Gross Domestic Product GDP I. GDP (or nominal GDP) is the dollar amount of all final goods and services produced within a countrys borders in a year A.a measure of national output, or production B.Single most important measure of overall performance C.Current GDP is over $14 trillion Japan has 2nd highest with $5.8 trillion China comes in 3 rd with $5.3 trillion The only GDP higher than US is the combined GDP of the European Union with $18.6 trillion II. Calculating GDP A.Whats not included 1.Intermediate products A product used in the manufacturing of a final product 2.Secondhand sales Garage sale tire? Swap meet tire? 3.Non-market transactions Nanny vs. Mom services 4.Underground economy (black market) Illegal, so unreported, so cannot be counted B.Distortions to GDP 1.Inflation can make nominal GDP appear to have grown when it hasnt a.Calculating GDP: Multiply price and the amount of a product sold, added to every other products calculation. If the number sold increases, GDP would rightly appear to go up b.But if price increased, GDP would incorrectly appear to have increased also c.Remember, GDP is the measurement of national output, so inflation would create a false impression Wertopia Population:1 Factories:1 Workers: 1 Number of products produced per year:5 Price: $5 GDP? $25 What would happen to GDP if production increased to 6 products per year? GDP: $30 What would happen to GDP if inflation increased instead of GDP to $6? GDP: $30 Both production and price increases have the same effect: higher GDP 65 Price: $6 But GDP is supposed to measure national output, or production. Inflation, therefore, distorts nominal GDP 2.Real GDP (or GDP in constant dollars) is GDP adjusted for inflation distortions of price are removed from the calculationdistortions of price are removed from the calculation leaving the REAL dollar value of all products produced that year, or real GDPleaving the REAL dollar value of all products produced that year, or real GDP 3. Population changes can also affect GDP a.Country A has 5 producers, producing $500 worth of goods and services a year b.Country B has 500 producers producing $5 worth of product a year c.Which has a more productive population? 1)Country A d.Economists solve the problem by dividing GDP by the population, called GDP per capita 4. Per capita GDP is GDP adjusted for population, or is calculated on a per person basis 5. GDP per capita tells economists how much each person in the economy can produce, or the production capacity of the average worker 6. Real GDP per capita is GDP adjusted for both inflation and population AS AD Price GDP Since GDP is a measurement of production, or the QUANTITY of all final products produced within a countrys borders in a given year, GDP is sometimes shown on the QUANTITY axis of a S&D curve. Government policy can influence GDP, as we will later see. III. Gross National Product (GNP) A.Definition: 1.A measure of a countrys economic performance as measured by the dollar value of all final goods and services produced by a countrys citizens and citizen-owned capital whether foreign or domestic 2.In other words, U.S. GNP measures the production capacity of Americans here and abroad 3.In one sense, GNP measures Americas income 4.Calculated by adding to GDP all U.S. citizen production outside the U.S. and subtracting foreign produced goods within the U.S. 5.A statistic not used much in recent years, replaced in the 1990s by the more popular GDP Questions 1. Define GDP 2. Define GNP 3. List those types of economic activity that are NOT included in calculating GDP 4. How does inflation distort GDP? 5. What is nominal GDP? 6. What is real GDP? 7. What is per capita GDP ? 8. What is real GDP per capita?