Borough_of_Manhattan_Community_College

Domestic Product

  • Definition: Domestic product (GDP) is defined as the dollar value of all final goods and services produced domestically within a year.

Key Points

  • Produced Domestically: Refers to goods and services produced within the geographic boundaries of a country. For the U.S., this includes any product manufactured in the country, irrespective of the nationality of the company.

    • Example: A German car manufacturer manufacturing cars in Texas contributes to the U.S. GDP due to the location of production.

  • Exclusion of Foreign Services: Services rendered outside (e.g., a service in Singapore) do not contribute to U.S. GDP; they count towards Singapore's GDP instead.

Time Frame

  • Annual Measurement: GDP is measured annually; hence only goods and services produced in the current year are counted towards the GDP.

    • Used Goods: The purchase of used goods (e.g., a second-hand car) does not impact this year's GDP, as they have already been counted in the year they were originally manufactured.

    • Example: Purchasing a 2017 car in 2021 does not count toward 2021 GDP since it was included in 2017 GDP.

Components of GDP

  • Value Added calculations: Only the value added in services, not the total transaction value, contributes to GDP. For example:

    • If a used car is sold, only the value of services performed (like maintenance) contributes to GDP.

Influencing Factors on GDP

  • Fiscal Policy:

    • Refers to changes in taxes and government spending initiated by the federal government to influence economic activity.

    • Recession: In a recession, governments may lower taxes to increase consumer spending power, stimulating GDP growth. Increased government spending on projects also influences GDP positively.

  • Demand-Production Relationship: Producers gauge likely consumer demand to determine production levels, as increased production typically leads to a rise in GDP.

  • GDP Growth Example: If an economy produces 100 cars one year and 200 the next, the GDP increases reflecting the higher demand for cars.

Key Economic Terms

1. Trade Off

  • Definition: This refers to the idea of giving up one option in favor of another.

    • Example: Choosing to attend class over going to work represents a trade-off.

2. Opportunity Cost

  • Definition: The value of the next best alternative that is forgone when making a decision.

    • Example: If the second best choice was going to work, then the lost earnings or experiences from that choice represent opportunity cost.

3. Production Possibility Frontier (PPF)

  • Definition: A graph showing all possible combinations of two goods or services that an economy can produce using its available resources efficiently.

    • Points on the curve indicate maximum production efficiency, points below indicate inefficiency, and points outside are unattainable without increased resources.

4. Budget Constraint

  • Definition: A graph showing all possible combinations of two goods or services that a consumer can purchase based on income and prices.

    • Illustrated by how changing income or prices can alter the budget available for spending.