Gross Domestic Product


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Gross Domestic Product

  1. 1. MEASURING ECONOMIC PERFORMANCE ECONOMICS Mr. Redelsheimer Redelsheimer's PowerPoints Inc.
  2. 2. <ul><li>The year 2000 was a very good year to be a college graduate in the US. </li></ul><ul><li>Companies were “tripping over themselves to entice graduating seniors with fat salaries and other perks.” </li></ul>Redelsheimer's PowerPoints Inc.
  3. 3. Redelsheimer's PowerPoints Inc. Average Starting Salaries of new MBA grads SCHOOL 2000 STARTING SALARY 2002 STARTING SALARY 2004 STARTING SALARY STANFORD $165,000 HARVARD $160,000 U OF PENN $156,000 COLUMBIA $142,000 DARTMOUTH $149,000
  4. 4. In the year 2002, graduation was not the happy occasion many had expected  a golden ticket to a well paying job and success. Redelsheimer's PowerPoints Inc. Even at top business schools in 2002, many students and faculty watched in disbelief as recruiters reneged on job offers that had already been extended to hundreds of newly graduated MBA’s. This alteration between boom and bust is know as the BUSINESS CYCLE
  5. 5. Redelsheimer's PowerPoints Inc. Average Starting Salaries of new MBA grads SCHOOL 2000 STARTING SALARY 2002 STARTING SALARY 2004 STARTING SALARY STANFORD $165,000 $138,100 $150,000 HARVARD $160,000 $134,000 $147,000 U OF PENN $156,000 $124,000 $144,000 COLUMBIA $142,000 $123,000 $142,000 DARTMOUTH $149,000 $122,000 $135,000
  6. 6. Redelsheimer's PowerPoints Inc. Did you know … the average salary for a Stanford MBA in the class of 1968 was only $12,000 … the US Economy has doubled in size since 1968? In other words, we have twice as much stuff as in 1970. … the graduates of 2002, even though facing disappointing job prospects and a lower salary, would have had an enormously higher standard of living than a comparable grad in 1968.
  7. 7. Redelsheimer's PowerPoints Inc. MACROECONOMICS Why is there a business cycle, and can anything be done to smooth it out? That’s one question addressed by Macroeconomics , the area of economics that focuses on the behavior of the economy as a whole.
  8. 8. How do we know how the United States Economy is doing? Redelsheimer's PowerPoints Inc.
  9. 9. You will become “ Doctors of the Economy ” Redelsheimer's PowerPoints Inc. [The economy is the patient suffering from “inflation” or “unemployment.” ] Diagnosis Prognosis Treatment ACL has torn Repair the ACL R ehab on crutches
  10. 10. Redelsheimer's PowerPoints Inc. G D P ROSS OMESTIC RODUCT
  11. 11. <ul><li>THE MARKET VALUE OF ALL THE FINAL GOODS AND SERVICES PRODUCED IN AN ECONOMY IN A GIVEN YEAR. </li></ul>Redelsheimer's PowerPoints Inc. Please look at the underlined words, very, very carefully GDP
  12. 12. MARKET VALUE <ul><li>If an economy in a given year produces … </li></ul><ul><li>3 Ant Farms </li></ul><ul><li>4 Nights stay at an Inn </li></ul><ul><li>6 pairs of blue jeans </li></ul>Redelsheimer's PowerPoints Inc. ________________________________ 13 ANTS INN THE PANTS. This does not mean the economy produced…
  13. 13. MARKET VALUE, Correctly Done <ul><li>3 Ant Farms </li></ul><ul><li>4 Nights stay at an Inn </li></ul><ul><li>6 pairs of blue jeans </li></ul>Redelsheimer's PowerPoints Inc. $30 $200 $80 Total market value of.. ____________________________________________ $310
  15. 15. Final Goods and Services <ul><li>Tires sold on a new car are not final goods </li></ul>Redelsheimer's PowerPoints Inc.
  16. 16. FINAL GOODS <ul><li>Tires sold at a tire store are final goods </li></ul><ul><li>Final goods have reached their final consumer; they will not be resold to anyone </li></ul>Redelsheimer's PowerPoints Inc.
  17. 17. Redelsheimer's PowerPoints Inc. Counted in GDP NOT counted in GDP FINAL GOODS INTERMEDIATE GOODS Bread Flour used for making bread Cruise Missile Screw on the Missile New Auto Window glass in a new auto Cheese Pizza Cheese to be put on Pizza
  18. 18. Redelsheimer's PowerPoints Inc. 1. Intermediate Goods – components of the final good. A. Ford buys batteries or tires for its cars. B. KFC buys chickens to eventually sell to customers.
  20. 20. GDP Counts market value in the year a product is produced. <ul><li>This car is not counted in GDP for 2007. It was not produced this year. </li></ul>Redelsheimer's PowerPoints Inc.
