Gross Domestic Product
Definition: The total dollar value
of all final goods and services
produced within a country during
one calendar year.
Measuring Economic Production
Final Output:
 Is a good or service
that requires no
additions or changes
before being used.
 Ex: With a new car,
you get factoryinstalled seat belts,
battery, tires…
Current Year:
GDP is a gauge of
production-not salesfor the current year.
Sales of secondhand
items are not counted.
These goods were
counted in the year
they were produced.
Measuring Economic Production - cont…
Output-Expenditure Model:
Economists calculate U.S. GDP on the
factories/businesses within the U.S.
Output-Expenditure Model
Personal Consumption
Expenditures:
 Personal consumption
expenditures include
durable goods,
nondurable goods, and
services.
 Durable goods are
items that have a
useful lifetime of
more than a year. Ex:
car and computers.
Nondurable goods are
items that have short useful
lifetime. Ex: food, cosmetics.
Gross Investment:
 Gross investment is
the total value of all
capital goods produced
in a given nation during
one year as changes in
the dollar value of
business inventories.
Gross Investment
include two categories:
Fixed investment
includes spending on
residential structures
such as office space,
factories, new
machinery,
Inventory investment
Includes the total
dollar amount of the
stock of raw materials,
intermediate goods,
Government Purchases
GDP consists the total
dollar value that
federal, state, and
local governments
spend on goods and
services such as
highways, public
education, and national
defense.
Net Exports:
Is the total exports minus total
imports.
Thus GDP includes the value of goods
and services produced domestically but
sold in other countries (exports) and
does not include goods and services
produced in other countries but
purchased locally (imports).
GDP Formula
• Personal Consumption expenditures (C)
• Gross investment (I)
• Government purchases of goods and services (G)
• Net exports of goods and services or exports minus
imports ( X- M)
C + I + G + (X – M) = GDP
Adjusting GDP for Price Increases
Nominal GDP: is GDP expressed in the current
prices of the period being measured.
Real GDP is GDP adjusted for price changes.
Price Index is a set of statistics that allows
economists to compare prices over time.
Limitations of GDP
• Accuracy and Timeliness of Data: Economists
use estimates and sampling techniques to
determine prices and quantities of goods and
services.
• Nonmarket Activities: Transactions that do
not involve money and are not recorded are
nonmarket activities. Ex: D0-it-yourself home
repairs.
• Underground Economy: Illegal activities and
unreported legal activities.
• Goods and Bads: The value of many “goods”
things that make for a better society are not
reported in GDP while the value of many “bads”
things that make society worse are.
Other National Income and Product Accounts
• Gross National Product: Is to measure the
U.S. economy. GNP measures the total dollar
value of all final output produced with factors
of production owned by residents of a country
during one year.
• Net National Product: It is GNP with
depreciation subtracted. Depreciation is the
decrease in the value of tools and other
equipment from wear and tear and the passage
of time.
• National Income: The sum of employees’ and
proprietors’ income, real and estimated rental
income, corporate profits, and net interest.
Other National Income and Product Accounts
• Personal Income: Is the total income
earned by consumers before paying
individual taxes.
• Disposable Personal Income: It is the
total income the consumer has after
paying personal income tax.
Gross Pay and Net Pay
What is the meaning of Gross Pay?
• Gross pay refers to the amount of
salary that is paid by an employer to an
employee. The amount reflects the total
amount of pay before any deductions of
any type are withdrawn from the pay.
What is the meaning of Net Pay?
The remaining amount of an employee's
gross pay after deductions, such as taxes
and retirement contributions, are made.