Gross Domestic Product

By: Mrs. Erin Cervi

Gross Domestic Product• G= Gross- TOTAL• D= Domestic- Made in a country• P= Product- Production of a final good/service during a specific period of

time.• (GDP) measures our nations (and others around the world) total

economic performance – It is an economic indicator!

• 1991 U.S. gov’t switched from GNP to GDP– GNP: included production of all U.S. resident’s no matter where they were

located – WE WANTED TO KNOW WHAT WAS GOING ON IN OUR COUNTRY!

• Bureau of Economic Analysis (BEA): Calculate the GDP in the U.S.

Counted Toward GDP NOT Counted Toward GDP

•only final goods and services (C, I,G, (X-M))•New (produced that year)

• Capital resources count if they are NEW

•Domestically produced• Foreign companies

w/in U.S. borders•Commissions (broker fees, real estate agent fees)•Inventories (produced, just not sold)

•Intermediate goods (NO DOUBLE COUNTING)•Old goods/resale goods (already counted before)•U.S. companies abroad•Financial assets (stocks, bonds, CDs)•Non-market activity

• unpaid labor/do-it-yourself projects, finding own home, buying own stocks, volunteer work

• under the table transactions b/c no record of transaction (babysitting)

•Public transfer payments (SS, Medicaid, unemployment)•Private transfer payments (gift of money)

Gross Domestic Product (GDP)

• GDP is measured by totaling money spent on four categories.

–GDP= C+I+G+ (X-M)

Consumption

• Definition: The spending by households on goods and services.– A new car, food,

clothes, college tuition, sporting event, health insurance.

– Makes up 2/3rds of GDP

At the beginning of the 1980’s, just over 60% of the U.S. Gross Domestic Product was consumer spending. Today, consumer spending is close to 70% of GDP.

http://www.irle.berkeley.edu/events/spring08/feller/

Productivity and Wages–the Big Disconnect

Investment• Investment sometimes refers to the purchase of financial products,

such stocks, bonds, or even gold, with the hope of making money in the future.

• Regarding GDP, investment is defined as: purchases that contribute to the overall performance of an economy.

• There are THREE things that count as investments1. Spending by businesses on capital resources/machinery,

factories, equipment, tools, computers, technology, new buildings.

2. Individuals buying a new house3. INVENTORIES: A company's merchandise, raw materials, and

finished and unfinished products which have not yet been sold.

Government Spending

• Definition: Spending by all levels of government on goods and services– Direct payment for

goods/services– Military, roads,

healthcare

Net Exports

• Definition: Spending by people outside the United States on US produced goods (exports, or X)

• Minus spending by people in the United States on foreign goods and service (imports, or M)

• (X-M) = Net Exports

How is GDP an economic indicator?

• When the GDP is rising, a national economy is growing. – If the U.S’s GDP increases 3-5% each year =optimal b/c

we are growing at a healthy, sustainable rate (a rate that can be kept up).

• When GDP increases 2% and below it is considered to have a sluggish/declining economy.

• Even better indicator: real GDP per capita=real GDP/population