GDP

Gross Domestic Product

©2012, TESCCC Economics, Unit: 06 Lesson: 01

Learning Targets

• Define GDP• Explain How Gross Domestic Product is

calculated• Explain the difference between nominal

GDP and real GDP• Explain difference

between GNP & GDP

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Gross Domestic ProductDollar value of all final goods and

services produced within a nation’s borders in one year.

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Economic growth is one of the major goals of U.S.

• Economic growth - increasing production of goods and services

• To do this, we must use our productive resources wisely and efficiently.

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How to useFactors of Production Wisely

• Land or natural resources – don’t waste, but conserve

• Labor or human resources – make sure workforce has adequate training & education

• Capital goods/resources – save more and invest more in capital goods

• Entrepreneurship – new business vital, encourage entrepreneurs to start new business

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GDP measureseconomic growth

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-GDP combines spending of the 3 sectors within the national economy including households (consumer spending), business firms (investment), and the government (government spending)-GDP also calculates international trade (exports and imports) as a contributing factor

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How is GDP determined?

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

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

C = consumer spending

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

I = investment (business) spending on capital goods

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

G = government spending

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

(X-M) = net exportX= exportsM= imports

(exports – imports)©2012, TESCCC

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

• C = consumer spending• I = investment (business)

spending• G = government spending• (X-M) = net export (exports -

imports)©2012, TESCCC

GDP

-10%

0%

10%

20%

30%

40%

50%

60%

70%

ConsumersBusiness-IGovernmentForeign

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Foreign = Net Export

If below zero, it means there are

more imports than exports

Not included in GDP:

Intermediate goods: Goods used in the production of another

good (We wait and count the final product).

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Cost of denim fabric not counted

Instead, we count the value of the finished product, jeans.

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New Goodyear Tires

New Stereo

NEW TRUCK or final product

counted in GDP

not counted not counted

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Used products -These products were counted the year they were made so we will not count them again this year or the year it was purchased. For example, if you buy a used car, just 1 year old with only 10,000 miles, it is not counted in this year.

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Non market activities

• These are activities that a person does themselves such as painting your house instead of hiring a painter.

You do not have a buyer

and a seller so you do not

have a market.

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Illegal market

• This includes all of the underground economy or illegal transactions.

Such as:• gambling• drugs• stolen property

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Financial Transactions

• This includes things like stocks and bonds. Nothing is produced; just paper showing a claim of some sort, not a good or service.

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Gifts or Transfer

• You receive money for your birthday, or pay taxes or pay child support. Nothing is produced; simply transferring money from one group to another

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Different Types of GDP

• Nominal GDP: no adjustment for inflation (current dollar value used)

• Real GDP: adjusted for inflation (converted to base year prices)

• Real per Capita GDP: Real GDP Population

– shows overall standard of living

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GDP & GNP

• GNP – Gross National Product: all goods & services produced by a nation’s citizens inside and outside of borders.

• GDP – Gross Domestic Product: all final goods & services produced within a nation’s border during a year

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Limitations of GDP

1. Non-market activities2. The underground economy3. Negative externalities4. Quality of life• http://www.learner.org/vod/vod_window.html?pid=

2467

©2012, TESCCC