It is used to measure a nation’s income and expenditures.
It is the market value of all final goods and services produced within a country in a given period of time.
GDP is measured by this method:
GDP = consumption + gross investment + government spending + ( exports − imports )
Real Vs. Nominal GDP
Real GDP: values the production of goods and services at constant prices .
Nominal GDP: values the production of goods and services at current prices .
Why Measuring GDP?
Determining the health of an economy.
Comparisons over time.
Reference for formulating public policy.
U.S GDP Analysis
The U.S economy is the largest national economy in the world, with an estimated GDP of $14.264 trillion (2008).
What contribute to this high number?
U.S. GDP and Its Components 2008 70% 14% 21% -5% Consumption Investment Government Purchases Net Export
Consumption is spending by households on goods and services .
Goods include households spending on durable goods and nondurable goods.
Services include such intangible items.
Quick Quiz Section
Question : Which is the largest components contributing to the U.S. GDP?
Answer : Consumption (occupies approximately 70% of the total nation’s GDP).
From 2004 to 2007, the percent change in consumption decreased slightly. However, from 2007 to 2008, it decreased dramatically from 2.8% to 0.2%
In the fourth quarter of 2008, the total of consumption decreased 235.6 billions less than in the third quarter of 2008
From 2004 to 2007, in general, the percent changes in durable goods, nondurable goods and services were quite stable though there were some slight decreases.
There were significant decreases in the percent changes of the components of consumption in 2008.
In general, the percent change of durable goods decreased most significantly, next is nondurable goods and the last is services
Spending on capital, equipment, inventories, and structures, including household purchases of new housing
Investment in GDP is different from financial investment, such as stock, bonds…
The types of investment
Include 2 types:
Single family housing
Equipment for housing
Government or federal institutes, business buildings
Equipment or software
Mining areas, wells ,etc
GDP and investment of the US from 2004 to 2008
The GDP increased steadily but little from2004 to 2008
While the billion of dollars in investment almost remained unchanged around 2000 billions
Either of nonresidential or residential investment contribute to the GDP and how sub components interact
Investment is used to understand and predict output growth and business cycle
The percentage change from preceding period in real private investment
From quarter 1_2006 to quarter 3_2008, the effect of decreasing percentage of investment in household was lessened to a certain degree by increasing contribution from nonresidential structure, private inventory of software.
However, quart 4_2008 saw the decreasing of both nonresidential and residential investment.
It caused the decreasing in GDP in this quarter
The spending on goods and services by local , state and federal governments.
The salaries of government workers and spending on public work.
National defense. E.g. the cost of Iraq war.
Federal funds: $2,650 billion
MILITARY: 54% and $1,449 billion
NON-MILITARY: 46% and $1,210 billion
Source: Center for Arms Control and Non-Proliferation
GP does not include the transfer payment
Reason: It is not made in exchange for a currently produced goods or services
Definition: Payments from the government to individuals used to redistribute a country's wealth. Examples are pensions, welfare, and unemployment benefits.
Trust fund such as: Social security-that are raised and spent in separately from income taxes
Alter household income
Do not reflect the economy’s production
NET EXPORTS Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports). Net exports = exports – imports
Trade reports come out much later than other data. For example, June trade data are released in August.
Net exports is a relatively small component of GDP but can be highly variable.
When advance (the first estimate) GDP comes out, only two months of trade have been released, and the BEA actually forecasts the third month of trade in producing their GDP estimate.
Note that in recent years imports have been larger than exports, so net exports are negative and subtract from total GDP.
Imports and Exports of Leading Commodities (in millions of dollars) 5,617 – 2,989 Net adjustments $689,973 $425,220 Total balance of payment basis Imports Exports 2008 Cumulative Item
Three Most Frequently Exchanged Products
Vehicles : $ 32,236
Electrical machinery :$ 27,684
Airplanes : $ 17,401
Crude oil: $ 109,715
Vehicles: $ 69,805
TV, VCR, etc.:$40,682
Despite the great recession, U.S. still remains the leading country of the world in economy.
However high its economy is, U.S. is still experiencing the most severe misery since the Great Depression of the 1930s.
Reasons Based On 4 Components
Deceleration in Personal Consumption Expenditures.
Downturn in equipment and software.
Decelerations in exports.
Exceeding government spending.
Decrease in private in private inventory investment.
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