Gross Domestic Product

Definitions

• GDP – final value of all goods and services produced within a country in a year.

• Nominal GDP – GDP reported in current prices.• Real GDP – GDP adjusted for inflation.• Inflation – An overall rise in prices.• Real per capita GDP - Real GDP divided by the

countries population.• GDP deflator – price index that reduces current

prices into prices of a base year.

Shortcomings of GDP

• Not a perfect indicator of the well-being of the people.

• Does not measure goods and services that people produce but do not sell.

• Does not measure goods that a household produces and consumes its self.

• Does not measure the value of leisure time.• Does not measure the value of illegal activities.

Productivity

• Output of goods and services measured per unit of input.

• Labor, capital, land• When productivity goes up more goods are

produced by the same amount of resources.• Per capita GDP only increases when production

grows faster than population.• Labor productivity – amount work force can

produce during a given period of time.

Keys to Productivity

• Quality of human resources – education, training, attitude.

• Quality of management – Example: Henry Ford – installed assembly line as new method of producing cars.

Raising Productivity

• Customer satisfaction – give customers what they want and expect. Conduct research or a survey to assess this.

• High-quality work – set clear quality standards. Provide training and equipment to guarantee standards are met.

• Employee involvement – LISTEN to employees. “Empower” employees. Involve them in decision making.

• Shared vision – nurture employees commitment to company and its goals. Mission statements, company slogans, internal reward systems to recognize employee contributions.

Production and Cost Changes

• Fixed costs – remain the same –real estate, taxes, managers salaries.

• Variable costs – wages, utilities, raw materials.• Fixed plus variable equals total costs.• Average costs – costs divided by units

produced.• Marginal cost – additional cost of increasing a

unit of production.

Law of Diminishing returns

• As more and more variable resources are added to fixed resources production eventually decreases.

• Decreasing amount produced leads to increasing costs.

• Beyond a certain point production won’t be profitable.

• Marginal revenue – sales from additional products.

Marginal Analysis

• Compares marginal benefits and marginal costs.

• When marginal costs exceeds marginal revenue companies will stop production.

• Marginal revenue = marginal costs – profits are maximized.

Economies of Scale

• When a company reaches the point where it can employ large-scale production methods it has economy of scale.

• cost per unit produced gores down.• Benefits – 1.divide labor into specialized tasks. 2. discounts on purchase of supplies. 3. use of specialized machinery and equipment. 4. invest in research and development.