Chapter 11 Gross Domestic Product

1. Chapter 11Gross Domestic Product Survey of EconomicsIrvin B. Tucker Lecture Slides

2. What is national income accounting? • The system used to measure the aggregate income and expenditures for a nation

3. What is gross domestic product? • GDP is the market value of all final goods and services produced in a nation during a period of time, usually a year

4. What are final goods? • Finished goods and services produced for the ultimate user

5. What areintermediate goods? • Goods and services used as inputs for production of final goods

6. Does GDP count intermediate goods? • No, to avoid double counting, GDP only measures final goods and services

7. What is an advantage of using GDP? • GDP measures value using dollars, rather than a list of the number of goods and services

8. Does GDP measure secondhand transactions? • No, current GDP does not include the sale of a used car or the sale of a home constructed some years ago. To include these items would be double counting because they were counted in GDP when they were new.

9. What is atransfer payment? • A government payment to individuals, not in exchange for goods or services currently produced. Such nonproductive transactions are not counted in GDP.

10. Does GDP measure nonproductive financial transactions? • No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments

11. What is acircular flow model? • A model that show us how all the pieces of the GDP puzzle fit together

12. Productmarkets Goods & Services Supply Demand Spending Exhibit 11.1 Households Basic Circular Flow Model Businesses Demand Factor Payments Factormarkets Supply Factors of Production

13. What is theexpenditure approach? • The national income accounting method that measures GDP by adding all the spending for final goods and services

14. What are the four sectors of GDP? • Consumption • Investment • Government • Foreign (X - M)

15. GDP = C + I + G + (X - M)

16. Exhibit 11.2 Gross Domestic Product Using the Expenditure Approach, 2010 Percent of GDP Amount National Income Account (trillions of dollars) Personal consumption expenditures ( C ) $10.3 71% Durable goods $1.1 Nondurable goods 2.3 Services 6.9 Gross private domestic Investment ( I ) 1.8 12 Fixed investment 1.7 Change in business inventories 0.07 Government consumption expenditures and gross investment ( G ) 3.0 20 Federal 1.2 State and local 1.8 Net exports of goods and services (X-M ) - 0.5 - 3 Exports ( X ) 1.8 Imports ( M ) 2.3 Gross domestic product ( GDP ) $14.6 100%

17. Exhibit 11.3 An International Comparison of GDPs, 2010 $14.6 GDP (Trillions of dollars) $5.9 $5.5 $3.3 $2.3 $2.3 $1.6 $1,.4 $1.0 United States United Kingdom China Japan Germany Mexico Russia India Canada Country

18. What are shortcomings of GDP? • Nonmarket transactions • Distribution, kind, and quality of products • Neglect of leisure time • Underground economy • Economic bads

19. What is a conclusion from the shortcomings of GDP ? • GDP is a quantitative, rather than qualitative, measure of the output of goods and services

20. What other national accounts measure economic performance? • National Income • Personal Income • Disposable Personal Income • Nominal and Real GDP • GDP Chain Price Index

21. What isnational income? • NIis the total earned by resource owners, including wages, rents, interest, and profits

22. Exhibit 11.4 National Income Calculated from Gross Domestic Product, 2010 Amount National Income Account (billions of dollars) Gross domestic product (GDP) $14.6 Depreciation -1.8 National income $12.8

23. What ispersonal income? • PI is the total income received by households that is available for consumption, saving, and payment of personal taxes

24. Exhibit 11.5 Four Measures of the Macro Economy Depreciation Personal Taxes Consumption plus Investment National Income Personal Income GDP minus plus minus minus profits personal taxes Government Spending depreciation minus FICA plus plus Net Exports X - M transfer payments GDP National Income Personal Income Disposable Income

25. Exhibit 11.6 Personal Income Calculated from National Income, 2010 Amount National Income Account (billions of dollars) National income (NI ) $12.8 Corporate profits -1.6 Contributions for Social Security (FICA) -1.0 Transfer payments and other income 2.3 Personal income ( PI ) $12.5

26. What is disposable personal income? • DI is the amount of income that households have to spend or save after payment of personal taxes

27. Exhibit 11.7 Disposable Personal Income Calculated from Personal Income, 2010 Amount National Income Account (billions of dollars) Personal income ( PI ) $12.5 Personal taxes -1.1 Disposable personal income ( DI ) $11.4

28. What is nominal GDP? • The value of all final goods based on the prices existing during the time period of production

29. What is real GDP? • The value of all final goods produced during a given time period based on the prices existing in a selected base year

30. What is thechain price index? • A measure that compares changes in the prices of all final goods during a given period to the prices of those goods in a base year

31. Real GDP = nominal GDP GDP chain price index X 100

32. Exhibit 11.8 Nominal GDP, Real GDP, and the GDP Chain Price Index (3) (2) (1) Real GDP (billions of 2005 dollars) GDP Chain Price Index (2005 = 100) Nominal GDP (billions of dollars) Year 1960 $ 526 $ 2,831 18.60 1970 1,038 4,270 24.31 1980 2,788 5,839 47.77 1990 5,800 8,034 72.20 2000 9,951 11,226 88.64 2005 12,638 12,638 100.00 2010 14,660 13,248 110.66

33. Exhibit 11.8 Nominal GDP, Real GDP, and the GDP Chain Price Index 16,000 14,000 12,000 Real GDP and Nominal GDP (billions of dollars per year) 10,000 8,000 6,000 Real GDP 4,000 Nominal GDP 2,000 Base year 1960 1970 1980 1990 2000 2005 2010 Year

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