Chapter 12 Gross Domestic Product GDP Read P

Chapter 12 Gross Domestic Product (“GDP”) Read P. 301 -305 (up to “Other Income and Output Measures”)

The concept: if a nation produces more goods and services from one year to the next, it can generally be said that the economy is growing… A growing economy creates jobs… People who live in an ever-growing economy enjoy a rising standard of living

How do we measure the health of the national economy? 5 statistics are used… we’ll focus only on GDP

Gross Domestic Product (GDP) is the broadest measure of a nation's total economic activity GDP represents the dollar value of all final goods and services produced within a nation's geographic borders over a specified period of time From Investopedia

Calculating GDP: 2 Methods 1. by adding up what everyone (and every business!) earned in a year (income method) 2. by adding up what everyone spent in a year (expenditure method) (we will focus on expenditure method)

Key points about GDP Measures value of the stuff we produce… not the quantity OR quality (GDP is currently approx. $18 trillion): $ 18, 000, 000

Economists add up what is spent in 4 areas: Consumer spending: What we spend on everything from gum to private jet airplanes Investment by business: What business spends on new equipment, labor, buildings, software, etc. G 0 vernment spending: What government spends on defense, Social Security, Medicare, etc. X…net exports: The difference between what we sell overseas and what we buy from overseas

GDP: 4 Main Components GDP = C+I+G+X

Limitations of GDP Does NOT take into account: 1. Non-market activities: things we do for ourselves…mowing the lawn, fixing our own car, etc. 2. “Underground economy” (aka the “black mkt. ” … illegal drugs, weapons, stolen cars, etc. 3. Quality of life…growing GDP that leads to higher std. of living does not necessarily mean greater happiness

Be Careful! Inflation skews (distorts)GDP HOW? It does not represent higher output Explanation: Imagine an ice cream cone cost $1. 00 last year…. and now it costs $2. 00 GDP has doubled… but we haven’t produced twice as many ice cream cones, have we?

So… to remove the misleading effects inflation has on output, we use…

The GDP Price Deflator A mathematical computation used to remove the effects of inflation (don’t panic…you don’t have to do the computation… just know that it IS used) The resulting number is called “Real GDP”

Summary Just as we might monitor our blood pressure as a way of assessing our overall health, we monitor how the economy is performing to see if it is expanding or contracting Remember: growth creates jobs and leads to a higher std. of living