Lectur 6 2 2 Copyright 2013 N S

Is This Part of GDP? GDP is made up of many different factors. While

“GDP” Targets Knowledge 3 Understand the various components of Gross Domestic Product (GDP). Reasoning

What Is GDP? The Gross Domestic Product is the value of all final goods

What GDP Does Not Measure It is important to remember that GDP does not

GDP: Production Approach The first way to calculate GDP is to add up the

GDP: Expenditure Approach The second way to calculate GDP is to add up all

GDP: Income Approach The third way to calculate GDP is to add up all

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s

Real GDP per Capita Real GDP per capita is the key statistic used for

Calculating GDP DIRECTIONS There are different stations set up around the room. Each station

Resources http: //www. bea. gov/national/index. htm#gdp: Data regarding Real GDP growth rates and Real

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Is This Part of GDP? GDP is made up of many different factors. While working in pairs, decide whether you think each economic event below is included in GDP or excluded from GDP. If you think it is included, place an “I” in the blank. If you think it is excluded, place an “E” in the blank. ____ 1) Hair cut is purchased. ____ ____ ____ 11) Stay-at-home mothers create community garden. 2) Honda purchases steel for producing new cars. ____ 12) Chevrolet purchases a new factory. 3) Dell Computers sells computers to Japan. ____ 13) Ben & Jerry’s purchases milk for making ice cream. 4) Mc. Donald’s purchases a brand new grill. ____ 14) Wall Street traders purchase stocks. ____ 15) Ford Motor Company pays for the land it uses 5) Macy’s pays its employees an hourly wage. in production. 6) Students purchase airplane tickets to Hawaii. ____ 16) U. S. citizens purchase oil from Saudi Arabia. 7) Pepsi donates money to the Susan G. Komen ____ 17) Wells Fargo Bank gives a student loan. Foundation. ____ 18) Wells Fargo Bank is paid interest for the loan it made to Wal-Mart. 8) A stereo is purchased on e-Bay. ____ 19) Owner of NFL team makes millions in profits. 9) Citizens pay property tax. ____ 20) Lemonade is sold at a neighborhood lemonade stand by 8 -year olds. 10) Government buys supplies for the military. Copyright © 2013 N. S.

“GDP” Targets Knowledge 3 Understand the various components of Gross Domestic Product (GDP). Reasoning 1 Explain why sustained growth in GDP per capita is desirable. Skill 2 Calculate data regarding GDP. Copyright © 2013 N. S.

What Is GDP? The Gross Domestic Product is the value of all final goods and services produced by a country. 1) It is a measure of aggregate output defined in terms of the current price level. 2) Useful for making comparisons over time or between countries. 3) GDP only measures final products, not intermediate ones. 4) Intermediate products are used up when producing a final product. (Like steel for a car. ) 5) Counting only final products eliminates double counting. Copyright © 2013 N. S.

What GDP Does Not Measure It is important to remember that GDP does not include all economic activity. The following items do not get counted when measuring GDP. 1) Used goods, such as cars or houses. 2) Financial assets, such as stocks or bonds. 3) Anything not produced within the country’s borders. 4) Household production subsistence farming. or 5) Underground markets or unreported economic activity. 6) The amount or distribution of wealth in a country. Copyright © 2013 N. S.

GDP: Production Approach The first way to calculate GDP is to add up the value of all the final goods produced in the economy. 1) Economists count only each producer’s value added amount. 2) For example: a) A wheat farmer grows a bushel of wheat that costs $1. Value Added = (Sales Price) - (Price of Inputs) a) VA = $1 - $0 = $1 b) VA = $2 - $1 = $1 c) VA = $5 - $2 = $3 b) A miller buys the wheat for $1 to turn into flour, which costs $2. c) A baker buys the flour for $2 to turn into bread, which costs $5. $1 Copyright © 2013 N. S. $1 $3

GDP: Production Approach The first way to calculate GDP is to add up the value of all the final goods produced in the economy. 1) Economists count only each producer’s value added amount. 2) For example: a) A wheat farmer grows a bushel of wheat that costs $1. b) A miller buys the wheat for $1 to turn into flour, which costs $2. Value Added = (Sales Price) - (Price of Inputs) a) VA = $1 - $0 = $1 b) VA = $2 - $1 = $1 c) VA = $5 - $2 = $3 d) VA = $9 - $5 = $4 c) A baker buys the flour for $2 to turn into bread, which costs $5. d) A grocer buys the bread for $5 to sell it to consumers for $9. $1 Copyright © 2013 N. S. $1 $3 $4

GDP: Production Approach The first way to calculate GDP is to add up the value of all the final goods produced in the economy. 1) Economists count only each producer’s value added amount. 2) For example: a) A wheat farmer grows a bushel of wheat that costs $1. b) A miller buys the wheat for $1 to turn into flour, which costs $2. Value Added = (Sales Price) - (Price of Inputs) a) VA = $1 - $0 = $1 b) VA = $2 - $1 = $1 c) VA = $5 - $2 = $3 d) VA = $9 - $5 = + $4 $9 c) A baker buys the flour for $2 to turn into bread, which costs $5. d) A grocer buys the bread for $5 to sell it to consumers for $9. 3) All sales total $17. But GDP is only value added, which is $9. $1 Copyright © 2013 N. S. $1 $3 $4

GDP: Expenditure Approach The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories. 1) Consumption Consumer spending on final goods and services is the largest category. 2) Investment This describes the fact that firms also spend money on final products. It does not mean financial investment. + C I Copyright © 2013 N. S.

GDP: Expenditure Approach The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories. 1) Consumption 3) Government Consumer spending on final goods and services is the largest category. The government also spends money on final products. 2) Investment This describes the fact that firms also spend money on final products. It does not mean financial investment. + C + I G Copyright © 2013 N. S.

