UNIT 3 - Gross Domestic Product

UNIT 3 - Gross Domestic UNIT 3 - Gross Domestic ProductProduct

Gross Domestic Product DefinitionGross Domestic Product Definition

Gross Domestic Product, or GDP, is the Gross Domestic Product, or GDP, is the value of all final goods and services value of all final goods and services produced during a period of time in a produced during a period of time in a certain area or country.certain area or country.


United States GDP United States GDP

For United States GDP data, sFor United States GDP data, see Unit ee Unit 3, Section 3 of our CD, or visit 3, Section 3 of our CD, or visit http://www.bea.gov/



Excluded in the calculation of GDP areExcluded in the calculation of GDP are Intermediate goods (car tires, flour).Intermediate goods (car tires, flour). Any good sold this year, but produced in an other Any good sold this year, but produced in an other

year (used car, existing houses).year (used car, existing houses). Any transaction not directly representing production Any transaction not directly representing production

(welfare payments, purchases of stocks and bonds).(welfare payments, purchases of stocks and bonds). Goods and services that are difficult to measure Goods and services that are difficult to measure

(fixing your own car) or that we choose not to (fixing your own car) or that we choose not to measure (illegal drugs, illegal prostitution).measure (illegal drugs, illegal prostitution).



Using the expenditure approach, GDP is:Using the expenditure approach, GDP is:C + I + G + XC + I + G + X CConsumptiononsumption + I + Investmentnvestment + G + Governmentovernment + + netnet eeXXportsports

Using the income approach, GDP is: Using the income approach, GDP is: W + I + R + P + IBT + CCAW + I + R + P + IBT + CCAwwages)ages) + + i interestnterest + + r rent ent + + pprofit rofit + + IIndirectndirect B Businessusiness T Taxesaxes + + CCapital apital

CConsumption onsumption AAllowance (depreciation)llowance (depreciation)



Because all intermediate products are Because all intermediate products are excluded, GDP does not accurately excluded, GDP does not accurately reflect ALL production in a country. reflect ALL production in a country.

In the GDP definition, two-thirds is In the GDP definition, two-thirds is consumption goods. In actuality, consumption goods. In actuality, production of consumer goods is much production of consumer goods is much less than two-thirds of all production.less than two-thirds of all production.


Gross Domestic Product CalculationGross Domestic Product Calculation

Example 1Example 1Let’s say that we produce 5,000 cups Let’s say that we produce 5,000 cups of yogurt at $1 per cup.of yogurt at $1 per cup.

And let’s say that we produce 100 And let’s say that we produce 100 cell cell phones at $40 per phone.phones at $40 per phone.

What is GDP?What is GDP?


GDP CalculationGDP Calculation

Example 1 answer:Example 1 answer:

The value of the yogurt cups is:The value of the yogurt cups is:

5,000 times $1 = $5,000.5,000 times $1 = $5,000.

The value of the cell phones is:The value of the cell phones is:

100 times $40 = $4,000.100 times $40 = $4,000.

GDP = $5,000 + $4,000 = $9,000.GDP = $5,000 + $4,000 = $9,000.



Example 2Example 2

Let’s say that we produce 5,000 cups of Let’s say that we produce 5,000 cups of yogurt at $2 per cup.yogurt at $2 per cup.

And let’s say that we produce 100 cell And let’s say that we produce 100 cell phones at $80 per phone.phones at $80 per phone.

What is GDP?What is GDP?



Example 2 answer:Example 2 answer:The value of the yogurt is:The value of the yogurt is:5,000 times $ 2 = $10,000.5,000 times $ 2 = $10,000.The value of the cell phones is:The value of the cell phones is:100 times $80 = $8,000. 100 times $80 = $8,000. GDP is $10,000 + $8,000 = $18,000.GDP is $10,000 + $8,000 = $18,000.

GDP has doubled compared to example 1. Has GDP has doubled compared to example 1. Has the economy improved?the economy improved?


Nominal and Real GDPNominal and Real GDP

Year X nominal GDP uses year X prices Year X nominal GDP uses year X prices times year X quantities.times year X quantities.

Year X real GDP uses a base year’s prices Year X real GDP uses a base year’s prices times year X quantities. times year X quantities.

When comparing real GDP between various When comparing real GDP between various years, only the quantity changes.years, only the quantity changes.


Nominal and Real GDP CalculationNominal and Real GDP Calculation

Example 1Example 1Let’s say that in year X, production is 20 cars Let’s say that in year X, production is 20 cars and 10 computers. Prices are $100/car and and 10 computers. Prices are $100/car and $30/computer.$30/computer.

Let’s say that in year Y, production is 22 cars Let’s say that in year Y, production is 22 cars and 9 computers. Prices are $120/car and and 9 computers. Prices are $120/car and $25/computer.$25/computer.

What are nominal and real GDP for year X and What are nominal and real GDP for year X and year Y?year Y?

In the previous question, nominal GDP In the previous question, nominal GDP

for year 1 is ___ and for year 2 is for year 1 is ___ and for year 2 is ______

:100 of 30

1.1. $2,250; $2,856$2,250; $2,856

2.2. $2,250; $2,478$2,250; $2,478

3.3. $2,856; $2,200$2,856; $2,200

4.4. $2,300; $2,865$2,300; $2,865

5.5. $2,300; $2,450$2,300; $2,450

6.6. $4,040; $5,359$4,040; $5,359



Example 1 answer for nominal GDPExample 1 answer for nominal GDPNominal GDP in year X isNominal GDP in year X is(20 x $100) + (10 x $30) = $2,000 + $300 = (20 x $100) + (10 x $30) = $2,000 + $300 = $2,300.$2,300.

