Measuring GDP

Mr. HenryAP Economics

Why GDP?• Just as a business would

analyze their accounts to determine their health as a business, so too does our country

• The Bureau of Economic Analysis (BEA) compiles the National Income and Product Accounts (NIPA) for the U.S. economy

• From the BEA, we can:- Asses the health of the economy by comparing

levels of production at regular intervals- Track the long-run course of the economy to

see whether it has grown, been constant, or declined

- Formulate policies that will safeguard and improve the economy’s health

The GDP

• Our GDP is based on our aggregate output, or the dollar value of all final goods and services produced within the borders of a given country during a given period of time, typically a year

• GDP is a monetary measure, so we compare the values of the vast number of goods and services produced in different years.

Wait…can’t something be counted twice??

• GDP must count items only once, so to avoid counting twice we count only final goods, not intermediate goods.

• Intermediate Goods are goods and services that are purchased for resale or for further processing or manufacturing

• Final Goods are consumption goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing

• This avoid multiple counting and distorting the GDP!

• Value added is the market value of a firm’s output less the value of the inputs the firm has bought from others.

$120 (VA = $120) $180 (VA = $60) $220 (VA = $40) manufacturer

$270 (VA = $50) wholesaler $350 (VA = $80)

Total Sales Values = $1140

Value Added (Total Income) = $350

So for the GDP, we could use the final cost of the item, $350 at Hollister, or the Value Added

Intermediate or Final Good?

• There are two ways to measure GDP• We can determine GDP as the value of output by

summing all expenditures on that output• Or, we can determine GDP by adding up all the

components of income arising from the production of that output

Expenditures Approach

• To determine GDP using the expenditures approach, we add up all the spending on final goods and services that has taken place throughout the year.

Personal Consumption (C)

• Personal Consumption Expenditures covers all expenditures by households on durable consumer goods, nondurable consumer goods, and services.

Gross Private Domestic Investment (I)• (I) includes:- All final purchases of machinery, equipment,

and tools by business enterprises- All construction- Changes in inventories (unsold goods)

Government Purchases (G)• Government consumption expenditures and gross

investment- Expenditures for goods and services that the

government consumes in providing public services- Expenditures for publicly owned capital

Net Exports (Xn)

• Foreign spending on our exports must be included in GDP

• HOWEVER, some expenditures for C, I, and G are for domestically produced goods and services!

• So, we must subtract off the spending that goes to imports, (M).

• GDP = C + Ig + G + X-M or GDP = C + Ig + G + Xn

• As was the case in 2002 and in your book table 24.3, notice that net exports are minus

AP Sample Questions

• Please review the AP Sample Questions on GDP and keep them in your notebook!