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Measuring the Wealth of the Nation
Chapter 12
What is GDP?
Gross Domestic Product The total dollar value of all final goods
and services a nation’s industries produce within its borders in one year.
Quantity of goods produced in a year X price of each item = GDP
Nominal GDP
Dollar values (reported as is) – the way the government reports GDP
Real GDP
GDP adjusted for inflation from a base year.
Final Goods measure GDP
Final goods and services – sold to ultimate users
Intermediate goods – those used in the production of other goods.
Tire example: may be either final or intermediate depending on who sells it.
Unsold inventories are counted in GDP- dealer is considered the final purchaser.
GDP includes only goods produced in the specified calendar year.
GDP measures only domestic production, things produced in the U.S.
Toyota Tundra made in Texas?
Recap: 4 concepts used to determine GDP
1. Quantity of Goods X Price 2. Only final goods & services 3. Only goods produced during the
calendar year. 4. Only includes domestic production.
How to Measure GDP
GDP has to be estimated.
Add all purchases in the four basic economic groups: › Households› Businesses› Government› foreign buyers
Household Consumption
Households account for the greatest portion of the nation’s total purchases: $9,224.5 billion in 2006.
Consumer Services – haircuts, education
Consumer Durable Goods: life expectancy more than one year
Consumer Non-durable Goods: wears out or used up in less than one year.
Trash bags Car stereo Suntan lotion Flip flops Prom dress Laundry detergent Home theater
Business Investment
Gross Private Domestic Investment (GPDI)- business investment
Sum of all business spending on captial investment and unplanned inventories.
Government Spending
In 2006, Government spending accounted for about one-fifth of the GDP.
Net Exports
Consider the amount of goods a nation sells to other countries.
Then subtract the amount that nation buys from other countries.
That gives you the Net Exports. The U.S. has had a negative trade
balance every year since the 1970s. (We buy more from other countries than we sell.)
GDP = C + I + G + NX
Problems with GDP Measurement
Purpose of GDP – tell government officials and economists how productive the economy has been at any given time.
GDP is an estimate and is NOT precise.
Unrecorded Transactions – barter transactions, do-it-yourself activities, black market activities
Counterproductive Items – pollution, environmental damage
Inflation- GDP doesn’t recognize the true dollar value of production. Economists adjust for inflation to a base year = REAL GDP
Changes in population – per capita GDP, wealth per person
Real GDP/total population = per capita real GDP
Foreign Trade
Trade Deficit
Negative balance of trade – buy more from foreign countries than you sell.
Trade Surplus
Positive balance of trade – Sell more to foreign countries than you buy.
Since 1976 the U.S. has run trade deficits.
Trade deficits mean jobs leave the U.S. and go overseas where countries are producing more.
Trade deficits indicate a decline in U.S. manufacturing.
Trade deficits show that other countries are able to produce better or less costly products.
Reasons for Trade Deficits
Reasons for Trade Deficits
1. Domestic inability to produce some goods.
2. Better quality of some foreign goods. 3. Cheaper foreign materials. 4. Lower foreign wages. 5. Lower foreign capital costs. 6. Foreign subsidies – Gov’t pays
producers to help with manufacturing costs.
Trade Policy: Protectionism vs. Free Trade
Protectionists
Try to protect domestic manufacturing and jobs.
Protectionists
Support trade quotas which limit the quantity of goods that can be imported.
Support tariffs which make imports more expensive and domestic products more competitive.
Unintended Consequence: Costs rise for the American consumer causing a reduced demand for products.
Free Trade Advocates
Believes free markets will offer the best opportunities.
Consumers are important to productivity.
Say protectionism is similar to mercantilism (how?)
Quotas and tariffs cause shippers and boatmen to lose jobs due to fewer imports.
Free Trade Advocates
If foreigners prosper from trade, they are able to purchase American products.
Protectionist laws favors some businesses and industry and hurts others. (redistribution of unemployment)
Winners & Losers
Protectionism Non-competitive
firms win Limits buyers
choices Raises prices
Free Trade Solid businesses
may suffer Gives buyers more
choices Lowers prices
GDP Review
What is it? Why is it important? What must be taken into
consideration?