Gross Domestic Product How do you measure economic

Gross Domestic Product How do you measure economic growth?

Gross Domestic Product (GDP) • Dollar Value of all new FINAL goods & services produced domestically over one year. • Released quarterly by the Government (measured by % growth) – Recession = Negative GDP growth for 2 consecutive quarters • Historically, U. S. GDP grows between 1% - 5% annually – Growth above 5% is considered “too fast” – Growth below 2% is considered “too slow”

2 methods of calculating GDP = Total Expenditures Spending Revenue Goods and services sold PRODUCT MARKET Goods and Total Expenditures must equal Total Income services bought FIRMS HOUSEHOLDS Labor, land, capital & entrepreneurship Factors of production Wages, rent, Interest & profit GDP = Total Income FACTOR Market Income = Flow of inputs and outputs = Flow of dollars

2 Ways to measure GDP • Every economic transaction has both a buyer & a seller • You measure GDP by either adding all spending or all income: – Expenditure Method= total spending – Income Method= wages, rent, interest & profits Resource Supplied Labor Land Capital Entrepreneurial Talent Income Received Wages Rent Interest Profit

NOT included in GDP: Intermediate Goods: Only FINAL goods counts (must avoid “double counting”) Example: steel used to make a car does not count only value of the entire car (not parts) Non-market transactions: – If you call a plumber it counts – If you fix your sink It does not count Underground Economy • illegal sale of goods (drugs), payments made “under the table”, etc… International goods: Financial Transactions • Only goods produced in USA count Second hand sales • only NEW sales count only a transfer of assets Gov’t Transfer Payments Gov’t transfers to person/company (welfare)

Equation for GDP: PRODUCT Market HOUSEHOLDS FIRMS FACTOR Market GDP = C + I + G + (X-M) New Capital Machinery New Construction Unsold Inventories

Worksheet: GDP Analysis GDP = C + I + G + (NX)

The Recovery is very weak by historical standards!

GDP growth by quarter (3 months)

Day 2: GDP Equation GDP = C + I + G + (NX)

Primary Use of GDP • Objective way to “keep score” on economic performance • Politicians monitor GDP figures to determine Gov’t Policy • Federal Reserve also base their policy decisions on GDP

U. S. GDP in Comparison 24% of World GDP • U. S. 15. 6 Trillion • • • 65. 0 5. 8 5. 6 3. 3 1. 7 Trillion Trillion Entire World: China Japan Germany India

Per Capita GDP • GDP divided by a countries population • Illustrates the $ value of economic output person • Current Statistics: – USA 310, 000 Million people – GDP $15, 600, 000, 000 Trillion dollars – Per Capital GDP = $50, 000

Global Perspective: Per Capita GDP • • World Luxembourg Denmark U. S. England Japan China Bhutan $8, 600 $104, 000 $56, 000 $46, 000 $39, 000 $3, 700 $1, 800

GDP Per Capita

What GDP does Not Measure • The mix of products: – all goods treated equally: Guns versus Food • How goods are distributed – Is wealth concentrated evenly? • The Quality of goods – New computers with more memory

GDP and Quality of Life • Does not measure Leisure Time – Vacation Days in Europe vs. U. S. • Work 80 hours instead of 40 hrs/week, GDP increases – What about quality of life?

Want to move to Bhutan? GDP Per Capita $1, 800 Benefits Costs

Denmark Video Why? USA Trade off