Chapter 13
Tracking the Macroeconomy
Activity 13.1
GDP & Me
Type:
Topics:
In-class assignment
Gross Domestic Product (GDP), intermediate and final goods,
components of GDP
None
20 minutes
Works in any size class
Materials:
Time:
Class limitations:
PURPOSE
This lesson reviews the definition of Gross Domestic Product, identifies major components of
GDP, and distinguishes between intermediate and final goods.
INSTRUCTIONS
Start by reviewing the definition of Gross Domestic Product (GDP). GDP is the value--in dollars-of all final goods and services produced in a year. Only final goods and services count in the
GDP. Make sure that students realize goods and services include investments, goods purchased
by the government, and consumer goods and services. An intermediate good is a good purchased
for resale or for use in producing another good.
Ask students the following questions. Give them time to write an answer, then discuss their
answers before moving to the next question.
1. Get out a sheet of paper. Jot down a list of all the final goods and services you used in the last
couple days.
2. If you washed your clothes, did you include the washing machine? If you cooked a stew, did
you note the crockpot you used? If you typed a paper, did you remember to include the computer
or word processor that you used?
POINTS FOR DISCUSSION
Once pointed out, students easily make the distinction between final and intermediate goods. This
is a good chance to talk about the limits of GDP. For example, GDP does not include garage
sales, cleaning and house projects since these ventures do not have a market price. Also, GDP
accounts only for market activity and includes the price of costly projects as well, such as
machinery designated to clean up after a tornado.
Activity 13.2
National Income and Social Welfare
Type:
Topics:
Materials:
Time:
Class limitations:
In-class demonstration
per capita GDP, social welfare
Your Nation (http://www.your-nation.com) – optional
15 minutes
Works in any size class
PURPOSE
This activity examines the usefulness and the limits of national income measures. Students often
accept the use of national income as a proxy for well-being. Per capita GDP does not directly
measure well-being--no measure could really do so for the same reason that we cannot measure
utility among consumers--but it is highly correlated with direct measures. Making this correlation
explicit helps students understand the emphasis on national income in macroeconomics.
INSTRUCTIONS
Ask students the following questions. Discuss each before moving to the next question.
1) If national income is a good measure of well-being, why is Switzerland's Gross Domestic
Product so much lower than India's GDP or China's GDP?
2) What measures would better compare the well-being for residents of different
countries?
3) How do you expect these direct measures to correlate with per capita GDP?
COMMON ANSWERS AND POINTS FOR DISCUSSION
1) If national income is a good measure of well-being, why is Switzerland's Gross Domestic
Product so much lower than India's GDP or China's GDP?
National income itself tells very little; Switzerland's Gross Domestic Product is much lower than
that of India or China, yet Swiss citizen's have one of the highest living standards in the world.
The difference, of course, is population. Switzerland is a small country, so national income is
relatively small, despite its wealth. The appropriate comparison is per capita GDP.
A more interesting question is: "Is per capita GDP a good measure of well-being?" Or worded
another way: "What constitutes well-being?"
2) What measures would better compare the well-being for residents of different countries?
Well-being can be measured directly in a variety of ways. Students often suggest these:
Health care
Security
Freedom of choice
Food
Education
These are certainly better measures than money income, but they can be difficult to collect and
interpret.
3) How do you expect these direct measures to correlate with per capita GDP?
While per capita GDP does not directly measure well-being, it can be used as a proxy for direct
measures. The wealthiest countries have per capita incomes over 10 times higher than the
poorest.
Health Care
Measures such as population per physician can give a general idea of the level of health care
available in a country. Wealthy countries typically have from 400-600 people per doctor. The
poorest countries often have more than 5,000 people per doctor.
Life expectancy statistics essentially summarize the average effectiveness of health care. In rich
countries, the average life expectancy is nearly eighty years. In poor countries, it's just over fifty.
Food
Using daily calorie supply per person directly measures the overall amount of food available. In
wealthy countries, 3,000 calories (or higher) is a typical figure. Many of poorest countries have
only 2,000 calories available. The World Health Organization estimates that 2,600 calories per
day are needed for basic nutrition.
Education
Literacy rates indicate the most basic level of education. In wealthy countries, literacy rates of
99% are common. In the poorest countries, literacy rates range form 35-65%.
Optional Data Investigation
Visit Your Nation at http://www.your-nation.com to compare different countries on measures like
GDP per capita, literacy, infant mortality, life expectancy, and other indicators of social welfare.