GROSS DOMESTIC PRODUCT

SSEMA1 b. Define: Gross Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate

supply and aggregate demand.

Gross Domestic Product

To try and predict the future economists use past and current performance as a indicator of where the economy is going.

Measuring Economic Production

Economists use the GDP to measure the economy’s strength.

The total value of all final goods and services produced within a country during the year.

Measuring Economic Production 3 Components that make up the definition:

When calculating for GDP, we only count products that are finished products. We do this so that we do not count goods twice.

GDP only measures goods made within the US

Nikes made in Asia do Kias made in not factor into our GDP West Point,

GA do count in our

GDP

GDP only measures the sale of new items.

Any used or second hand goods are not counted.

OUTPUT-EXPENDITURE MODEL

This is the formula for computing the GDP:

OUTPUT-EXPENDITURE MODEL

OUTPUT-EXPENDITURE MODEL

C = Consumer Spending are the goods and services you and I purchase everyday.

I = Gross Investment-The total value of all capital goods produced in a given nation during the year as well as the dollar value of business inventories This does not include the financial assets of

comp.

OUTPUT-EXPENDITURE MODEL

G = Government Purchases-The total dollar value that federal, state, and local governments spend on goods and services. Highways, public education, national defense

X - M = Exports - Imports-

Total exports minus total imports.

Just like calculating your own income, GDP measures how well the U.S. is doing financially.

How do you use GDP? 1. Compare to previous years (Is there growth?)2. Compare policy changes (Did a new policy work?)3. Compare to other countries (Are we better off?)

What does GDP tell us?

*CIA Factbook 2011 Estimate13

Just like calculating your own income, GDP measures how well the U.S. is doing financially.

How do you use GDP? 1. Compare to previous years (Is there growth?)2. Compare policy changes (Did a new policy work?)3. Compare to other countries (Are we better off?)

What does GDP tell us?

*CIA Factbook 2011 Estimate14

World GDP Distribution

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How can you measure growth from year to year?

% Change in GDP

=Year 2 - Year 1

Year 1X 100

Mordor’s GDP in 2007 was $4000Mordor’s GDP in 2008 was $5000What is the % Change in GDP?

Transylvania’s GDP in 2007 was $2,000Transylvania’s GDP in 2008 was $2,100

What is the % Change in GDP? 17

ADJUSTING THE GDP: There are 2 ways to measure GDP:

Nominal GDP is the GDP expressed in the current prices for the fiscal year.

ADJUSTING THE GDP: There are 2 ways to measure GDP:

•Real GDP is adjusted to make up for price changes over time.

•Economists use price indexes to compare how prices have changed over time.

Limitations of the GDP1. Accuracy and timeliness of data

Data is an approximation and often slow to calculate

2. Non-Market ActivitiesDoes not factor things like your chores

3. Underground EconomyIllegal and unreported legal activities