Chapter 12

Gross Domestic Product and Growth

Gross Domestic Product

Goods and servicesproduced within the borders of a country

Geography-not citizenship

Who cares about GDP?

It’s unreliable!!!

Non-market activities are NOT counted—cannot be measured as they are not

sold in a “market”

Illegal Business Activities are not counted because they are illegal—even though they are sold in a “market” and

are measurable

Unreported Sales

Things that don’t last long(non-durable goods)

Durable goods—things that last at least three years

Disasters and Wars increase GDP—but are not necessarily beneficial

Intermediate goods and services are not counted in GDP

Only FINAL goods and services arecounted!

GDP also does not include:

Second hand sales—though salesman’s commission does count

Public/Private transfer paymentsPurely financial transactions—but broker’s

fees count

Expenditures ApproachGDP=C+I+G+Xn

Consumption spending (consumers)65%

Investment spending (business) 15% Government spending (government) 15% Net exports (trade) 5%

Consumption

Investment

Government Spending

Exports-Imports=net exports

Since GDP is based on prices—we must adjust for inflation of current

prices

Nominal vs. real GDP

GDP is measure of economic health of a nation

Business Cycle—visual representation of the “ups” and

“downs” of an economy

Parts of a Business Cycle

Business Cycles reflect the increases/decreases of GDP

…was originally thought to be a

natural occurrence

The idea that government should not get involved in the economy changed during the Great

Depression

John Maynard Keynes

Encouraged government spending to offset the decrease in consumption and investment spending during the Great

Depression

Government spending serves as a “counter-weight”

IT KEEPS THE ECONOMY IN BALANCE

GDP is not a measure of the quality of life

High Stress = high GDP

Low stress = low GDP

GDP per capitaGDP divided by population

Nations by GDP per capita

Liechtenstein $118,000 Qatar $111,000 Luxembourg $ 81,200 Bermuda $ 69,900 Norway $ 59,900 Kuwait $ 57,500 Jersey $ 57,000 Singapore $ 51,600 Brunei $ 47,500

#10

United States$47,500

Lowest GDP per capital

Afghanistan $800Malawi 800Cent. Afr. Rep. 700Niger 700Eritrea 700Guinea-Bissau 600Somalia 600Liberia 500

Burundi $300Congo $300Zimbabwe $200

Other GDP’s per capita

37 Japan $34,10048 Israel 28,60070 Mexico 14,30073 Russia 16,100133 China 6,000162 Iraq 3,200167 India 2,900

Low GDP does not mean a nation is lazy

It means they have few factors of production!

Factors of Production

LandLaborCapitalEntrepreneurship