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� Gross Domestic Product (GDP)
- o The total market value of all final goods and services produced in a given year
- o Includes domestically supplied and foreign supplied resources employed within the country
- o Ex. Market value of fords produced in Michigan or the Hondas produced by a Japanese-owned factory in OH
- o What the goods/services sold for value
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� GDP as a Monetary Measure
o Compares value of goods/services produced in a given country in different years
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� US GDP
- o Current GDP is approximately $14.3 trillion
- o Highest in the world
- o China�s in second ($5.2 trillion) and expected to pass us eventually
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� Intermediate Goods
- o Goods and services that are purchased for resale or for further processing or manufacturing
- o Become part of the final good
- o Ex. Sugar, steel, car engines
- o Don�t count toward GDP (final good counts)
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� Final Goods
- o Goods and services that are purchased for final use by the consumer (not for resale or for further processing or manufacturing)
- o Ex. Cars, televisions
- o Count toward GDP
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� Multiple Counting
- o Counting the intermediate goods in the GDP
- o They�ll be added twice (once as intermediate goods and once as part of the final good)
- o Artificially raises GDP
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� Value Added
- o Market value of a firms output excluding the value of the inputs the firm has bought from others
- o Adding value at each production stage will equal the final price of that good
- o Helps avoid multiple counting
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� GDP excludes�
- o Public Transfer Payments: social security payments, welfare payments, and veterans� paysments
- ? Recipients contribute nothing to current production
- o Private Transfer Payments: money that parents give children, cash gifts, etc.
- ? Produce no output (just transfer funds from one private individual to another)
- o Stock Market Transactions: the buying and selling of stocks/bonds does not add to current production (the current wealth just changes hands)
- ? But the fee you pay stockbrokers counts toward GDP (they�re producing a service)
- o Secondhand Sales: the good/service was already added to the GDP when it was sold the first time
- ? Don�t contribute to current production
- ? Ex. Selling a used car
- o Black Market Sales: any sale made by a business who doesn�t pay taxes to the government (ex. Fake DVDs in China, gambling, drugs, etc)
- ? Should count toward GDP because they add to production (as long as the good/service is produced in the US) but aren�t reported so aren�t added
- ? Cause underestimated GDP
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� Two Ways to Calculate GDP
- o The Expenditures Approach: looks at all of the money spent buying a product
- o The Income Approach: looks at the income derived from producing the product
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� The Expenditures Approach
- o Add up all of the spending on final goods and services throughout the year
- o GDP = (personal consumption expenditures)+(gross private domestic investment)+(government purchases)+(net exports)
- o GDP = C + Ig + G + Xn
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� Personal Consumption Expenditures (C)
o Includes expenditures BY HOUSEHOLDS on durable goods, nondurable goods, and services
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� Gross Private Domestic Investment (Ig)
- o Final purchases of machinery, equipment, and tools BY BUSINESSES
- o All construction
- o Changes in inventory
- ? Add goods produced in a given year that weren�t purchased in that year
- ? Subtract goods that were produced in a previous year (and counted in that year) and not sold until this year
- ? Count toward the year they were produced, not sold
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� Government Purchases
- o Expenditures for goods and services the government consumes in providing public services
- o Expenditures for social capital like schools and highways
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� Net Exports (Xn)
o Exports (X) � imports (M)
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� National Domestic Product (NDP)
- o NDP = GDP � depreciation (aka consumption of fixed capital)
- o Consumption of fixed capital = how much capital is used up to add to GDP
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� Disposable Income
- o Personal income minus taxes
- o All the money you have � taxes
- o Save or spend what�s left
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� Inflation
- o A rise in the general level of prices in an economy
- o Costs more for the same good
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� Deflation
- o A decline in the economy�s price level
- o Costs less for the same good
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� Nominal GDP
- o The GDP measured using the price of the goods purchased
- o NOMINAL GDP = NUMBERS OF GOODS SOLD * PRICE PER GOOD
- o Not adjusted for inflation
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� Real GDP
- o Adjusted for inflation
- o Inflated (when prices fall) or deflated (when prices rise) to show changes in price level
- o Ex: the same hamburger cost less in 1940 than it does now
- o REAL GDP = (NOMINAL GDP)/(PRICE INDEX/100)
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� GDP Price Index
- o A measure of the price of a specific collection of goods and services (called a market basket) in a given year as compared to the price of an identical or very similar basket in a reference year
- o The reference year = the base year
- o PRICE INDEX IN A GIVEN YEAR = (PRICE OF MARKET BASKET IN SPECIFIC YEAR/PRICE OF SAME BASKET IN BASE YEAR) * 100
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� Rate of change
- o The price rose by this percent (since the base year price index is always 100)
- o RATE OF CHANGE = (NEW PRICE INDEX � OLD PRICE INDEX)/OLD PRICE INDEX * 100
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� Shortcomings of GDP
- o Nonmarket activities excluded
- ? Work of a housewife and carpenter fixing his home doesn�t count
- o Improved product quality
- ? A cell phone now is much better quality than one from 10 years ago
- o Underground economy
- ? Illegal and off the books activities (gambling) don�t count
- o No accounting for negative pollution caused by the production
- o Raising GDP doesn�t necessarily improve a country
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� The GDP would be higher if nonmarket activities, improved product quality, and underground economy were accounted for
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