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Gross Domestic Product

©2006 South-Western College Publishing

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What is gross domestic product? GDP is the most widely reported measure of a nation’s economic performance

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What does GDP measure?

The market value of all final goods and services produced in a nation during a period of time, usually a year

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Does GDP measure secondhand

transactions?No, Current GDP does not include the sale of a used car or the sale of a home constructed some years ago

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What areintermediate goods?Goods and services used as inputs for production of final goods

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Does GDP count intermediate goods?

No, to avoid double counting, GDP only measures final goods and services

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What are final goods?Finished goods and services produced for the ultimate user

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Does GDP measure nonproductive

financial transactions?No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments

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What is atransfer payment?

A government payment to individuals, not in exchange for goods or services currently produced

What Is Not Counted in GDP?

• GDP excludes most items that are produced and consumed at home and that never enter the marketplace.

• It excludes items produced and sold illicitly, such as illegal drugs.

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Does GDP measure the whole economy?

GDP consists of many puzzle pieces to fit together, including

markets for products, resources, consumers,

workers, and businesses

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Productmarkets

Households

Factormarkets

Businesses

Basic Circular

Flow Model

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What additional sectors does a

complex circular flow model contain?• Financial markets• Government• Foreign markets

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What are the two approaches we use to

measure GDP?

ExpenditureIncome

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What is theexpenditure approach? The national income accounting method that measures GDP by adding all the spending for final goods and services

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What are the four sectors of GDP?• Consumption• Investment• Government• Foreign (X - M)

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

The Components of GDP

• Consumption (C): The spending by households on goods and

services, with the exception of purchases of new housing.

• Investment (I): The spending on capital equipment,

inventories, and structures, including new housing.

The Components of GDP

• Government Purchases (G): The spending on goods and services by

local, state, and federal governments. Does not include transfer payments

because they are not made in exchange for currently produced goods or services.

• Net Exports (NX): Exports minus imports.

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What are shortcomings of GDP?

• Nonmarket transactions• Distribution, kind, & quality of products

• Neglect of leisure time• Underground economy• Economic bads

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$11,733

$4,621

$2,672$2,128 $1,986

$1,649

U.S. Japan CanadaU.K.Germany MexicoFrance China

$663$970

GDP and Its Components (1998)

GDP and Its Components (1998)

Consumption 68 %

Investment16%

GDP and Its Components (1998)

Consumption 68 %

Consumption 68 %

Government Purchases

18%

GDP and Its Components (1998)

Investment16%

Net Exports -2 %

GDP and Its Components (1998)

Consumption 68 %

Investment16%

Government Purchases

18%

Other Measures of Income

• Gross National Product (GNP)• Net National Product (NNP)• National Income• Personal Income• Disposable Personal Income

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What is nominal GDP?The value of all final goods based on the prices existing during the time period of production

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What is real GDP?The value of all final goods produced during a given time period based on the prices existing in a selected base year

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Real GDP =nominal GDP x 100

GDP price index

(Periods of falling real GDP)

Real GDP in the United States

1970 1975 1980 1985 1990 19953,000

4,000

5,000

6,000

7,000

Billions of 1992 Dollars

2000

8,000

GDP and Economic Well-Being

• GDP is the best single measure of the economic well-being of a society.

• GDP per person tells us the income and expenditure of the average person in the economy.

GDP and Economic Well-Being

• Higher GDP per person indicates a higher standard of living.

• GDP is not a perfect measure of the happiness or quality of life, however.

GDP and Economic Well-Being

• Some things that contribute to well-being are not included in GDP. The value of leisure. The value of a clean environment. The value of almost all activity that takes place

outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.

GDP, Life Expectancy, and Literacy

Country Real GDP perPerson (1997)

LifeExpectancy

AdultLiteracy

United States $29,010 77 years 99%

Japan 24,070 80 99

Germany 21,260 77 99

Mexico 8,370 72 90

Brazil 6,480 67 84

Russia 4,370 67 99

Indonesia 3,490 65 85

China 3,130 70 83

India 1,670 63 53

Pakistan 1,560 64 41

Bangladesh 1,050 58 39

Nigeria 920 50 59