Economics LAP 1 Measure Up? Gross Domestic Product.

Economics LAP 1Economics LAP 1

Measure Up?Measure Up?Gross Domestic ProductGross Domestic Product

ObjectivesObjectives

Describe gross domestic product.Describe gross domestic product.

Explain the economic role of gross Explain the economic role of gross domestic product.domestic product.

Describe gross domestic product.Describe gross domestic product.

ObjectiveObjective

• U.S. gross domestic U.S. gross domestic product (2009)—over product (2009)—over $14 trillion$14 trillion

• Haiti GDP (2009)—Haiti GDP (2009)—$6.5 billion $6.5 billion

• Ethiopia GDP (2009)Ethiopia GDP (2009)—$32 billion—$32 billion

• Every country has a Every country has a GDP.GDP.

• GDP—an important GDP—an important indicator of economic indicator of economic healthhealth

Defining GDPDefining GDP

• GDP—the final market value GDP—the final market value of the total output of all goods of the total output of all goods and services produced within and services produced within a country’s geographic a country’s geographic boundaries during a year’s timeboundaries during a year’s time

ChinaChina

$4.9 trillion• Final market value:Final market value:

Does not include intermediate Does not include intermediate products (parts of other products (parts of other finished items)finished items)

Always expressed in dollarsAlways expressed in dollars

Defining GDPDefining GDP

• Total output of all goods and Total output of all goods and services:services:

Is comprehensiveIs comprehensive

Includes exchanges made Includes exchanges made by consumers, businesses, by consumers, businesses, and governmentand government

• Geographic boundaries—all Geographic boundaries—all output is included, regardless output is included, regardless of ownershipof ownership

Categories of Goods & ServicesCategories of Goods & ServicesThat Make Up GDPThat Make Up GDP

• Personal consumption expenditures:Personal consumption expenditures: All products purchased for consumption by individualsAll products purchased for consumption by individuals

Purchases made by the household sectorPurchases made by the household sector

Purchases made by U.S. citizens living abroadPurchases made by U.S. citizens living abroad


• Personal consumption expenditures:Personal consumption expenditures:

Three types:Three types:

Durable goods (last one year or more)Durable goods (last one year or more)

Nondurable goods (last less than one year)Nondurable goods (last less than one year)

Services (non-tangible products, such as education)Services (non-tangible products, such as education)


• Gross private domestic investmentGross private domestic investment Investments in residential and nonresidential buildings Investments in residential and nonresidential buildings

and equipmentand equipment

Value of changes in business inventoriesValue of changes in business inventories

Purchases made by the business sectorPurchases made by the business sector


• Government purchases of goods and servicesGovernment purchases of goods and services Everything purchased by local, state, and federal Everything purchased by local, state, and federal

governmentsgovernments

Does not include transfer payments—payments made Does not include transfer payments—payments made when no good or service has been produced, such as:when no good or service has been produced, such as:

Social SecuritySocial Security

Disaster-relief fundsDisaster-relief funds


• Net exports of goods and servicesNet exports of goods and services Also called balance of tradeAlso called balance of trade

The difference between what a country imports and The difference between what a country imports and what it exportswhat it exports

Trade surplus—more exports than imports—raises GDPTrade surplus—more exports than imports—raises GDP

Trade deficit—more imports than exports—lowers GDPTrade deficit—more imports than exports—lowers GDP

Formula for Calculating GDPFormula for Calculating GDP

Symbols:Symbols:

CC = Personal consumption expenditures = Personal consumption expenditures

II = Gross private domestic investment = Gross private domestic investment

GG = Government purchases of goods and services = Government purchases of goods and services

FF = Net exports of goods and services = Net exports of goods and services

Formula for Calculating GDPFormula for Calculating GDP

Formula:Formula:

CC + + II + + GG (+ or -) (+ or -) FF = = GDPGDP

Problems With Calculating GDPProblems With Calculating GDP

• Dynamic economyDynamic economy You can’t stop it to measure it.You can’t stop it to measure it.

GDP represents trends, not GDP represents trends, not static figures.static figures.

• Uncounted productionUncounted production Goods and services that are Goods and services that are

not sold in the marketplacenot sold in the marketplace

No money changes hands—No money changes hands—value can only be estimated.value can only be estimated.

• Underground economyUnderground economy

Transactions in which Transactions in which money changes hands but money changes hands but no receipts are keptno receipts are kept

Income is not reported to Income is not reported to the government.the government.

Activities may be legal or Activities may be legal or illegal.illegal.