  21. 21. GDP Counts market value in the year a product is produced. <ul><li>This Commodore 64 computer (My 1 st ) is not counted in 2006 GDP </li></ul>Redelsheimer's PowerPoints Inc.
  22. 22. <ul><li>If you buy a car made in 2003 in the year 2004, in Which year is it counted in GDP? </li></ul><ul><li>Answer: 2003 </li></ul>Redelsheimer's PowerPoints Inc.
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  27. 27. Redelsheimer's PowerPoints Inc. McDonalds opens a restaurant in China. Are the hamburgers they sell counted in the United States’ or China’s GDP? Answer: China’s GDP
  28. 28. US vs. World’s GDP (2006 data) Redelsheimer's PowerPoints Inc. Country Percentage of Global GDP United States 29% Japan 8% Germany 6.0% China 5% UK 4.7% France 3% Italy 2.5%
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  31. 31. GDP Formula <ul><li>The Formula for GDP is… </li></ul>Redelsheimer's PowerPoints Inc. C + Ig + G + Xn Personal Consumption Expenditures Gross Investment Government Spending Net Exports (A/K/A) Exports – Imports
  32. 32. Redelsheimer's PowerPoints Inc. GDP UP EQUALS UMEMPLOYMENT RATE DOWN
  33. 33. WHAT IS NOT COUNTED IN GDP? <ul><li>1. ILLEGAL TRANSACTIONS </li></ul>Redelsheimer's PowerPoints Inc.
  34. 34. Unreported “Legal” business Activity Redelsheimer's PowerPoints Inc. Unreported “legal” business activity does not count. This is two-thirds of the “underground economy.” What if an eye surgeon doesn’t report $500 of his his $3,400 LASIK bill? And what if this waitress doesn’t report all tips ? And what if the dentist doesn’t report $400 for teeth whitening ?
  35. 35. Redelsheimer's PowerPoints Inc. 0 5 10 15 20 25 30 Greece Italy Spain Portugal Belgium Sweden Germany France Holland United Kingdom Japan United States Switzerland GLOBAL PERSPECTIVE The Underground Economy as a Percent of GDP
  36. 36. WHAT IS NOT COUNTED IN GDP? Redelsheimer's PowerPoints Inc. 2. Sale of used items. If sold, the Mona Lisa would not be counted in France’s GDP.
  37. 37. Redelsheimer's PowerPoints Inc. Chevy - what is not counted Second Hand Sales – no current production . A. If a 1957 Chevy is bought in 2005 [It has not been produced again so would not count.] The salesman is doing productive work. His commission would count . B. Boots produced in 1980 are bought in a Thrift Store in 05. They also have not been produced again . Salesman’s commission would count . You are buying his services.
  38. 38. WHAT IS NOT COUNTED IN GDP? <ul><li>3. The value of leisure time is not included in GDP. </li></ul>Redelsheimer's PowerPoints Inc.
  39. 39. WHAT IS NOT COUNTED IN GDP? <ul><li>4. Social well being is not counted in GDP </li></ul>Redelsheimer's PowerPoints Inc.
  40. 40. WHAT IS NOT COUNTED IN GDP? <ul><li>5. Value of home activities (e.g. Cooking, House Cleaning, not included) </li></ul>Redelsheimer's PowerPoints Inc.
  41. 41. Non-market Transactions Are Not Counted Redelsheimer's PowerPoints Inc. Work in your own household or volunteer work in the community does not count because there was no payment. So, don’t marry your maid, gardener, or fitness instructor , or you will hurt GDP.
  42. 42. Does Her Work Count? Redelsheimer's PowerPoints Inc. It depends on whether she is the maid or housewife.
  43. 43. WHAT IS NOT COUNTED IN GDP? <ul><li>6. Costs of Pollution not included in GDP </li></ul>Redelsheimer's PowerPoints Inc.
  44. 44. WHAT IS NOT COUNTED IN GDP? <ul><li>7. Sale of Stocks and bonds is not counted </li></ul><ul><li>in GDP </li></ul>Redelsheimer's PowerPoints Inc.
  45. 45. – what is not counted Redelsheimer's PowerPoints Inc. Purely Financial Transactions – stocks, bonds, CDs. There is no current production . A. If 100 shares of Dell stock is bought I’m going to buy 100 shares of Google Stock. Exchanging one financial asset for another
  46. 46. – what is not counted . Redelsheimer's PowerPoints Inc. . Transfer Payment s – welfare, unemployment, social security . [There is no contribution to final production]
  47. 47. Do These Count in GDP? <ul><li>- W hen McDonalds buys potatoes for french fries </li></ul><ul><li>When a tattoo business buys </li></ul><ul><li>ink for tattoos </li></ul><ul><li>When Tom Thumb buys </li></ul><ul><li>spam to sell it to you </li></ul><ul><li>When the popsicle maker buys the sticks </li></ul><ul><li>Dell buys a computer monitor frame </li></ul><ul><li>Perkins buys an apple to put in its pies </li></ul><ul><li>W hen F ord buys a windshield wiper for a car </li></ul>Redelsheimer's PowerPoints Inc.
