Lecture 6 2 2 Table of Contents Begin

Table of Contents Access Prior Knowledge Set Goals New Information Activity Conclusion Is This Part of GDP? “GDP” Targets What Is GDP? Calculating GDP “GDP” Targets What GDP Does Not Measure GDP: Production Approach GDP: Expenditure Approach GDP: Income Approach Nominal vs. Real GDP per Capita Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Show Answers Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. I 1) Hair cut is purchased. ____ E ____ I ____ E ____ I ____ E 11) Stay-at-home mothers create community ____ garden. 2) Honda purchases steel for producing new cars. ____ I 12) Chevrolet purchases a new factory. 3) Dell Computers sells computers to Japan. E 13) Ben & Jerry’s purchases milk for making ice ____ cream. 4) Mc. Donald’s purchases a brand new grill. E 14) Wall Street traders purchase stocks. ____ I 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. E 16) U. S. citizens purchase oil from Saudi Arabia. ____ E 17) Wells Fargo Bank gives a student loan. 7) Pepsi donates money to the Susan G. Komen ____ Foundation. I 18) Wells Fargo Bank is paid interest for the loan ____ it made to Wal-Mart. 8) A stereo is purchased on e-Bay. I 19) Owner of NFL team makes millions in profits. ____ 9) Citizens pay property tax. E 20) Lemonade is sold at a neighborhood ____ lemonade stand by 8 -year olds. 10) Government buys supplies for the military. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

“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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

What Is GDP? The Gross Domestic Product is the value of all final goods and services produced by a country. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. ) Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back or Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

GDP: Production Approach The first way to calculate GDP is to add up the value of all the final goods produced in the economy. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Value Added = (Sales Price) - (Price of Inputs) Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Value Added = (Sales Price) - (Price of Inputs) a) 2) For example: VA = $1 - $0 = $1 a) A wheat farmer grows a bushel of wheat that costs $1. $1 Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 b) A miller buys the wheat for $1 to turn into flour, which costs $2. $1 Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. $1 Forward Resources End Show

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 Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. $1 Forward $3 Resources End Show

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 Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. $1 Forward $3 Resources $4 End Show

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. Title Page Table of Contents Back $1 Last Slide Viewed Copyright © 2013 N. S. $1 Forward $3 Resources $4 End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. C Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Title Page Table of Contents I Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Title Page Table of Contents + I Back G Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Title Page Table of Contents Some products get bought by other countries, but we must subtract products we buy from other countries. + I Back + G Last Slide Viewed Copyright © 2013 N. S. Forward (X - M) Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Some of the money earned by firms gets paid to workers as wages. W Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Some of the money earned by firms gets paid to workers as wages. 2) Interest Some of the money earned by firms must get paid to the people who have lent the firm money. + W Title Page Table of Contents I Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Some of the money earned by firms must get paid to the people who have lent the firm money. + W Title Page Table of Contents + I Back R Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Title Page Table of Contents Once wages, interest, and rent have been paid, all of the remaining income is considered profit. + I Back + R Last Slide Viewed Copyright © 2013 N. S. Forward P Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Year 1 Year 2 Quantity of Apples 50 Price of Apple $1 Nominal GDP Real GDP Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP Real GDP Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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? Title Page Table of Contents Back Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP Calculate Real GDP Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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? Title Page Table of Contents Back Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP $50 $120 Real GDP Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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? Title Page Table of Contents Back Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP $50 $120 Real GDP Last Slide Viewed Copyright © 2013 N. S. Forward Calculate Resources End Show

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? Title Page Table of Contents Back Year 1 Year 2 Quantity of Apples 50 60 Price of Apple $1 $2 Nominal GDP $50 $120 Real GDP $50 $60 Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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? Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

Real GDP per Capita Real GDP per capita is the key statistic used for tracking the health and growth of an economy. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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 Population Real GDP per capita = See Sample Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. = Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Real GDP Population $15, 681, 500, 000 315, 439, 603 $49, 713 Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

“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. Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show

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) Title Page Table of Contents Back Last Slide Viewed Copyright © 2013 N. S. Forward Resources End Show