Ch. 12 Section 1

Gross Domestic Product

Guiding Questions

Why does it matter how the economy is doing to the individual?

How do we determine if the economy is healthy?

Gross Domestic Product

Gross Domestic Product – Main aspect of NIPA The dollar value of all final goods and services

produced within a country’s borders in a given year.

Terms Defined: Dollar Value – average price of all goods. Final Goods/Services – only final products are counted,

not intermediate products. Within the borders – no outsourced goods are counted. In a Given Year – Only this year’s products/services are

counted.

What does the GDP Show?

GDP measures the amount of money brought into a nation in a single year through the selling of that nation’s goods and services.

GDP is a measurement of how well a nation’s economy is doing for a particular year. A high GDP means the nation is doing well economically. A low GDP means the nation is doing poorly economically.

What does GDP show?

Basically, gross domestic product tracks exchanges of money.

To understand GDP, you need to understand which exchanges are included in the final calculations—and which ones are not.

What is GDP? Dollar Value

YES – cash value of all goods and services

NO – costs of producing those things

Final Goods/Services YES – Goods/Services

offered to consumers NO – Intermediate Goods

Within a Country’s Borders YES – American or foreign

countries producing in the US

NO – American companies producing overseas.

How to Calculate the GDP – Expenditure Approach

4 Components are included in the calculations of the GDP: Consumption (C) – durable and nondurable

goods Investment (I) – Business goods and services Government (G) – Government Employees,

Gov’t purchases. Net Exports – (NE) – Exports minus the cost of

imports

GDP = C + I + G + NE

GDP = C + I + G + NE CONSUMPTION = C

Largest Aspect of GDP Durable Goods = Lasting products Nondurable goods = Food, gasoline, shoes

INVESTMENT = I = Business Purchases Business investment into equipment Purchasing a new mine, upgrading software NOT purchasing financial products (savings)

GDP = C + I + G + NE GOVERNMENT SPENDING = G

Government expenditures on final goods. Salaries of public servants, purchases of

weaponry

NET EXPORTS = NE Exports – Total production shipped elsewhere by

businesses. Imports – Total purchases from other countries. Net = Exports minus Imports.

Income Approach Another method calculates GDP by adding up all the

incomes in the economy.

When a business sells a good/service, the selling price minus the dollar value of the Factors of Production equals income for the owners and employees.

Income v. Expenditure The two are usually compared to get a more

accurate representation of the GDP.

Nominal v. Real GDP Nominal GDP is measured with current prices

and does not correct values to account for inflation or aggregate price increases.

Real GDP corrects this by accounting for total output rather than only price.

If prices rise, nominal GDP will inflate, real GDP will show that output has remained the same.

Limitations of GDP Nonmarket Activities—GDP does not measure goods

and services that people make or do themselves.

The Underground Economy—GDP does not account for black market activities or people paid “under the table” without being taxed

Negative Externalities—unintended economic side effects, like pollution or poverty, are not subtracted from GDP

Quality of Life—a high GDP does not necessarily mean people are happier. Why is this?

GDP per capita GDP per capita is gross domestic product

divided by midyear population.

So this shows the GDP per person in the economy.

Higher value means higher GDP and economic success.

Using growth in GDP per head rather than crude GDP growth reveals a strikingly different picture of other countries’ economic health

GDP 2014 Rank Country/Region GDP (Millions of US$) [trillions]

 World[9] 77,269,168

 European Union[n 1][9] 18,527,116

1  United States 17,348,075

2  China 10,356,508

3  Japan 4,602,367

4  Germany 3,874,437

5  United Kingdom 2,950,039

6  France 2,833,687

7  Brazil 2,346,583

8  Italy 2,147,744

9  India 2,051,228

10  Russia[n 2] 1,860,598

11  Canada 1,785,387

12  Australia 1,442,722

13  South Korea 1,410,383

14  Spain 1,406,538

15  Mexico 1,291,062

GDP per capita 2014

GDP per Capita 2014Rank Country US$

1  Luxembourg 103,187

2   Switzerland 82,178

3  Qatar 78,829

4  Norway 76,266

5  United States 55,904

6  Singapore 53,224

7  Australia 51,642

8  Denmark 51,424

9  Iceland 51,068

10  San Marino 49,139

11  Sweden 48,966

12  Ireland 48,940

13  Netherlands 44,333

14  United Kingdom 44,118

15  Canada 43,935

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita

Overall

What does the GDP show about the nation’s economy?

How do the GDP and the GDP per capita change the conclusions about a country’s health economically?