GDP: Expenditure Approach The second way to calculate GDP is to add up all of the money spent on final goods and services. Spending is divided into four categories. 1) Consumption 3) Government Consumer spending on final goods and services is the largest category. The government also spends money on final products. 2) Investment 4) Net Exports This describes the fact that firms also spend money on final products. It does not mean financial investment. + C Some products get bought by other countries, but we must subtract products we buy from other countries. + I + G Copyright © 2013 N. S. (X - M)

GDP: Income Approach The third way to calculate GDP is to add up all of the income received by firms from the sale of final goods and services. 1) Wages 3) Rent Some of the money earned by firms gets paid to workers as wages. Some of the money must be paid to rent the land used for production. 2) Interest 4) Profit Some of the money earned by firms must get paid to the people who have lent the firm money. + W Once wages, interest, and rent have been paid, all of the remaining income is considered profit. + I + R Copyright © 2013 N. S. P

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation. 1) Real GDP tells us how much a change in GDP is due to a change in aggregate output. 2) For example: a) Suppose in Year 1, 50 apples are sold for $1 apiece. b) Suppose in Year 2, 60 apples are sold for $2 apiece. Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP Real GDP Copyright © 2013 N. S.

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation. 1) Real GDP tells us how much a change in GDP is due to a change in aggregate output. 2) For example: a) Suppose in Year 1, 50 apples are sold for $1 apiece. b) Suppose in Year 2, 60 apples are sold for $2 apiece. c) What is the nominal GDP for Year 1 and for Year 2? Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP Real GDP Copyright © 2013 N. S. Calculate

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation. 1) Real GDP tells us how much a change in GDP is due to a change in aggregate output. 2) For example: a) Suppose in Year 1, 50 apples are sold for $1 apiece. b) Suppose in Year 2, 60 apples are sold for $2 apiece. c) What is the nominal GDP for Year 1 and for Year 2? Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP $50 $120 Real GDP Copyright © 2013 N. S.

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation. 1) Real GDP tells us how much a change in GDP is due to a change in aggregate output. 2) For example: a) Suppose in Year 1, 50 apples are sold for $1 apiece. b) Suppose in Year 2, 60 apples are sold for $2 apiece. c) What is the nominal GDP for Year 1 and for Year 2? d) What is the GDP for each year if we only use the price from Year 1? Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP $50 $120 Real GDP Copyright © 2013 N. S. Calculate

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation. 1) Real GDP tells us how much a change in GDP is due to a change in aggregate output. 2) For example: a) Suppose in Year 1, 50 apples are sold for $1 apiece. b) Suppose in Year 2, 60 apples are sold for $2 apiece. c) What is the nominal GDP for Year 1 and for Year 2? d) What is the GDP for each year if we only use the price from Year 1? Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP $50 $120 Real GDP $50 $60 Copyright © 2013 N. S.

Nominal vs. Real GDP Nominal GDP is the current dollar value for one year’s GDP. Real GDP, however, is much more useful because it is corrected for inflation. 1) Real GDP tells us how much a change in GDP is due to a change in aggregate output. 2) For example: a) Suppose in Year 1, 50 apples are sold for $1 apiece. b) Suppose in Year 2, 60 apples are sold for $2 apiece. c) What is the nominal GDP for Year 1 and for Year 2? d) What is the GDP for each year if we only use the price from Year 1? Real GDP Nominal GDP 3) What do you notice about this graph of nominal and real GDP? Copyright © 2013 N. S.

Real GDP per Capita Real GDP per capita is the key statistic used for tracking the health and growth of an economy. 1) Divide real GDP by the population of a country to find real GDP per capita. Real GDP per capita = RGDPC of U. S. = Copyright © 2013 N. S. Real GDP Population $15, 681, 500, 000 315, 439, 603 $49, 713

Real GDP per Capita Real GDP per capita is the key statistic used for tracking the health and growth of an economy. 1) Divide real GDP by the population of a country to find real GDP per capita. 2) U. S. real GDP per capita has steadily grown over time. 3) The U. S. has almost three times as much purchasing power person as it had in 1960. Copyright © 2013 N. S.

Real GDP per Capita Real GDP per capita is the key statistic used for tracking the health and growth of an economy. 1) Divide real GDP by the population of a country to find real GDP per capita. 2) U. S. real GDP per capita has steadily grown over time. 3) The U. S. has almost three times as much purchasing power person as it had in 1960. 4) Other countries, however, continue to have low real GDP per capita rates. Copyright © 2013 N. S.

Calculating GDP DIRECTIONS There are different stations set up around the room. Each station contains a set of cards for calculating GDP. There are cards for the production approach, the expenditure approach, and the income approach. Begin at one station and make sure the cards are shuffled. Place the cards in the four appropriate piles face down. Draw one card from each pile, and calculate the GDP using the data on those four cards. An example of how to calculate each of the different methods is provided under each heading below. PRODUCTION APPROACH In order to find GDP using the production approach, add together all of the value added amounts. EXPENDITURE APPROACH In order to find GDP using the expenditure approach, add together the values of consumption, investment, government spending, and net exports. To find the value of net exports, subtract imports from exports. INCOME APPROACH In order to find GDP using the income approach, add together the values of wages, interest, rent, and profit. Copyright © 2013 N. S.

Resources http: //www. bea. gov/national/index. htm#gdp: Data regarding Real GDP growth rates and Real GDP Data on GDP pre Capita provided by the International Monetary Fund (IMF) via wikipedia. http: //research. stlouisfed. org/fred 2/series/USARGDPC/downloaddata: Data regarding real GDP per capita in the U. S. http: //www. census. gov/main/www/popclock. html: Data for U. S. population (March 5, 2013) Copyright © 2013 N. S.