10/08/13 Economics Journal

Warm-up: Contrast the following with your partner: Aggregate Markets vs. Individual Markets Constant $$ vs. Current $$ Final Goods vs. Intermediate Goods Cycle– Expansionary vs. Contractionary Boom vs. Trough

Formula for Calculating GDP

TAKE QUIZ

SWBAT: Define GDP; explain three methods for calculating GDP; identify transactions that do and do not contribute to U.S. GDP.

IN 2012 U.S. GDP WAS

APPROXIMATELY $15.7 TRILLION!

Gross Domestic Product

Also Known As Aggregate Output or National Income

Gross Domestic Product (GDP) (Y)

GDP: the total value of all final goods and services produced in the economy during a given period (usually a year)

Three ways to measure GDP Measure value of production of final goods &

services (value added) Measure spending on final goods & services Measure factor income

Method #1: Value Added Approach

includes only domestically produced final goods & services

Excludes intermediate goods & services

In essence we are only considering each producer’s value added (the value of a producer’s sales minus the value of its purchases of inputs)

Method #2: Expenditure Approach

Consumer Spending + Investment Spending + Government Spending + Net Exports = GDP

GDP = C + I + G + (X-M)

GDP = C + I + G + NX

Consumer Spending (C)

Approximately 70% of GDP

Tangible goods – food, clothing, cars, etc.

Intangible services – haircuts, doctor visits, concerts, etc.

Investment Spending (I)

Approximately 12% Investment: spending on

capital equipment, inventories, and structures (including purchases of new housing)

Durable goods produced but not sold in the year count as investment spending

Does not include stocks, bonds, mutual funds

Government Purchases (G)

Approximately 21% Local, state, & federal Salaries of gov’t

workers Military,

infrastructure, education

Does not include transfer payments

Net Exports (X-M) (NX)

Value of exports minus the value of imports

Negative for the U.S. – large trade deficit

Approximately -3%

What’s In, What’s Out

Included Not Included

Domestically produced final goods & services including Capital goods New construction Changes to

inventories

Intermediate goods and services

Inputs Used goods Transfer payments Financial assets Foreign-produced goods

& services Purchases of illegal

substances Housework

Method #3: Income Approach Wages earned by labor

Interest earned by those who lend savings to firms and the government

Rent earned by those who lease land or structures to firms

Profit earned by shareholders (the owners of the firm’s physical capital) - dividends

Circular Flow Magic

All three methods (value added, expenditure, income) all come to (roughly) the same figure

Total output = total expenditure = total income

Quiz Time! Determine if each of the following would contribute to U.S. GDP.

A. Coca-Cola builds a new bottling plant in the U.S.B. Delta sells one of its existing airplanes to Korean

Air.C. Ms. Moneybags buys an existing share of Disney

stock.D. A California winery produces a bottle of

Chardonnay and sells it to a customer in Montreal, Canada.

E. An American buys a bottle of French perfume in Tulsa.

F. A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.

What GDP Tells Us

Size of the economy, aggregate output

But not a good measure of growth over time – unless we account for inflation

To measure aggregate output we need to know real GDP

A Simple Economy

Year Q Apples

P Apples

Q Oranges

P Oranges

Nominal GDP

Real GDP (Year 1 Base)

1 2000 $0.25 1000 $0.50 $1000 $1000

2 2400 $0.30 1200 $0.70 $1560 $1200

3 2200 $0.50 1100 $1.00 $2200 $1100

Nominal GDP: the total value of all final goods and services produced in the economy in a year, calculated with current prices

Real GDP: the total value of all final goods and services produced in the economy in a year, calculated using constant prices

Nominal v. Real GDP in the U.S.

Nominal GDP (trillions of current

dollars)

Real GDP (trillions of 2005 dollars)

2001 $10.3 $11.3

2005 $12.7 $12.6

2009 $14.2 $13.0

Real GDP in the U.S. Since 1945

Changes in Real GDP 2008-2012

GDP Cautions In order to make comparisons between countries

we need to take population into account GDP per capita: GDP divided by the size of the

population Only a very rough estimate of human welfare in a

country Doesn’t include important factors related to

happiness – leisure, volunteerism, housework, natural beauty

GDP increases with spending on divorce, crime, natural disasters

GDP doesn’t measure how a society uses its output