GDP

The Strength of the National

Economy

GDP

GDP—Gross Domestic Product…

Is used to compare the US’ economy with that of other nations…

And to compare our economic strength year-to year.

The GDP is the total dollar value of all final goods and services produced within a country during one calendar year.

Per Capita GDP—the average amount produced by each citizen in a year.

US GDP in 2007:US GDP in 2007:$13,750,000,000,000$13,750,000,000,000

Per Capita Per Capita GDP:GDP:

$46,000$46,000

Calculating the GDP Measures “final output”

ONLY. Which of these would be

counted in the GDP? A. A tree cut by a

woodcutter who sells it to a lumber yard.

B. The lumber bought by the lumber yard who then sells it to a furniture manufacturer.

C. A table made by the manufacturer now sold to a couple in Detroit, Michigan.

Calculating the GDP Only products produced in

the current year are measured.

Which of the following was used in the calculation of the GDP in 1999? A computer

manufactured in 1998 but sold in 1999.

A used 1993 Toyota that was sold to Ms. Simpson in Memphis in 1999.

A Ford F150 produced in 1999 but sold in 2000.

Limits of the Limits of the GDPGDP

It counts produced It counts produced within within national national borders onlyborders only..

Would this include or Would this include or exclude exclude Coca-ColaCoca-Cola (a (a U.S. company) U.S. company) produced at a plant produced at a plant in Russia?in Russia?

How about a How about a Toyota Toyota TundraTundra made at a made at a factory in Kentucky?factory in Kentucky?

The GDP The GDP FormulaFormula

GDP= GDP= CC+I +G++I +G+(X-M)(X-M)CC= Consumer goods.= Consumer goods.This includes all This includes all durable goodsdurable goods (a (a lifetime of more than lifetime of more than one year)…one year)…Non-durable goodsNon-durable goods (a lifetime of less (a lifetime of less than one year), and…than one year), and… Services.Services.

GDP= GDP= C+C+I I +G++G+

(X-M)(X-M)

I= Gross InvestmentI= Gross Investment. This is the total value of . This is the total value of all capital goods produced during all capital goods produced during one year.one year.

Gross investment includes:Gross investment includes: Physical capitalPhysical capital (tools, factories, etc.)…and… (tools, factories, etc.)…and… Human capitalHuman capital (hiring workers, paying for (hiring workers, paying for

workers to be trained, etc.)workers to be trained, etc.)

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

purchases. Government spending…

Schools, highways, national defense, etc.

X=Net Exports. Goods and services PRODUCED HERE but sold in other countries.

M=Net Imports. Goods and services produced in other countries, but bought HERE.

Nominal vs.Real GDP

Nominal GDP-GDP measured in current prices.

Real GDP-GDP expressed in constant prices after inflation (price increases) have been removed.