• Double counting—mistakenly Double counting—mistakenly counting a product more than counting a product more than onceonce

• Vast amount of informationVast amount of information


• InflationInflation

A rapid rise in prices that A rapid rise in prices that may occur when demand may occur when demand exceeds supply or when exceeds supply or when productivity declines and productivity declines and costs of labor go upcosts of labor go up

Can distort GDP by making Can distort GDP by making it seem higher than it it seem higher than it actually isactually is


Explain the economic role of gross Explain the economic role of gross domestic product.domestic product.

ObjectiveObjective

Why Countries Calculate GDPWhy Countries Calculate GDP

• To check their economic performanceTo check their economic performance

• To check the well-being of their citizensTo check the well-being of their citizens

• To compare findings with other countriesTo compare findings with other countries

GDP FlawsGDP Flaws

• Does not indicate types Does not indicate types of products producedof products produced

• Does not indicate quality Does not indicate quality of products producedof products produced

• Does not indicate Does not indicate distribution of wealthdistribution of wealth

Importance of Economic GrowthImportance of Economic Growth

• Supports a higher standard Supports a higher standard of livingof living

More products = more jobsMore products = more jobs

More jobs = more people More jobs = more people able to satisfy their needs able to satisfy their needs and wantsand wants

• Improves government Improves government performanceperformance

More products = more jobsMore products = more jobs

More jobs = more tax dollarsMore jobs = more tax dollars

Importance of Economic GrowthImportance of Economic Growth

• Helps to resolve domestic Helps to resolve domestic economic problems—stronger economic problems—stronger economy helps to fight povertyeconomy helps to fight poverty

• Helps to develop trading Helps to develop trading partnerships with other partnerships with other countriescountries

Having products to exportHaving products to export

Being a market for importsBeing a market for imports

Government & GDPGovernment & GDP

• Government is responsible for Government is responsible for monitoring economic growth.monitoring economic growth.

• When the economy is slow When the economy is slow (recession), government can:(recession), government can:

Increase amount of money in Increase amount of money in circulationcirculation

Spend more on goods and Spend more on goods and servicesservices

Lower the prime interest rateLower the prime interest rate


• Government is responsible for Government is responsible for monitoring economic growth.monitoring economic growth.

• When the economy is slow When the economy is slow (recession), government can:(recession), government can:

Decrease the discount rate for Decrease the discount rate for banks (interest rate at which banks (interest rate at which banks borrow from the Federal banks borrow from the Federal Reserve)Reserve)

Lower taxesLower taxes


• When the economy grows too When the economy grows too fast (inflation), government can:fast (inflation), government can:

Restrict amount of money in Restrict amount of money in circulationcirculation

Spend less on goods and Spend less on goods and servicesservices

Raise the prime interest rateRaise the prime interest rate

Increase the discount rate for Increase the discount rate for banksbanks

Raise taxesRaise taxes

Businesses & GDPBusinesses & GDP• GDP—helps businesses GDP—helps businesses

with planningwith planning

• Guides decisions such as:Guides decisions such as: Whether or not to expandWhether or not to expand Whether to increase or Whether to increase or

decrease productiondecrease production Whether or not to borrow Whether or not to borrow

moneymoney

Businesses & GDPBusinesses & GDP• GDP—helps businesses GDP—helps businesses

with planningwith planning

• Guides decisions such as:Guides decisions such as:• Whether to increase or Whether to increase or

decrease investmentsdecrease investments

• Whether or not to hire Whether or not to hire new employeesnew employees

• Whether to increase or Whether to increase or decrease inventoriesdecrease inventories

• Businesses and suppliers Businesses and suppliers are interrelated—changes are interrelated—changes in one affect the other.in one affect the other.

• How are you contributing to your country’s gross domestic product?

• If you have a job, what goods or services are you producing and selling?

• As a consumer, what did you purchase in the past week that will be part of this year’s GDP?

• Underground transactions weaken GDP.

• Example: A person who makes and sells

hair bows out of her home She sells them to family and

friends and doesn’t make a lot of money.

She just keeps the cash and does not report the income.

• Underground transactions weaken GDP.

• Example: Depending on how much she

makes, this action may or may not become illegal.

She believes her actions are acceptable, no matter what, since the law is really intended

to catch “bigger fish” than she.

• What do you think? • Is she behaving unethically?

MBAResearchAcknowledgments

Original DevelopersChristopher C. Burke,

Sarah Bartlett Borich, MBAResearch

Version 1.0

Copyright © 2011MBA Research and Curriculum Center®

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Economics LAP 1 Measure Up? Gross Domestic Product.

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