Gross Domestic
Product
GDP
SSEMA1 The student will illustrate the
means by which economic activity is
measured.
a. Explain that overall levels of income, employment, and
prices are determined by the spending and production
decisions of households, businesses, government, and
net exports.
b. Define Gross Domestic Product (GDP), economic
growth, unemployment, Consumer Price Index (CPI),
inflation, stagflation, and aggregate supply and
aggregate demand.
c. Explain how economic growth, inflation, and
unemployment are calculated.
Gross Domestic Product
 GDP = the total
market value of all
final goods and
services produced
in a country in a
year.
 Two ways to
measure GDP:
 Expenditure
approach
 Income approach
Measuring GDP
Expenditure
Expenditure Approach
counts: (think expenses)
 Consumption spending by
households
 Investment spending by
businesses
 Government spending
 Net exports =

Exports – imports
 Only final goods count to
avoid double counting.
 A car counts, but not
individual tires, steering
wheel, seats, nuts, bolts, etc
used to make the car.
Reasoning
 I spend money on your
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goods/services
You earn income
Issues:
Goods bought include:
Responses to terrorism,
pollution, natural
disaster
Left out:
Leisure time activities,
time spent w/family
Mixed bag
 Who contributes
to the GDP?
 Divorcee
 Retiree
 Heart surgery
 Wars, hurricanes,
disease, crime =
contribute
Y
=
C+
I+
G+
XM
National GDP
Is composed of
Consumption by households
Investment purchases of business
and households
Government Spending
Total Exports minus
Total Imports
Recap - GDP
 The expenditure approach
 transactions made in the

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

product market.
product market =
households use incomes to
purchase goods/services
from firms.
household expenditures
(consumption), business
expenditures on capital
(investment), military
contracts (government
spending), and foreign
expenditures on U.S. goods
and services (net exports).
Note: Changes in these
expenditures shift the
aggregate demand curve
Value approach
(Income approach)
 Examines output

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values.
Has different way of
avoiding double
counting
$1 worth cotton bought
=
$5 fabric =
$30 dress
30= 1(price of the cotton) + (5 –
1)(the fabric – the price of the cotton) + 30
– 5 (the dress – the price of the fabric)
Income Approach
 Transactions on factor

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market
Factor Market = firms pay
households for resources
i.e. land, labor, capital
w/specific income
payment
Firms pay: rent, wages,
interest (borrow $)
Note: Changes in these
costs of production shift
the short-run aggregate
supply curve
GDP = Media Darling
 Government + media =


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
GDP Growth = Best thing
ever!
Is it really?
Signals societal failures
Bad stuff is happening
Bad habits growing
 war started,
 more fast food instead of
home cooked,
 nannies instead of parents,
 social media instead of
friends
Bad Stuff
 Defensive Goods and
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services
Corruption
Natural disasters
Disease
War
Pollution
Congestion
Work related stress
Not Counted
 Spending on:
 Raw materials
 Intermediate goods
 Car parts, etc
 Anything for resale
 Purchase of stocks and bonds
(transfer of money nothing is bought)
 Money put in savings
 Leisure activities
 reading, listening to music,
etc.
 Household activities:
 cleaning, cooking, mowing
lawn, etc.
Not included
 Retirement
 Days off
 Vacations
 Child care
 Housework
 Gardening
 DIY
Economic Growth
 Real GDP = GDP adjusted
for inflation.
 achieved through an
increase in real GDP
 Economic growth can be
shown by an outward shift
of the production
possibilities curve.
 economic growth = gains in
new technology used to
improve production or
gains in new factors of
production.
Vocabulary
 Gross Domestic Product = the




total market value of all final
goods and services produced
within a country in a given time
period.
“market value” – GDP uses
market prices of goods and
services for calculations.
“final goods” = The Finished
product.
Intermediate goods = Materials
purchased by companies that
become part of the final good.
“produced within a country” –
All final goods produced within
the United States are counted in
U.S. GDP, foreign or domestic.
Inflation
 Inflation = occurs in an
economy when the average
price level of goods and
services rise over time.
 An index number, i.e.
consumer price index, is
used to calculate the
inflation rate between two
specified years or periods
 Base year = basis of
comparison for all other
periods
 Calculating:
Real GDP
 Nominal GDP = GDP not
adjusted for inflation
 Implicit price deflator = an
index of average levels of
prices for all goods and
services in the economy.
 Real GDP = GDP that is
adjusted for inflation,
a/k/a GDP in constant
dollars
 Calculating real GDP:
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Stagflation
 Stagflation = economic condition
 rising average price level
(inflation)
 decrease in Real GDP (recession)
 usually accompanied by a rising
unemployment rate.
 Usually real GDP declines
w/falling price level.
 stagflation = stimulating
economic growth = rising prices.
 Causes: The most common causes
of stagflation include
 negative supply shocks i.e. large
increase in the price of oil or
major increases in regulation
and/or corporate tax rates by the
government.
Aggregate Supply
 Aggregate Supply = total of all goods

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and services firms are willing/able to
supply at each price level in a given
period of time.
Short run = aggregate supply curve
(SRAS) is upward-sloping showing a
direct relationship between price level
and real GDP.
It is upward because wages/prices slow
to change due to contracts. a/k/a sticky
wages/prices
Long run = prices completely flexible
supply curve (LRAS) is vertical at the
full employment level of real GDP (real
output or real national income).
Aggregate Demand
 Aggregate Demand = total
quantity of all goods and
services consumers are
willing and able to
purchase at each price
level in a given period of
time.
 The aggregate demand
curve (AD) is downwardsloping showing an inverse
relationship between price
level and real GDP.
Three Effects
 The interest rate effect =
downward slope of the aggregate
demand curve because
 price level rises
 interest rates (the price of
borrowing money) rises
 consumers and businesses
spend less on interest sensitive
purchases i.e. cars, new homes,
and physical capital.
 The wealth effect occurs = rising
price level reduces the purchasing
power of consumers = lowers
consumption
 foreign purchases = higher price
level in a country = country’s
exports higher = reducing
demand for the country’s exports
in other countries.
Economic Growth
 Economic growth =
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calculated by finding the
percentage change in real
GDP from one time period
to the next.
If the real GDP growth rate
= positive, then economic
growth has occurred.
Real GDP 2010 15.03 Trill
Real GDP 2011 15.29 Trill
15.29-15.03 / 15.03 X 100 =
1.72% positive growth rate.
Inflation Rate
 The inflation rate = calculated
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by finding the % change in the
price index from one period to
another.
Example
June 2011 the CPI as reported
by the Bureau of Labor
statistics was 225.722.
In June 2012, the CPI was
229.478.
Inflation Rate = June 2012June 2011 divided by June 2011
multiplied by 100 =
229.478 – 225.722 = 3.756 /
225.722 = 0.0166 X 100 = 1.66 %
inflation rate, OR 1.7%
rounded.