Nominal GDP in year Y isNominal GDP in year Y is(22 x 120) + (9 x $25) = $2,640 + $225 = (22 x 120) + (9 x $25) = $2,640 + $225 = $2,865.$2,865.

Nominal GDP has increased.Nominal GDP has increased.

In the previous question, real GDP for In the previous question, real GDP for year 1 is ___ and year 2 is ___ (using year 1 is ___ and year 2 is ___ (using year 1 prices)year 1 prices)

100 of 30

1.1. $2,250; $2,856$2,250; $2,856

2.2. $2,856; $2,250$2,856; $2,250

3.3. $2,250; $3,298$2,250; $3,298

4.4. $2,250; $2,490$2,250; $2,490

5.5. $2,300; $2,470$2,300; $2,470

6.6. $2,300; $2,610$2,300; $2,610

7.7. $2,300; $3,298$2,300; $3,298


Nominal and Real GDP Calculation Nominal and Real GDP Calculation

Example 1 answer for real GDPExample 1 answer for real GDPReal GDP in year X (using year X prices) isReal GDP in year X (using year X prices) is(20 x $100) + (10 x $30) = $2,000 + $300 = (20 x $100) + (10 x $30) = $2,000 + $300 = $2,300.$2,300.

Real GDP this year (using year X prices):Real GDP this year (using year X prices):(22 x 100) + (9 x $30) = $2,200 + $270 = (22 x 100) + (9 x $30) = $2,200 + $270 = $2,470.$2,470.

Real GDP has also increased.Real GDP has also increased.


Nominal and Real GDP CalculationNominal and Real GDP Calculation Example 2Example 2Let’s say that in year X, production is 30 Let’s say that in year X, production is 30 cameras and 50 pizzas. Prices are $80/camera cameras and 50 pizzas. Prices are $80/camera and $5/pizza.and $5/pizza.

Let’s say that in year Y, production is Let’s say that in year Y, production is 25 cameras and 60 pizzas. Prices are 25 cameras and 60 pizzas. Prices are $100/camera and $8/pizza.$100/camera and $8/pizza.

What are nominal and real GDP for year X and What are nominal and real GDP for year X and year Y?year Y?



Example 2 answer for nominal GDPExample 2 answer for nominal GDPNominal GDP in year X isNominal GDP in year X is(30 x $80) + (50 x $5) = $2,400 + $250 = (30 x $80) + (50 x $5) = $2,400 + $250 = $2,650.$2,650.

Nominal GDP in year Y isNominal GDP in year Y is(25 x 100) + (60 x $8) = $2,500 + $480 = (25 x 100) + (60 x $8) = $2,500 + $480 = $2,980.$2,980.

Nominal GDP has increased.Nominal GDP has increased.



Example 2 answer for real GDPExample 2 answer for real GDP

Real GDP in year X (using year X prices) isReal GDP in year X (using year X prices) is(30 x $80) + (50 x $5) = $2,400 + $250 = (30 x $80) + (50 x $5) = $2,400 + $250 = $2,650.$2,650.

Real GDP in year Y (using year X prices) isReal GDP in year Y (using year X prices) is(25 x $80) + (60 x $5) = $2,000 + $300 = (25 x $80) + (60 x $5) = $2,000 + $300 = $2,300.$2,300.

Real GDP has decreased.Real GDP has decreased.


Per Capita GDPPer Capita GDP

is GDP per person (GDP divided by is GDP per person (GDP divided by population).population).

For per capita GDP data, see unit 3, For per capita GDP data, see unit 3, section 2 of the CD (Bouman), or visit section 2 of the CD (Bouman), or visit http://www.bea.gov/.


Per Capita GDP Per Capita GDP

For data on per capita GDP of the For data on per capita GDP of the various states in the United States, various states in the United States, ssee unit 3, section 4 of our CD, or visit ee unit 3, section 4 of our CD, or visit http://www.bea.gov/


GDP and the EnvironmentGDP and the Environment

Is there a trade-off between increased Is there a trade-off between increased production and pollution?production and pollution?


GDP and the Environment GDP and the Environment

Some environmentalists support to stop Some environmentalists support to stop economic growth in order to preserve the economic growth in order to preserve the environment, natural resources, and environment, natural resources, and wildlife. wildlife.

UNIT 3 - Gross Domestic ProductUNIT 3 - Gross Domestic Product

GDP and the Environment GDP and the Environment

Others believe that economic progress Others believe that economic progress through technological advances will continue through technological advances will continue to find solutions to environmental and social to find solutions to environmental and social problems, and actually improve the problems, and actually improve the environment (electric environment (electric

cars; computers).cars; computers).


GDP and Leisure TimeGDP and Leisure Time

Does greater production mean a sacrifice Does greater production mean a sacrifice of leisure time?of leisure time?


GDP and Leisure TimeGDP and Leisure Time

Some people sacrifice leisure Some people sacrifice leisure time for greater production. time for greater production.

Most people have experienced increases in Most people have experienced increases in GDP and leisure time.GDP and leisure time.

For these people, the income effect of a For these people, the income effect of a higher wage is greater than the substitution higher wage is greater than the substitution effect.effect.

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UNIT 3 - Gross Domestic Product