EQ: How do we measure a nation’s EQ: How do we measure a nation’s wealth?wealth?

Intro Video

Gross Domestic Product

“GDP is the total market value of all final goods and services produced within a country in a given period of time.”

Activity: Breakdown the following parts of the definition.

What does each mean? total market value Of all final goods and services within a country in a given period of time

Definition of GDP

With a partner, what is included in GDP?

What is NOT included in GDP?

GDP is the sum of the following:

Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

GDP = C + I + G + NX Why does GDP = Y? Think back, way back….

The components of GDP

Y =

Remember this?

–Every transaction has a buyer and a seller.

–Every dollar of spending by some buyer is a dollar of income for some seller.

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. 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.

Components of GDP

Come up with 5 scenarios that increase or

decrease the GDP C, I, G, NX, and one that doesn’t count in GDP

5 volunteers Each volunteer holds their sign up if it

increases their component of GDP or down if it decreases.

GDP Scenarios

What country has the absolute adv in

computers? Calculators? What country has the comparative adv in

computers? Why? Calculators? Why? For terms of trade, should the U.S. accept 180

calculators for 1 computer?

Review

What is the percentage

breakdowns for the U.S. (yes, this means

math)?

What does this say about our economy?

Nominal GDP values the production of goods

and services at current prices. Real GDP values the production of goods and

services at constant prices.

Real vs Nominal GDP

Year # of hot

dogs sold

Price # of hamburgers sold

Price NominalGDP

2005 100 $1 50 $2

2006 150 $2 100 $3

2007 200 $3 150 $4

Nominal GDP

What is NOMINAL GDP for each

year?

REAL GDP

REAL GDP?

Year # of hot dogs sold

Price # of hamburgers sold

Price Real GDP

2005 100 $1 50 $2

2006 150 $2 100 $3

2007 200 $3 150 $4

What is REAL GDP for each year using

2005 base year?

GDP Deflator

G D P d efla to r =N o m in a l G D P

R eal G D P 1 0 0

What is the GDP deflator for 2005, 2006, and 2007

using our previous example?

GDP Deflator (cont).

R eal G D PN o m in a l G D P

G D P d efla to r2 0 X X2 0 X X

2 0 X X

1 0 0

Using the GDP Deflator for 2007, show the calculations to find real GDP. Did it match your original calculation for 2007 GDP?

Year P of

milkQ of milk

P of honey

Q of honey

Nominal GDP

RealGDP

Deflator

2005 (base)

$1 100 $2 50

2006 $1 200 $2 100

2007 $2 200 $4 100

POP Quiz

• Also, compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2006 and 2007 from the preceding year.

• Did economic well-being rise more in 2006 or 2007? Explain?

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.

Higher GDP per person indicates a higher standard of living.

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

Is GDP a good measure of 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.

What does GDP not tell us?

Some perspective…

Summary

Guided Practice P. 526 #5