Gross Domestic Product GDP Basics Guttmann AP Macroeconomics

Gross Domestic Product (GDP) Basics Guttmann – AP Macroeconomics from Kleinschmidt APSI Notes

What is GDP? • Defined = The total value of all final goods and services produced in a country in a year, using resources from that country • The measures were created in the 1930’s. • Until the 1990’s, Gross National Product was the federal measure of the economy. • Key terms to know: • “Gross” = Totals before adjustments (inflation’s effect) • “National” = Production owned by US companies • “Domestic” = Production in the US, even if foreign owned

How does it work? • GDP is officially measured in “quarters” of years: • Quarter 1 = Jan/Feb/Mar • Quarter 2 = Apr/May/June • Quarter 3 = July/Aug/Sep • Quarter 4 = Oct/Nov/Dec

What’s it made of? • The main form used is the “Expenditures” Approach: • GDP = C + Ig + G + Xn • The traditional Alternate approach to GDP accounting = Income Approach: was W+R+I+P+SA (as listed in older texts)

GDP Components • C = Personal Consumption in the economy: • (67% of the Economy !!!) • The purchases of finished goods and services (but not houses)

GDP Components • Ig = Gross Private Business Investment monies: • • Factory equipment maintenance, New factory equipment, Construction of housing, Unsold inventory of products built in a year, but not sold that year

GDP Components • G = Government Spending: • Government purchases of products and services

GDP Components • Xn = Net Foreign Factor of Trade: Exports minus Imports • Exports = Dollars in, Imports = Dollars out • (Post WWII, Xn has usually been a negative number: Trade Deficit)

What’s not counted? • Items that DO NOT Count in GDP: • Used goods/Second-Hand goods • Gifts or “Transfers” (Private or Public) (note COLAs) • Stock/Equity/Securities purchases (places like the NYSE, NASDAQ) • Unreported business activities conducted in “cash” (unreported tips. . . ) • Illegal activities (underground markets) • Financial transactions between banks and businesses • “Intermediate goods” (no double counting) • “Non market” activities like volunteer and family work