Gross Domestic ProductHow do you measure economic growth?

PRODUCT Market

FACTOR Market

FIRMS HOUSEHOLDS

Gross Domestic Product (GDP)

• Dollar Value of all new FINAL goods & services produced domestically over one year.– 2016 = $18.6 Trillion dollars– Per capita GDP = $57,000 (per person) ($18.6 Trillion/321 million people)

• GDP growth rate released quarterly by the Government– Recession = Negative GDP growth rate for 2 consecutive quarters

• Historically U.S. GDP grows between 1% - 5% annually– Growth above 5% is considered “too fast” (causes inflation…)

– Growth below 2% is considered “too slow” (causes rising unemployment)

% GDP growth by quarter (3months)

Slow GDP growth recoveryfrom great recession = +2.0%

Great Recession

2013 = +1.7%

2014 = +2.6%

2015 = +2.9%

2016 = 1.5%

2.5% 1.6%% 2.2%

Slow RecoveryWhy?

Calculating GDP

•Expenditure Method= add up all the spending on U.S. produced goods & services

• Most common method used in AP Economics

GDP = C + I + G + (X –M)

GDP = Total “size” of U.S. Economy => $18.7 Trillion Dollars

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

Expenditure Equation for GDP:

Business Investment:

New Capital MachineryNew Construction Unsold Inventories

Consumption70% of GDP!

Government24% of GDP!

Exports - Imports

Gov’t Transfer Payments: => Do NOT count as Gov’t Spending ↓Unemployment insurance, welfare, food stamps => end up in “C” as consumer spending

NOT included in GDP:

Non-market transactions:– If you call a plumber it counts. If you fix your sink It does not count

Underground Economy• illegal sale of goods (drugs), payments made “under the table”, etc…

Intermediate Goods: Only FINAL goods counts (must avoid “double counting”)

Example: steel used to make a car does not count count only value of the entire car (not parts)

International goods:• Only goods produced in USA count

Second hand sales• only NEW sales count

Financial Transactions only a transfer of assets

Gov’t Transfer Payments Gov’t transfers to person or company Example: welfare, social security, food stampsetc…

Worksheet: GDP Analysis

GDP = C + I + G + (NX)

Primary Use of GDP

• Objective way to “keep score” on economic performance

• Politicians monitor GDP figures to determine Gov’t Policy

• Federal Reserve also base their policy decisions on GDP

What GDP does Not Measure

• The mix of products: – all goods treated equally: Guns versus Food

• How goods are distributed– Is wealth concentrated evenly?

• Does not measure Leisure Time– Vacation Days in Europe vs. U.S.

– Work 80 hours instead of 40 hrs/week, GDP increases– What about quality of life?

U.S. GDP in Comparison

• U.S. $18.6 Trillion

• Entire World: $78.0 Trillion• China $11.0 Trillion• Japan $5.0 Trillion• Germany $3.4 Trillion• India $2.2 Trillion

23% of World GDP

2 Ways to calculate GDP• Since every economic transaction has both a buyer & a seller =>

there are 2 ways to measure GDP. (Add up all Spending or all Income)

–1) Expenditure Method= add up all spending (GDP = C + I + G + NX)– method used most of the time in AP Economics

– OR

–2) Income Method= add up all income (wages, rent, interest & profits)

Resource Supplied Income ReceivedLabor WagesLand RentFinancial Capital InterestEntrepreneurial Talent Profit

Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,capital & entrepreneurship

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,Interest & profit

FIRMS

HOUSEHOLDS

FACTOR Market

PRODUCT MARKET

GDP = Total Expenditures GDP = Total Income

Total Expendituresmust equal

Total Income

2 methods of calculating GDP continued