Gross domestic product

1. Defined

   1. Total market value of all final goods and services produced in a country’s borders for a given year

2. Monetary measure ($)

   1. Allows us to compare our GDP with other country’s GDP

      1. Puts it in monetary terms

3. Multiple counting

   1. We want to avoid this

      1. We only count the final good because if we were to total up all the prices of intermediate goods it would equal the final goods

         1. Ex. If a car is $30,000 and the intermediate goods are the same price and we use multiple counting the price would be $60,000

         2. Ex. lettuce, carrots, and vinegar are intermediate goods of a salad while the whole salad is a final good

      2. We want to avoid this to make sure we only count the xyz to all be on the same page

   2. Intermediate goods- used to make final goods

      1. If we’re buying a car it’s the brakes, fuel, etc.

   3. Final goods- the actual item that the consumers purchase

      1. Already includes the value of all the intermediate goods that were used in producing them

4. Approaches to calculating GDP

   1. The income approach

      1. Going to calculate GDP through adding up how much money we can make (by adding up every individual’s income)

      2. Not using this

   2. Expenditures approach

      1. We will use this

      2. Calculates GDP by adding up how much people spent (by adding up every individual’s expenditures)

      3. Key variables

         1. Consumption ( C )

            1. Represents expenditures from households

            2. When we go to the grocery store, spend gas, etc when we spend money on things it fall under consumption

            3. In the circular flow diagram, consumption equals the household

            4. Durable goods, nondurable goods, and services

         2. Gross Private Domestic Investment ( Ig )

            1. We shorten it to Gross Investment or in Prato land just investmentIn the circular flow diagram, gross investment equals the firms

            2. Purchases of capital, construction, and changes in inventories (“leftover stuff from last year”)

            3. Ex. If I go to Macy’s and buy 500 bottles of cologne (consumption) then sell 300 of the bottles, I’d still have 200 bottles left, but that is 200 less bottles than I’d have to spend the next year (gross investment/changes in inventory)

            4. Government ( G )

            5. Net Exports ( Xn )

               1. Exports ( X ) - imports ( M ) = net exports ( Xn )

               2. When we export to other countries it is considered a credit

               3. When we import to other countries it is considered a debit

               4. If we export $7 billion but import $10 billion then we would have a debt of $3 billion

            6. When we add all of these up we get the GDP through the expenditures approach

            7. Both ways will add up to the same number

               1. If i get $100 and then spend $100 it will add up to $100 with each approach

            8. Not counted in GDP

               1. Public transfer payments

                  1. Social security check, welfare payments (unemployment checks, disability checks, etc.), veteran benefits

                  2. We don’t count these because it would be double counting, govt would count when you get the check and when the check was given

               2. Private transfer payments

                  1. Any job or work that you do not report as a part of your income/on your taxes

                     1. Ex. babysitting, mowing the lawn, parents giving allowance, etc.

                  2. We don’t know how much of it actually exists

               3. Second hand sales

                  1. We only count the first time it was sold, if we count when it was sold again we would be double counting, the second hand sale does not contribute to current production of the good

                     1. Ex. selling your 1995 Ford Mustang to a friend

                  2. Even if the price of the second hand sale is higher than the original price it was bought at we still do not count it in GDP

               4. Stock market transactions

                  1. Buying and selling shares of ownership in a company, nothing is being produced, you are just transferring ownershipEx. i have a company and have 1000 shares of ownership, i keep 600 and sell 400, i still have majority power over my company when it comes to voting on something

                  2. Nominal GDP vs. Real GDP

                     1. Nominal GDP is NOT adjusted for inflation

                        1. Measured in current prices/values

                           1. Ex. if a good is $2.50 then it is counted as $2.50

                     2. Real GDP has been adjusted for inflation

                        1. Real values are the real values

                           1. Ex. some things “back in the day” were less expensive than they are now but they may not be taking into account inflation

                     3. Inflation

                        1. A general rising of prices (in an economy)

                           1. Cannot increase individually, it is an increase of all

                        2. Calculated by the consumer price index (CPI) using a market basket

                           1. Consumer price index (CPI)

                              1. The average urban household expenses