1. Gross Domestic Product
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2. Is measuring the performance of the
economy an important part of life?
WHY?
• Suppose one candidate for President of the
United States proclaims that the economy’s
performance is the best in a generation, and
an opposing candidate argues that the
economy could perform much better.
What statistics would you seek to tell how
well the economy is doing?
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3. What is
gross domestic product?
The market value of all final
goods and services produced in
a nation during a period of time,
usually a year
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4. GDP…
• Measures our nation’s (and others around
the world) total economic performance
(INDICATOR)
• Excludes production abroad by US business
• 1991govt. switched from GNP to GDP
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5. What is gross national
product (GNP)?
the market value of all final
goods and services produced
by a nation’s residents, no
matter where they are
located
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6. What’s the difference?
Politicians want to
know what’s going
on in OUR country
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7. GDP counts only NEW
domestic production
Secondhand transactions-the sale of
USED products
*commission on the sale of USED
products counts-b/c salesman
performed a SERVICE in the
present day
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8. GDP counts only NEW domestic
production
• Nonproductive financial transactions-the
giving of gifts or buying/selling stocks or
making transfer payments
• *transfer payments - govt. payment to
individuals NOT in exchange for goods or
services currently produced
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9. GDP counts only final goods
• Final goods - Finished goods and
services produced for the “ultimate
user” (end consumer)
• To avoid double counting intermediate
goods must be excluded
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10. Intermediate goods
Goods and services used
as inputs for the
production of final
goods
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11. Suppose a wholesale
distributor sells glass
to an automaker.
Is this transaction
included in the GDP?
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12. Which of the following are
final goods or services?
• a haircut from a barber
• a new automobile
• an oil filter purchased in the new auto
• crude oil
Explain you answer
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13. There are four
components of GDP
• Consumption
• Investment
• Government
• Foreign (X - M)
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14. GDP = C + I + G + (X - M)
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15. How much does Mario
add to GDP?
Mario works part-time at Pizza Hut and earns
an annual wage plus tips of $15,000. He sold
4,000 pizzas at $10 per pizza during the year.
He was unemployed part of the year, so he
received unemployment compensation of
$3,000. During the past year, Mario bought a
used car for $1,000. Determine how much
has Mario contributed to GDP?
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16. GDP downfalls
Non-market transactions
• GDP excludes unpaid activities
• difficult to collect data & assign dollar
value to services people provide
themselves or others without
compensation
• which non-market activities to include
and to exclude?
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17. GDP downfalls
Distribution, Kind, & Quality of products
• GDP is blind to whether consumption is evenly
divided or not.
• Country A GDP consists of military goods only;
Country B GDP is made up of houses, tractors,
wheat, milk, etc.
• only a small group of people consume the goods in
A, but B has more even consumption
• GDP is a quantitative, rather than qualitative,
measure of the output of goods & services
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18. GDP downfalls
Neglect of Leisure Time
• The wealthier a nation becomes, in general,
the more leisure time its citizens can afford.
• GDP understates national well-being because
no allowance is made for people working
fewer hours than they once did.
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19. GDP downfalls
The Underground Economy
• illegal gambling, prostitution, loan-
sharking, illegal guns, and illegal drugs
meet the requirements for GDP
• all are final products, but GDP does not
include unreported criminal activities
• If the underground economy is sizeable,
GDP will understate an economy’s
performance
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20. GDP downfalls
Economic “Bads”
• Air, noise and water pollution impose costs on
society
• GDP does not account for the diminished
quality of life from the “bads” of production of
goods and services
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