Gross Domestic Product
A Starting Point
Gross Domestic Product
• The market value of all final goods and
services produced within a nation in a given
time period
• Measuring GDP
– The value of what is produced
– The value of what is demanded and purchased
The Circular-Flow Diagram
• a simple depiction of the macroeconomy
• illustrates GDP as spending, revenue,
factor payments, and income
• Preliminaries:
– Factors of production are inputs like labor, land,
capital, and natural resources.
– Factor payments are payments to the factors of
production (e.g., wages, rent).
MEASURING A NATION’S
INCOME
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The circular-flow diagram
Households buy goods
and services from firms,
and firms use their
revenue from sales to
pay wages to workers,
rent to landowners, and
profit to firm owners.
GDP equals the total
amount spent by
households in the
market for goods and
services. It also equals
the total wages, rent,
and profit paid by firms
in the markets for the
factors of production.
Measurement of Gross Domestic
Product
• Gross domestic product (GDP)
– Market value of all final goods and services
– Produced within a country
– In a given period of time
• “GDP is the market value…”
– Market prices - reflect the value of the goods
• “… of all…”
– All items produced in the economy
• And sold legally in markets
– Excludes most items
• Produced and sold illicitly
• Produced and consumed at home
• “… final…”
– Value of intermediate goods is already included in the prices of the
final goods
5
Measurement of Gross Domestic
Product
• “… goods and services…”
– Tangible goods & intangible services
• “… produced…”
– Goods and services currently produced
• “… within a country…”
– Goods and services produced domestically,
regardless of the nationality of the producer
• “… in a given period of time”
– A year or a quarter
6
The Components of GDP
• Y = C + I + G + NX
– Identity
– Y = GDP
– C = consumption
– I = investment
– G = government purchases
– NX = net exports
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The Components of GDP
• Consumption
– Spending by households
– On goods and services
– Exception: purchases of new housing
• Investment
– Spending on capital equipment, inventories, and
structures
– Including household purchases of new housing
– Inventory accumulation
8
The Components of GDP
• Government purchases
– Government consumption expenditure and gross
investment
– Spending on goods and services
– By local, state, and federal governments
– Does not include transfer payments
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The Components of GDP
• Net exports = Exports - Imports
– Exports
• Spending on domestically produced goods by foreigners
– Imports
• Spending on foreign goods by domestic residents
10
U.S. GDP and Its Components, 2007
billions
% of GDP
per capita
Y
$13,841
100.0
$45,825
C
9,734
70.3
32,228
I
2,125
15.4
7,037
G
2,690
19.4
8,905
NX
–708
–5.1
–2,344
MEASURING A NATION’S
INCOME
11
ACTIVE LEARNING
1
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $1200 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
D. General Motors builds $500 million worth of cars,
but consumers only buy $470 million worth of them.
ACTIVE LEARNING
1
Answers
A. Debbie spends $200 to buy her husband dinner
at the finest restaurant in Boston.
Consumption and GDP rise by $200.
B. Sarah spends $1800 on a new laptop to use in her
publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall
by $1800, GDP is unchanged.
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Real Versus Nominal GDP
• Total spending rises from one year to the next
– Economy - producing a larger output of goods and
services
– And/or goods and services are being sold at higher
prices
• Nominal GDP
– Production of goods and services
– Valued at current prices
• Real GDP
– Production of goods and services
– Valued at constant prices
Gross Domestic Product…
“… does not allow for the health of
our children, the quality of their
education, It does not include the
beauty
of our
or the strength
or
the joy
ofpoetry
their play.
of our marriages, the intelligence of
our public debate or the integrity of
our public officials.
It measures neither our courage, nor our wisdom,
nor our devotion to our country. It measures everything,
in short, except that which makes life worthwhile, and it
can tell us everything about America except why we are
proud that we are Americans.”
- Senator Robert Kennedy, 1968
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GDP Does Not Value:
• the quality of the environment
• leisure time
• non-market activity, such as the child care
a parent provides his or her child at home
• an equitable distribution of income
MEASURING A NATION’S
INCOME
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Then Why Do We Care About GDP?
• Having a large GDP enables a country to afford
better schools, a cleaner environment,
health care, etc.
• Many indicators of the quality of life are
positively correlated with GDP. For example…
MEASURING A NATION’S
INCOME
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Life expectancy (years)
GDP and Life Expectancy in 12 countries
Indonesia
China
Japan
U.S.
Mexico
Germany
Brazil
Pakistan
India
Russia
Bangladesh
Nigeria
Real GDP per capita
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GDP and Literacy in 12 countries
China
Russia
Germany
Adult Literacy
(% of population)
Mexico
Japan
U.S.
Brazil
Indonesia
Nigeria
India
Pakistan
Bangladesh
Real GDP per capita
19
GDP and Internet Usage in 12 countries
Internet Usage
(% of population)
Japan
Pakista
n
Nigeria
U.S.
Germany
Brazil
Indonesia
Mexico
Russia
China
India
Bangladesh
Real GDP per capita
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