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TO BE or Not to Be GDP

TO BE or Not to Be GDP. That is the Question. What is gross domestic product (GDP)?. GROSS equals entire, whole, aggregate DOMESTIC equals within a country’s border PRODUCT equals good or service

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TO BE or Not to Be GDP

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  1. TO BE or Not to Be GDP That is the Question

  2. What is gross domestic product (GDP)? • GROSS equals entire, whole, aggregate • DOMESTIC equals within a country’s border • PRODUCT equals good or service • The GDP measures the total dollar value of all FINAL goods and services produced within a country’s national borders during one calendar year period (12 Months).

  3. What is gross domestic product (GDP)? • Currency value (such as U.S. dollar) of all final goods and services produced within a country in a given period • Total income of a nation • Measure of nation’s economic well-being • Measure of a nation’s economic growth from one period to the next

  4. What’s included in GDP? • GDP = Consumption + Investment + Government spending + Net exports • GDP= C+I+G+(X-I)

  5. What’s included in GDP? • Consumption by households • Goods: groceries, clothes, iPods • Services: haircuts, oil changes Consumption (C) is the expenditure by households on consumption goods and services. It includes durables (goods lasting three or more years), nondurables, and services.

  6. What’s included in GDP? • Investment by businesses and households • Fixed assets for production • New homes • Inventories Investment (I) is the purchase of new capital goods (tools, instruments, machines, buildings, and other constructions) and additions to inventories. In other words, it is spending by firms, including final purchases on machinery, equipment and tools, all construction of new houses, buildings, and apartments, and additions to inventory.

  7. What’s included in GDP? • Government expenditures by local, state, and federal government • Roads and schools • Military and police • Government purchases of goods and services (G) are purchases of goods and services by all levels of government. • It excludes transfer payments (welfare spending and unemployment compensation) because those payments do not represent new products or services; rather, they are transfers of income.

  8. What’s included in GDP? • Net exports • Value of a country’s exports to other nations, less its imports from other nations Net exports of goods and services (X-IM or NX) is the value of exports of goods and services minus the value of imports of goods and services. In the United States, it is the value by which American spending on foreign goods and services exceeds foreign spending on American goods and services.

  9. What’s not included in GDP? • Intermediate goods • Used goods • Underground production (black market) • Financial transactions • Household production • Transfer payments (welfare spending and unemployment compensation)

  10. What’s not included in GDP?

  11. What are the components of GDP? Exports Imports Inventories FixedInvestment Residential Nonresidential GDP Personal Consumption Expenditures (C) Investment (I) Government (G) Net Exports (NX) GDP =C+ I +G+NX

  12. How much of GDP is each component? Component % of GDP Average Percent of GDP since 2003 Government 19% Investment 16% Consumption (PCE) 70 % Net Exports -5% GDP 100% Source: Bureau of Economic Analysis

  13. What is a good rate of growth?

  14. What is a good rate of growth? • For a developed economy a desirable rate of growth is approximately 3% to 3.5% • The U.S. economy has grown at a about 3% average rate since 1980

  15. GDP and Beyond

  16. Real and Nominal GDP • Nominal GDP measures the total spending on goods and services in all markets in the economy. • If total spending rises from one year to the next, one of two things must be true: • The economy is producing a larger output of goods and services, • and/or goods and services are being sold at higher prices.

  17. Real and Nominal GDP • To obtain a measure of the amount produced that is not affected by changes in prices, use real GDP, the production of goods and services valued at constant prices. • Calculate real GDP by choosing one year as a base year to express the prices in. • Real GDP uses constant base-year prices to place a value on the economy’s production of goods and services.

  18. Real and Nominal GDP • When GDP is computed in the current year’s prices, rising prices (inflation) can make it difficult to determine if a change in GDP from one year to the next is due to the country’s production of more goods and services or to increases in the price level.

  19. Real and Nominal GDP • Nominal GDP: GDP that is not adjusted for inflation. The value of goods and services in current prices. • Real GDP: The dollar price of GDP in a base year’s price, used to compare changes in GDP from one year to the next. An increase in real GDP is an increase in economic growth.

  20. What GDP does not tell us • Does not measure income distribution • Does not measure non-monetary output or transactions (e.g., barter, household activities) • Does not take into account desirable externalities, such as leisure or environment • Does not measure social well-being • Correlates to standard of living but is not a measure of standard of living

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