GDPGDPHow a nation’s wealth is measured…How a nation’s wealth is measured…

GDPGDP• Gross Domestic ProductGross Domestic Product, the total dollar value of all , the total dollar value of all

final goods and services produced within a country final goods and services produced within a country during one calendar year.during one calendar year.

– Measures total cash value of sales of all Measures total cash value of sales of all goods/services.goods/services.

– Products sold in form sold to consumers Products sold in form sold to consumers (computers; not the computer chips)(computers; not the computer chips)

– Goods produced in US (even by foreign nations)Goods produced in US (even by foreign nations)– Calculates sales at its original sale (no used goods)Calculates sales at its original sale (no used goods)

– Measures only official/legal market transactionsMeasures only official/legal market transactions

(No drug sales or services that do not involve cash (No drug sales or services that do not involve cash transactions)transactions)

How is GDP calculated?How is GDP calculated?

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

The Expenditure The Expenditure ApproachApproach

CC• Consumer purchases of goods and services Consumer purchases of goods and services

(includes “durable” and “nondurable” goods.(includes “durable” and “nondurable” goods.

II• Investment spending by businesses on capital Investment spending by businesses on capital

goods such as machinery, factories, equipment, goods such as machinery, factories, equipment, tools, and construction of new buildings.tools, and construction of new buildings.

GG• Spending by government on goods and services, Spending by government on goods and services,

such as military, schools, and highways.such as military, schools, and highways.

(X – M)(X – M) Net Exports or spending of spending by people abroad on the U.S.Net Exports or spending of spending by people abroad on the U.S.

XX – Exports (goods and services sold by the U.S. to other countries. – Exports (goods and services sold by the U.S. to other countries.

MM – Imports (goods and services bought by the U.S. from other countries) – Imports (goods and services bought by the U.S. from other countries)

The Income Approach

• You can also calculate GDP by adding the income that people receive from the sale of goods and services

• Rent / Wages / Interest / Profit

Which of the following are counted or notcounted in U.S. GDP and why?

• New U.S. manufactured Goodyear tire sold to

the General Motors Corporation• New U.S. manufactured Goodyear tire sold to

Mr. Lefkowitz• Cost paid by computer factory for computer chips• A new Tundra manufactured in San Antonio by

Japanese company Toyota.• A new F-150 manufactured in Mexico for the

American company Ford

Nominal GDP vs. Real GDP

• Nominal GDP is current GDP measured at current market prices (overstates the value of production)

• Real GDP is current GDP measured with a fixed dollar (Real GDP holds the value of the dollar constant and is useful for making year to year comparisons)

Real GDP is the IMPORTANT ONE!!!

Real GDP Calculated

Year 1

Let’s say total prod. Includes 1,000 I-Phones sold at $200.00

Total Output: $200,000

Year 2 (With 2% inflation)

Assuming that the same number of I-Phones are sold, but the price has increased 2% for the I-phone.

Total Output: 1000 x $ 204.00 = $204,000

What happened?

Limitations of GDP

• Does not measure activities people make/do by themselves

• Does not count unreported income

• Does not account for “negative externalities” (ie., pollution)

• Quality of Life (“Happiness”)