Gross Domestic Product for E1

1. Measuring a Nation’s Income
Chapter 10
0

2. Objectives:
 What is Gross Domestic Product (GDP)?
 What makes up GDP?
 Correct for inflation?
 Is the number valuable?
1

3. Income = Expenditure
2
Spending
Income

4. 3
Income and Expenditure
 Gross Domestic Product (GDP) measures
total income…
…and total expenditure of everyone in
the economy
For the economy as a whole,
income equals expenditure
dollar a buyer spends 
dollar of seller income

5. 4
The Circular-Flow Diagram
Markets for
Factors of
Production
HouseholdsFirms
Income (=GDP)Wages, rent,
profit (=GDP)
Factors of
production
Labor, land,
capital
Spending (=GDP)
G & S
bought
G & S
sold
Revenue (=GDP)
Markets for
Goods &
Services

8. 7

9. 8
Why Do We Care About GDP?
 Having a large GDP enables a country to afford
better schools, a cleaner environment,
health care, etc.
 Many indicators of the quality of life are
positively correlated with GDP.

10. Gross Domestic Product
(GDP)
Gross Domestic Product is the market value of all
final goods and services produced within a country in
a given period of time

11. 10
…the market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product (GDP) Is…
Market prices
 Same units, value to buyer and seller
 No market value  excluded from GDP
 i.e. housework you do for yourself.

12. 11
…the market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product (GDP) Is…
Final goods: intended for the end user
Intermediate goods: used as inputs to produce
other goods
Final goods embody the value of the
intermediate goods
Pbread = Pwheat + Pwater + Psugar + Plabor…

13. 12
Aside on final goods…
Family Cooking Night
Intermediate
Goods
Final
Good


Final
Goods
If sold to
consumer…
Family is
“end user”

14. 13
…the market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product (GDP) Is…
Goods i.e. Candy bars, bicycles, t-shirts
Services i.e. cell phone service, lawn mowing (if
purchased), dry-cleaning…

15. 14
…the market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product (GDP) Is…
Currently produced goods,
not goods produced in the past.

16. 15
…the market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product (GDP) Is…
Measures production within a country’s borders
US citizens or firms in US
Foreign citizens or firms in US

17. 16
…the market value of all final goods &
services produced within a country
in a given period of time.
Gross Domestic Product (GDP) Is…
Usually a year or a quarter (3 months)

18. In each of the following cases, determine if it would be
counted in Gross Domestic Product.
A. Caroline goes to the store a buys chocolate chip
cookies to eat.
B. Bob goes to the store and buys chocolate chip cookies
for his catering business to include in an order
C. Jim mows his own lawn
D. Nancy pays someone to clean her house
E. Chemours dumps GenX into the Cape Fear River
polluting the river
What counts

19. Components of GDP

20. GDPUS =Y =
C +
NX
Y = C + I + G + NX
Exports - Imports
I +
G +

21. The Components of GDP
21
Y = C + I + G + NX
Output,
measured
with GDP
=

22. 22
Consumption (C)
 is total spending by households on g&s.
 Note on housing costs:
 Renters and Homeowners both “consume”
“housing services”

23. 23
Consumption (C)
 Renters:
C includes rent payments.
 Homeowners:
C includes the “imputed rental value” of the
house
 “as if” renting their home (from themselves)
 Not the purchase price or mortgage payments
Purchase of home is “investment” which
produces “housing services”

24. 24
Investment (I)
 is total spending on goods that will be used in the
future to produce more goods and services.
 includes spending on
 capital equipment (e.g., machines, tools)
 structures (factories, office buildings, houses)
 inventories (goods produced but not yet sold)
 Note: “Investment” does not mean the
purchase of financial assets like stocks and
bonds.

25. House
Produces
“Housing Services”
Consume these each night
 part of
Consumption
“C”
Produces Housing
Services
Good that produces
more G&S
 Investment
“I”
If renting
then “rent”
If own then
“imputed rent”

26. 26
Government Purchases (G)
 is all spending on the g&s purchased by govt
at the federal, state, and local levels.
 G excludes transfer payments, such as
Social Security or unemployment insurance
benefits.
They are not purchases of g&s.

27. 27
Net Exports (NX)
 NX = exports – imports
 Exports represent foreign spending on the
economy’s g&s.
 Imports are the portions of C, I, and G
that are spent on g&s produced abroad.
 Adding up all the components of GDP gives:
Y = C + I + G + NX

28. 28
U.S. GDP and Its Components, Q4 2017*
–1,854
10,541
10,176
42,250
$61,111
per capita
–3.0
17.3
16.7
69.1
100.0
% of GDP
-599
3,405
3,287
13,647
$19,739
billions
NX
G
I
C
Y
$19.7 trillion (3.0% growth, annual rate, 2nd est.)
Import more than
we export

29. 29

30. In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. General Motors builds $500 million worth of cars,
but consumers only buy $470 million worth of them.
D. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
GDP and its components

31. A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in
her publishing business. The laptop was built in
China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.
Answers
31

32. C. General Motors builds $500 million worth of cars,
but consumers only buy $470 million of them.
Consumption rises by $470 million,
inventory investment rises by $30 million,
and GDP rises by $500 million.
D. Jane spends $1200 on a computer to use in her
editing business. She got last year’s model on
sale for a great price from a local manufacturer.
Current GDP and investment do not change,
because the computer was built last year.
Answers
32

33. 33
Y = C + I + G + NX
GDP, National
Income, Total
Expenditure, Total
Output…
Purchases of G&S
by households
And imputed
rent…
Purchases of goods
to be used to make
more goods.
NOT stocks and
bonds!!!
Purchases of G&S
by governments
Not transfer
payments
= Exports – Imports
Purchases by foreigners
and subtract foreign stuff
we buy