Chapter 20
Gross Domestic Product
Accounting
Principles of Economics
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
3/22/2016
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How do we measure
economic growth?
Gross Domestic Product
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What is
Gross Domestic Product?
GDP is the dollar
value of all new and
final goods & services
produced in a country
in any one year
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What is a Final Good
or Service?
Goods and services sold to
final, or ultimate, users
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What is an Intermediate
Good or Service?
Goods and services
purchased for further
reprocessing and resale
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What is Not in GDP?
• Used good purchases
• Transfer payments
• Purely financial
exchanges
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What are the two
Approaches of
measuring GDP?
• Expenditure
• Income
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Why Expenditure
and Income?
Because when someone
spends money that
money is income to
someone else
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What is the
Expenditure Approach?
A method of calculating GDP
that adds all expenditures
made for final goods and
services by households,
firms, & government
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What are the components of GDP
by the expenditure approach?
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Consumption
Gross private domestic investment
Government spending
Net exports
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What is the largest
component of GDP?
Consumption
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What do Consumers
spend their money on?
• Durable Goods
• Nondurable Goods
• Services
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What is Gross Private
Domestic Investment?
Businesses purchase such
things as plants &
equipment, houses &
apartment buildings, and
changes in inventory
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Gross vs. Net Investment
• Gross includes all investment, both for
new additions to the capital stock and
replacements
• Net investment subtracts out
depreciation, thus only counts
additions to the capital stock
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What is Depreciation?
The value of capital stock
used up during a year in
producing GDP
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What is Net Domestic
Product (NDP)?
Gross Domestic Product
minus depreciation
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What are
Government Purchases?
• Government spending on goods and
services at all levels, state, local, and
federal
• Does not include transfer payments
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What are net exports?
Exports minus imports
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Why do we include
Exports in GDP?
Because they are
produced domestically
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Why are Imports not
added to U.S. GDP?
Because they are
produced abroad
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Expenditure Approach
GDP = C + I + G + (X-M)
Investment Exports - Imports
Consumption
Government
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What is the
Income Approach?
A method of calculating
GDP by adding up all
payments to owners of
resources used to produce
output during a year
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Who earns income?
• Labor - compensation to
employees
• Capital - interest
• Land - rent
• Entrepreneurship - profit
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What is
National Income?
The sum of all payments
made to resource owners
for the use of their
resources, thus the sum of
wages, rent, interest and
profits.
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What is
Gross National Product?
The market value of all
final goods and services in
an economy produced by
resources owned by the
people of that economy
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Check out the World
Fact Book at
http://www.odci.gov/cia/public
ations/nsolo/wfb-all.htm
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What is the relationship
between National Income
and Net Domestic Product?
National Income is Net
Domestic Product minus
indirect business taxes
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What are Indirect
Business Taxes?
• general sales taxes
• excise taxes
• customs duties
• business property taxes
• license fees
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What is the difference
between National Income
and Personal Income?
• National income is what
people earn
• Personal income is closer
to what people receive
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What is Disposable
Personal Income?
Personal income
minus all personal
income taxes
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Is GDP a perfect measure
of Social Welfare? No!
• Crime expenditures, military,
pollution clean up
• Leisure time, household production
not counted
• Underground economy problems
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Despite limitations,
why is GDP helpful?
As long as the limitations
are constant we can get a
fairly accurate comparison
from year to year
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The Dismal Science is
an economic news &
analysis service
http://www.dismal.com
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For more information
on statistics:
http://www.bea.doc.gov
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How do we measure growth?
What is Gross Domestic Product?
How do we measure GDP?
What is the Expenditure Approach?
What is the Income Approach?
What is Gross National Product?
What is Net Domestic Product?
What is Personal & Disposable Income?
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