GDPIs the most important measure of economic

activity.Is a measure of the income and expenditures

of an economy.

Gross Domestic Product

What’s a Gross What’s a Gross Domestic Product?Domestic Product? Broccoli?Broccoli? I was gonna say I was gonna say

“Preparation H.”“Preparation H.”

The Circular-Flow Diagram

Firms Households

Market for Factors

of Production

Market for Goods

and Services

SpendinSpendingg

Revenue

Wages, rent, and

profit

IncomeIncome

Goods & Services

sold

Goods & Services bought

Labor, land, and capital

Inputs for production

GDP is used to compare economies world wide

The Measurement of GDP

GDP is the dollar value of all final goods and services

produced within a country in a given year.

The Measurement of GDP

• Production is measured as a $$$ dollar value $$$:

the price that Consumers, Businesses, Government and International buyers pay or earn for goods and services.

+Government Spending+Government Spending 18% 18%+Government Spending+Government Spending 18% 18%

++Foreign Spending -5% (Net Exports) ++Foreign Spending -5% (Net Exports)

Consumer Spending Consumer Spending 70%70% (Consumption)(Consumption) Consumer Spending Consumer Spending 70%70% (Consumption)(Consumption)

+Business Spending +Business Spending 17 % 17 % ((Investment)Investment)+Business Spending +Business Spending 17 % 17 % ((Investment)Investment)

EXPENDITURES APPROACHEXPENDITURES APPROACH

Net Exports = Exports – Imports[Imports represent production outside a country]

Wages + Rents (income from natural resources)

+ Interest (income from capital investments)

+ Owner’s Income (sole proprietorship and partnerships)

+ Corporate Profits- Corporate Income Taxes- Dividends- Undistributed Corporate Profits

THE INCOME APPROACHTHE INCOME APPROACH

Intermediate GoodsIntermediate Goods – components of the final good. A. Ford buys batteriesbatteries or tirestires for its cars.

B. KFC buys chickenschickens to eventually sell to customers.

GDP measures FINAL GOODS not intermediate goods

It includes both tangible GOODS (nondurable goods: food & clothing, durable goods: cars and refrigerators) and intangible SERVICES

(haircuts, housecleaning, doctor visits).

ChevyChevy

Second Hand SalesSecond Hand Sales – no current productionno current production. A. If a 1957 Chevy1957 Chevy is bought in 2009

[It has not been produced againnot been produced again so would not count.]

B. Boots producedBoots produced in in 20002000 are bought in a Resale Store in 09.They also have not been produced againnot been produced again.

Salesman’s commission would countcommission would count.You are buying his services.

It includes goods and services CURRENTLY PRODUCED, not transactions involving goods produced in the past.

The Measurement of GDP

• It measures the value of production WITHIN A COUNTRY’S BORDERS regardless of who owns the company.

BMW in WacoBMW in Waco

in Chicagoin Chicago

Provo,UTProvo,UT

It measures the value of production that takes place WITHIN A SPECIFIC TIME PERIOD, usually a year or a quarter (three months).

The Measurement of GDP

Q2

CHANGES IN GDP

o

P1

AS1

AD1

a

Q1

Pri

ce L

evel

Real Gross Domestic Product

bP2

AD2

The level of output (income and expenditures) is changed if there is a change in AGGREGATE DEMAND.

Q2

CHANGES IN GDP

o

P1

AS1

AD1

a

Q1

Pri

ce L

evel

Real Gross Domestic Product

bP2

AS2

The level of output (income and expenditures) is changed if there is a change in AGGREGATE SUPPLY.