GROSS DOMESTIC PRODUCT

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GROSS DOMESTIC PRODUCT (GDP) The measures were

developed in the 1930’s.

Originally the Gross National Product (GNP) was used.

Since the 1990’s the GDP has been the official measure.

The GDP is measured quarterly.

GDP Gross-total before adjustments. National-Production owned by U.S

companies Domestic-production in the U.S, even if

foreign owned.

GDP GDP defined is the total value of all final

goods and services produced in a given year. It includes all goods and services citizen or foreign supplied in the USA.

GDP measurement is a monetary amount

Why? As the GDP of an economy increases, we have economic growth, and is a tracking of long term economic growth.

Limitations: does not measure quality of life, leisure time, crime, economic variables.

THERE ARE TWO WAYS TO CALCULATE THE GDPThe Income approach:W+R+I+P+Sa=GDP

W=wages, compensationR=rents, lease paymentsI=interest, savings and bond paymentsP=profits, corporate income tax, dividends and

undistributed corporate profitsSa=statistical adjustments-Indirect business

taxes(sales, excise, property, customs, licenses, duties), consumption of fixed capital(CFC) is depreciation, net foreign income.

THERE ARE TWO WAYS TO CALCULATE THE GDPThe expenditure approach:C+Ig+G+Xn=GDP

C=personal consumption of finished goods and services

Ig=gross private business investment, construction of new houses, factory equipment

G=governmentXn=net foreign factor of trade (exports-imports) if Xn is negative, a trade deficit exists

WHAT IS NOT COUNTED? Used goods, secondhand sales Gifts, transfer payments(social security,

welfare, veterans payments) Stock equity and securities purchased. Unreported business activities done for cash. Illegal, black market activities. Financial transactions between banks and

business “intermediate goods” ‘non-market’ activities-volunteer or family

work.We only want to count things once!!!!!!!!

FLUCTUATIONS IN THE GDPLeakages are uses

of household income not used for consumption in the GDP.

Leakages are losses of $$$$

Leakages include:

Taxes-government

Saving Imports-income

created by one economy to purchase output form another.

BUSINESS CYCLE AND GDP

FLUCTUATIONS IN THE GDP Injections (money into economy) are expenditures

by either:Government, Business or foreign sectors on

domestic goods and services. This includes exports which inject money (when

the dollar is weak on the world market, exports increase because American goods are cheaper.)

The government can spend the taxes it collects by making government purchases.

Business spends profits on investment, but can retain some profits and capital consumption for later use.