Gross Domestic Product (GDP):
· GDP is the market value of all final goods and services produced in a country in a year.
· Final goods and services that have been purchased for final use. They are not for resale or further manufacture.
· Economist often measure GDP by totaling the money spent on four major categories of goods and services:
· Consumption (C): Spending by households on goods and services. Includes spending on things such as cars, foods, and visits to the dentist. Makes up two-thirds of GDP spending.
· Investment (I): Spending by businesses on machinery, factories, equipment, tools, and construction of new buildings. Also, new housing construction.
· Government (G): Spending by all levels of government on goods and services. Includes spending on the military, schools, and highways.
· Net Exports (X-M): Spending by people abroad on U.S. goods and services (exports, or X) minus spending by people in the U.S. on foreign goods and services (imports, or M).
Example:
In 2000, in trillions of U.S. dollars, third-quarter GDP estimates were:
GDP = C + I + G + ( X - M )
$10.04 = $6.81 + $1.87 + $1.75 + ($1.13 + $1.52)
* Source: Economic Report of the President, 2001, page 274.
What’s not counted in GDP:
· Intermediate goods (goods used to make other goods, ex. - plastic for computers)
· Transfer payments (Soc. Security, stocks, etc. – nothing is being produced)
· Used stuff
· Under the table activities (drugs, babysitting)
· Non-paid work
· Debt
Possible problems with GDP:
· Quality of life not counted. Ex. - Environment, Free time, etc.
Real GDP - adjusted for inflation.
Nominal GDP – constant prices, not adjusted for inflation.
Per Capita GDP – GDP per person