  48. 48. Redelsheimer's PowerPoints Inc. Eight Things Not Counted in GDP [no production] <ul><li>Second Hand Sales[no production] </li></ul><ul><li>Public/Private Transfer Payments </li></ul><ul><li>Purely Financial Transactions </li></ul><ul><li>Intermediate Goods </li></ul>5. U.S. Corporations producing overseas 6. Non-market transactions [household or volunteer work] Underground Economy 7. Illegal business activity 8. Unreported legal business activity
  49. 49. Redelsheimer's PowerPoints Inc. Personal Consumption Expenditure ( C ) EXPENDITURES APPROACH GDP = C(66%) + Ig(18%) + G(17%) + Xn <ul><li>Durable Consumer Goods[12%] </li></ul><ul><li>N ondurable s[29 %][soup & soap] </li></ul><ul><li>Consumer Expenditures for Services[59%] </li></ul>
  50. 50. Redelsheimer's PowerPoints Inc. G overnment P urchases (G) [state, local & federal] Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH
  51. 51. Redelsheimer's PowerPoints Inc. Government Purchases ( G ) Net Exports( X n ) Personal Consumption Expenditure ( C ) Gross Private Domestic Investment ( I g ) EXPENDITURES APPROACH Net Exports ( X n ) = Exports ( X ) – Imports ( N ) [M represents production outside a country]
  52. 52. Redelsheimer's PowerPoints Inc. We have 30% of the world’s GDP, 25% of global trade, 40% of world stock market capitalization, and nearly 50% of the world’s largest companies. Our GDP is greater than the next five countries combined.
  53. 53. Per Capita GDP – 2005 [Selected Countries] Redelsheimer's PowerPoints Inc. Country Per C apita Country Per C apita L uxembourg 53,958 U.S. $42,300 United Kingdom $24,700 S witzerland 31,100 Sweden 24,700 Norway 30,800 Italy 24,300 Denmark 29,800 Australia 24,000 Canada 29,700 New Zealand 19,500 Japan 29,200 Spain 18,900 Austria 27,000 Greece 17,900 Germany 27,000 Argentina 12,000 Belgium 26,100 Hungary 12,000 France 25,400 Mexico 9,000
  54. 54. GDP Over The Decades Redelsheimer's PowerPoints Inc. 11 tril. 10 tril. 9 tril. 8 tril. 7 tril. 6 tril. 5 tril. 4 tril. 3 tril. 2 tril. 1 tril. 0 1929 1940 1950 1960 1970 1980 1990 2005 GDP Per Capita $ 42,000
  55. 55. Redelsheimer's PowerPoints Inc. T he Poorest Nation s Nation Per Capita 1. Afghanistan $125 2. Sierra Leone $510 3. Ethiopia $600 4. Somalia $600 5. Congo $600 6. Eritrea $710 7. Tanzania $710 8. Burundi $720 9. Rwanda $900 10. Malawi $900 11. Mozambique $1,000 Djibouti $1,300 The world’s have-nots There are 6 billion people on our planet; 5 billion are in the Third World . 2.5 billion live on less than $2 a day . The direst poverty is in Africa , home to most of the world’s 10 poorest countries . Over ½ the people of Sub-Sahara Africa live on less than $2 a day . 8 million people die each year because they are too poor to stay alive. $6,538 1929 $15,931 1967 $25,989 1996 $42,000 2005 GDP Per Capita [in 1992 dollars] ½ of the world’s population have yet to make their first phone call.
  56. 56. Non-market Transactions Leisure Improved Product Quality The Underground Economy GDP and the Environment Composition & Distribution of Output Per Capita Output SHORTCOMINGS OF GDP Redelsheimer's PowerPoints Inc.
  57. 57. GDP NS 1-10 Redelsheimer's PowerPoints Inc. 1. GDP is the monetary value of all final domestic goods/services produced (by/within) a nation in one year. 2. If net foreign factor income earned in the U.S. is positive , then (GDP/GNP) is larger. 3. Double counting can be avoided by counting only (intermediate/final) goods. 4. (Final/Intermediate) goods and services refer to products purchased by the ultimate users . 5. Transfer payments [when you take tax money from those who are working & give it to those who are not working] (do/do not) count in GDP because they (do/do not) reflect current production. 6. (The purchase of 100 shares of Google stock/ The purchase of a drill press) is not considered real investment . 7. If depreciation exceeds gross private domestic investment , it can be concluded that In is (positive/negative) & we have declining productive capacity. 8. Depreciation can be determined by (adding/subtracting) In from Ig. 9. The largest component of spending is (C/Ig/G/Xn) and the smallest is (C/Ig/G/Xn). 10. NDP is (GDP-indirect business taxes/GDP-Depreciation).