Gross Domestic Product Measures Total Production Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time, typically one year. GDP Is Measured Using Market Values, Not Quantities The worth of a thing is the price it will bring. Final good or service A good or service purchased by a final user: • Household consumption • Business investment, including all residential construction • Government purchases vs Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck. GDP Includes Only Current Production
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Gross Domestic Product Measures Total Production Gross domestic product (GDP) The market value of all final goods and services produced in a country during.
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Gross Domestic Product Measures Total Production
Gross domestic product (GDP) The market value of all final goods and services produced in a country during a period of time, typically one year.GDP Is Measured Using Market Values, Not Quantities
The worth of a thing is the price it will bring.Final good or service A good or service purchased by a final user:
• Household consumption
• Business investment, including all residential construction
• Government purchases
• Exports to foreigners
vs
Intermediate good or service A good or service that is an input into another good or service, such as a tire on a truck.
GDP Includes Only Current Production
PRODUCTION AND PRICE STATISTICS FOR 2011
(1)PRODUCT
(2)QUANTITY
(3)PRICE PER UNIT
Eye examinations 100 $50.00
Pizzas 80 10.00
Textbooks 20 100.00
Paper (for textbooks) 2,000 0.10
PRODUCT(1)
QUANTITY(2)
PRICE PER UNIT(3)
VALUE
Eye examinations 100 $50 $5,000
Pizzas 80 10 800
Textbooks 20 100 2,000
Total GDP = $7,800
Production, Income, and the Circular Flow Diagram
SprivateIm
X
C T
T
G + Tr
G
DeficitNX = X - Im
I = Sprivate
- NX - Deficit
Y: Components of GDP = $16.0 trillion (2013:Q1)
Consumption Spending by households on goods and services, not including spending on new houses.
C: Personal Consumption Expenditures = “Consumption” = 71.0% of Y
Investment Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.
I: Gross Private Domestic Investment, or “Investment” = 13.4% of Y
G: Government Consumption and Gross Investment,or “Government Purchases” = 19.0 % of Y
Government purchases Spending by federal, state, and local governments on goods and services.
NX: Net Exports of Goods and Services, or “Net Exports” = -3.4% of Y
X = 13.7 % of Y Im = 17.1% of Y
Transfer payments are not included in GDP: Payments by the government to individuals for which the government does not receive a new good or service in return.
• Unemployment benefits paid to someone not working.
• Social security benefits paid to someone who is retired.
• Interest income paid to a government bondholder
Since the government doesn’t produce anything for
the market, the interest payment can’t be for any
productive service.
“Underground economy” activities are not included in GDP
• Production “off-the-books”• Illegal activities
Household production is not included in GDP
Does GDP Measure What We Want It to Measure?
Shortcomings of GDP as a Measure of Well-Being
The Value of Leisure Is Not Included in GDP
GDP Is Not Adjusted for Pollution or Other Negative Effects of Production
GDP Is Not Adjusted for Changes in Crime and Other Social Problems
GDP Measures the Size of the Pie but Not How the Pie Is Divided Up