumers and producers outside the United States

16. 7-What is the output-expenditure model? Shows how GDP is equal to the sum of aggregate demand by the consumer, investor, government and foreign sectors. GDP= C + I + G + [X-M] How GDP is calculated: GDP= Consumer purchases + Investments by businesses + Government purchases + [Exports – Imports]

17. The Expenditure Approach Formula GDP=C+I+G+ (X-M) Consumption + Investments + Government Purchases + eXports - M [Imports]

18. The Expenditure Approach Adding up the spending on every thing included in the GDP. The Economy is divided into four sectors: 1-Households: Consumption 2-Firms: Investments 3-Government: Government Purchases 4-Other Countries: eXports

19. Personal Consumption- “C” Largest Component of GDP Almost everything we purchase: • Food Clothing Movie Tickets Hair-Styling EXCEPT NEW HOUSES When new homes are built, they enter GDP as an investment by the construction company. To avoid double-counting, the value of the purchase of a new home is not counted again.

20. Investment “I” The Business Sector: 1-Physical Capital: machinery, tools, and equipment, etc. 2-All Construction [commercial and residential] 3-Any other goods produced, but not sold, during the year. [cars…]

21. Government Purchases “G” • Expenditures for goods and services • US Defense Dept. buys weapons • State Dept. buys travel services • Local gov’t buys cars for police • Expenditures for social capital • Roads, bridges, etc. • Post office • Schools

22. Net Exports “X-M” • Difference between Exports and Imports included in GDP (Exports minus imports) Exports (X)-Imports (M) A country that exports more than it imports will have a positive net export figure. [vice versa] Why don’t we include Imports?

23. What else is NOT included in GDP? • Leisure time • Happiness • General well-being • Income distribution and equity • 90% of output can go to 1% of households

25. GDP SMACKDOWN Fill out chart https://wetheeconomy.com/films/gdp-smackdown/?autoplay=no

26. GDP per Capita • A nation’s standard of living is determined by its GDP per Capita. • Means GDP per person or output by person. • Divide Real GDP by the total population • In 2015, the real GDP in the US was $16 Trillion while the population was about 318 million. So, real GDP per Capita was $16 trillion/318 million = $50, 314 • Where GDP per Capita is very low, most people are poor; high: people generally live more comfortable lives.

27. 5-List the five measures of national income. a. Gross National Product: The dollar value of all final goods and services produced in one year with labor and property owned by a country’s residents. b. Net National Product: GNP less depreciation charges for wear and tear on capital equipment. c. National income: Income that is left after all taxes are subtracted from the Net National Product. d. Personal Income: Total amount of income going to the consumer sector before income taxes are paid. e. Disposable Personal Income: Personal income less income taxes.