What is GDP?
Total market value of all final goods and services produced within a country in a given time period
GDP - Market Value
GDP utilizes the market prices (or current prices) of goods & services for calculations
GDP - Concern
This is inaccurate due to discounts
Market prices causes GDP to be over exaggerated
GDP standard of excellence
GDP calculations only entail FINAL goods from the country's borders (finished product)
Goods from other countries are NOT included.
Intermediate good
A good that is an input to the production of a final good
GDP allotted time period
GDP figures are computed quarterly (every three months) and yearly (once a year)
January 1st - December 31st
What is included in the GDP?
Consumption, Investment, Government spending, Net Exports
Consumption
The expenditure of households on consumption goods & service
Buying goods & services
Goods: groceries, clothing, iPods
Services: Haircuts, Oil Changes
Investment
The purchase of new capital goods (tools, machines, buildings) and additions to inventory
The business spending on FINAL goods like machines equipment and tools
Includes the building of NEW buildings & houses
Investments by business & households
Capital goods
New homes
Inventories
Gov't spending
Gov't purchases of goods and services are included
Does NOT include transfer payments (welfare/unemployment)
Gov't expenditures by local, state & federal gov't
Net Exports
Exports minus Imports
GDP Excludes
Intermediate goods
Second-Hand Sales/Used Goods
Black Market/Underground Production
Financial Transactions
Transfer Payments
Intermediate Goods
Utilized to make items (imputs)
Ex - lead for pencils, rubber for tires, etc
Avoids double counting
Helps not exaggerate our GDP
Second-Hand/Used Goods
Counted when originally purchased/produced
If you are buying a house that is not new, it is not part of the GDP
If you buy a used game at Game Stop or a pair of pants at Plato's closet, they are NOT part of GDP
Black Market/Underground Production
Entails illegal drugs, illegal goods, and illegal services
Babysitting & Lawn Mowing
"Hidden Economy"
People trade here to avoid taxes or legal regulations
This is NOT counted towards GDP
Financial Transactions
When a household purchases a stock or bond they are essentially making a loan
Deals with money that already exists & is not a good or service therefore it is NOT calculated in GDP
Transfer Payments
Payments made from gov't
Education Grants
Social Security
Welfare/Unemployment
Unrelated to economic production
How much of GDP is in the Government component?
19%
How much of GDP is in the Investment component?
16%
How much of GDP is in the Consumption (PCE) component?
70%
How much of GDP is in the Net Exports component
-5%
Expenditure Approach
Based on transactions made in the product market
Where households buy goods & services
What does the Expenditure Approach include?
Purchases in the product market include
Household expenditures (Consumptions)
Business expenditures (Investment)
Gov't Spending
Foreign Expenditure (Net Exports)
Subject to alter demand aggregate curve
Expenditure GDP
C + I + G + (N-M)
In the 3rd quarter of 2009 (in trillions), the GDP estimates were
C = $10.236
I = $1.707
G = $2.959
X = $1.680
M = $2.129
The federal gov't decides to invest $1 Billion in the nation's interstate highway system. What will be affected?
G (Gov't Spending)
The federal gov't decides to invest $1 Billion in the nation's interstate highway system. What will this do to the GDP?
Increase
Consumers cut spending by $20 Billion
What will be affected?
C (Consumer Spending)
Consumers cut spending by $20 Billion
What will this do to GDP?
Decrease
The state gov't cuts planned highway spending by $30 million to maintain a balanced budget.
What will be affected?
G (Gov't Spending)
The state gov't cuts planned highway spending by $30 million to maintain a balanced budget.
What will this do to GDP?
Decrease
Due to tax cut, consumers decide to buy more cars
What will be affected?
C (Consumer Spending)
Due to tax cut, consumers decide to buy more cars
What will this do to GDP?
Increase