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Gross Domestic Product. How do you measure economic growth?. Gross Domestic Product (GDP). Dollar Value of all new FINAL goods & services produced domestically over one year. Currently = $16.6 Trillion dollars Released quarterly by the Government ( measured by % growth )
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Gross Domestic Product How do you measure economic growth?
Gross Domestic Product (GDP) • Dollar Value of all new FINAL goods & services produced domestically over one year. • Currently = $16.6 Trillion dollars • Released quarterly by the Government(measured by % growth) • Recession = Negative GDP growth for 2 consecutive quarters • Historically U.S. GDP grows between 1% - 5% annually • Growth above 5% is considered “too fast” • causes inflation… • Growth below 2% is considered “too slow” • causes rising unemployment
GDP growth by quarter(3months) Slow GDP growth recovery from great recession = +2.0%
Resource SuppliedIncome Received Labor Wages Land Rent Financial Capital Interest Entrepreneurial Talent Profit 2 Ways to measure GDP • Since every economic transaction has both a buyer & a seller => there are 2 ways to measure GDP • GDP is the sum of all spending or all income • 1) ExpenditureMethod= add up all spending • method used most of the time in AP Economics • 2) Income Method= add up all income (wages, rent, interest & profits)
PRODUCT MARKET Total Expenditures must equal Total Income Goods and Goods services and services bought sold FIRMS HOUSEHOLDS Labor, land, Factors of capital & entrepreneurship production FACTOR Market Wages, rent, Interest & profit 2 methods of calculating GDP continued GDP = Total Income GDP = Total Expenditures Spending Revenue Income = Flow of inputs and outputs = Flow of dollars
NOT included in GDP: Intermediate Goods: Only FINAL goods counts (must avoid “double counting”) Example: steel used to make a car does not count count only value of the entire car (not parts) Non-markettransactions: • If you call a plumber it counts. If you fix your sink It does not count Underground Economy • illegal sale of goods (drugs), payments made “under the table”, etc… Financial Transactions only a transfer of assets Gov’t Transfer Payments Gov’t transfers to person or company Example: welfare, social security, etc… International goods: • Only goods produced in USA count Second hand sales • only NEW sales count
PRODUCT Market FIRMS HOUSEHOLDS FACTOR Market Expenditure Equation for GDP: GDP = C + I + G + (X-M) New Capital Machinery New Construction Unsold Inventories
Worksheet: GDP Analysis GDP = C + I + G + (NX)
Primary Use of GDP • Objective way to “keep score” on economic performance • Politicians monitor GDP figures to determine Gov’t Policy • Federal Reserve also base their policy decisions on GDP
23% of World GDP U.S. GDP in Comparison • U.S. $16.0 Trillion • Entire World: $70.0 Trillion • China 7.0 Trillion • Japan 6.0 Trillion • Germany 3.3 Trillion • India 1.8 Trillion
Per Capita GDP • GDP divided by a countries population • Illustrates the $ value of economic output perperson • Current Statistics: • USA 310,000,000 Million people • GDP $15,600,000,000,000 Trillion dollars • Per Capital GDP = $50,000
Global Perspective: Per Capita GDP • World $8,600 • Luxembourg $104,000 • Denmark $56,000 • U.S. $46,000 • England $36,000 • Japan $39,000 • China $3,700 • Bhutan $1,800
What GDP does Not Measure • The mix of products: • all goods treated equally: Guns versus Food • How goods are distributed • Is wealth concentrated evenly? • The Quality of goods • New computers with more memory
GDP and Quality of Life • Does not measure Leisure Time • Vacation Days in Europe vs. U.S. • Work 80 hours instead of 40 hrs/week, GDP increases • What about quality of life?
